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Recent case law offers some clarification but uncertainty remains, particularly in the medical space.
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Why it’s a tricky job telling contractors from employees
06 October 2023
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When a worker is characterised as an employee rather than a contractor multiple tax obligations are triggered that go beyond employment-related obligations such as annual leave and sick leave.
This remains a complex area of law with significant risk of error, but certain developments discussed below provide some opportunities to help businesses manage and mitigate risks.
Common law
Tax law does not define the terms ‘employee’ or ‘employment’. Therefore the starting point is common law, which applies a multifactorial test involving the weighing up of relevant factors including:
(a) The degree of control over the worker.
(b) The mode of remuneration (hourly/daily rate versus being paid for an outcome).
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(c) The ability of the worker to delegate.
(d) Who supplies the tools/equipment?
(e) Who bears the risk?
Subject to limited exceptions, the High Court has recently emphasised the importance of weighing up these factors by reference to the rights and obligations (but not labels) specified in the contract rather than the apparent “substance and reality” of the relationship.
While it remains important that the written contract matches the substance of the arrangement (so as not to enliven an exception to the primacy of the contract), the focus on the written contract now provides businesses with the opportunity to carefully negotiate and draft the contract to increase the likelihood of achieving the desired classification.
Superannuation
The ATO is targeting superannuation with the risk of substantial penalties for underpayments.
An employer must make superannuation contributions currently at the rate of 11 per cent on the ordinary time earnings of employees.
Yet in addition to relying on the common law employee test, the superannuation provisions deem certain contractors to be employees. The most relevant extension is for a person who “works under a contract that is wholly or principally for the labour of the person”.
On this point, earlier this year the Full Federal Court held that an individual engaged on a series of short-term contracts to deliver lectures and mark exams was not an employee for superannuation purposes because he had the ability to delegate, and had control over how, when and where the teaching services were provided. The Full Court explained that the right to delegate is inherently inconsistent with an employee relationship, as it reveals that the contract is not principally for the labour of the person but is instead for an outcome. The Commissioner has appealed to the High Court.
Additionally, the Full Federal Court indicated that the extended definition of an employee will not apply unless a natural person is a party to the contract in their individual capacity.
These cases suggest that superannuation may not be payable if the contract is entered into with a worker’s nominated entity (such as a trustee) and/or where a right of delegation is included within the contract.
Payroll tax
Payroll tax is payable by an employer on wages paid to an employee and on payments to contractors who have, broadly, entered into a ‘relevant contract’ for or in relation to the performance of work.
As has been widely reported, both the NSW and Victorian supreme courts have confirmed that passing on fees collected by a medical clinic (as trustee) back to doctors (as beneficiaries) is sufficient to constitute a ‘payment’ to the doctors for payroll tax purposes. It didn’t matter that the doctors were always beneficially entitled to the money.
On the back of these cases, certain states and territories have published rulings taking the view that medical centres are liable to payroll tax on amounts paid to medical practitioners who provide services to patients for or on behalf of the medical centres.
Despite these recent cases, there remains uncertainty as to whether the position adopted by the revenue authorities is correct, as arguably those cases should be confined to their unique facts and the forensic concessions made by the taxpayers.
In this respect, at least one of the cases may have arguably been decided differently had the taxpayer led more evidence and had not conceded that the exception from payroll tax for services ordinarily rendered to the public generally requires a doctor to work at multiple clinics. This is because, arguably, even a doctor working at a single clinic is providing services to the public generally.
Moreover, there are regulatory reasons as to why doctors – rather than clinics – provide medical services to patients. The rulings assume that a practitioner serves patients on behalf of the medical centre which may not reflect the specific terms of the relevant contracts (which often specify that the medical clinic merely provides administrative services to the practitioner for a fee). This approach of the revenue authorities is a departure from the High Court’s recent emphasis on the importance of the contract.
Nevertheless, upon registration, there are various amnesties available in Queensland, South Australia, NSW and the ACT but at best, these only provide temporary relief and are only available for GPs.
Importantly, Victoria has not offered any reprieve, temporarily or otherwise.
Fair Work Legislation Amendment (Closing Loopholes) Bill 2023
A bill recently introduced to Parliament proposes to amend the definition of an employee to effectively reverse the recent High Court’s emphasis on the primacy of the contract, returning the test to the substance and practical reality of the relationship. This change will only be for fair work purposes, thereby further complicating this area requiring slightly different tests for the same employee.
Takeaway
Correctly classifying workers as employees or contractors is not straightforward and different workers may have different classifications depending on the context. While recent case law has provided some clarifications, there remains uncertainty in other areas, particularly in the medical space.
Despite the complexity, the costs of errors are significant, both in dollar and reputational terms. Businesses should seek advice where necessary to help navigate this area and reduce risks by drafting contracts in a way that takes advantage of recent developments.
Jeremy Makowski is a partner at Coghlan Duffy Lawyers.
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