The legal distinction between independent contractors and employees is often written about: not so often the question of whether a working doctor is better off as an independent contractor or as an employee. If you have a choice, or the option is negotiable, what factors are relevant in deciding which way should you go?
Statutory employment benefits
Employment in Australia is highly regulated. Employees benefit from minimum entitlements under the National Employment Standards (NES) of the Fair Work Act 2009 (Cth) (FW Act), including four weeks paid annual leave, and ten days paid personal (sick or carer's) leave per annum (which each accumulate from year to year) and paid public holidays. The NES also provides employees with up to 12 months' unpaid parental leave.
In Victoria, employees are entitled under state legislation to 13 weeks long service leave after 15 years' continuous service with the same employer, payable pro-rata on termination after 7 years.
Monetary value of employee statutory entitlements
Some statutory entitlements have a readily calculable monetary value. Assuming a regular pattern of work, annual leave is worth 7.7% of annual earnings, and long service leave is worth 1.66% of annual earnings. Paid public holidays are worth 5% of annual earnings to a full-time employee (in Victoria). Personal leave is only calculable as a benefit if it is taken, but it makes available leave to the value of 3.85% of annual earnings.
Employees are entitled to employer superannuation contributions at 10% of their ordinary time earnings. (Employers are not obliged to make contributions on earnings above an indexed amount, currently $235,680 per annum). Some individuals working as independent contractors may also be entitled to employer superannuation contributions under the extended statutory definition of employee, but that may not always be complied with.
Other legislative protections
The FW Act protects most employees from unfair dismissal, and from adverse action taken by employers for reasons which include exercising a workplace right, making a complaint or enquiry, unlawful discrimination, or being temporarily absent from work because of illness or injury. Employers can face monetary penalties, and employees may be entitled to compensation for losses suffered.
Employees are covered by anti-discrimination legislation, but in most cases independent contractors are not. Contractor workers are only protected under the Equal Opportunity Act 2010 (Vic) where they are employees who do work for a principal under a contract between their employer and the principal, that is, in a "labour hire" arrangement.
Independent contracting is governed by the general law that applies to commercial contracts, and compared to employment is relatively unregulated. In some circumstances independent contractors may have access to the Federal Court under the Independent Contractors Act 2006 (Cth) to set aside or vary a contract that is unfair, harsh or unconscionable, unjust, or against the public interest.
Taking into account only legislated statutory entitlements (including superannuation) if an employee and an independent contractor were on the same hourly rate the employee would be 24.36% better off in dollar terms than the independent contractor, and possibly 28.21% better off.
(In a general practice an employed doctor on 48% of billings would be in a roughly equivalent position to an independent contractor on 65% of billings. The employer would, however, incur additional costs by way of Workcover insurance and payroll tax).
Independent contractors in public hospitals
In areas of work that are covered by an Award or Enterprise Agreement, an employee will also benefit from a more extensive range of entitlements than the basic NES provides. For example, a doctor employed by a public hospital in Victoria and covered by the AMA Victoria Specialists' Enterprise Agreement is also entitled to:
- Continuing Medical Education support worth a minimum of 7.6% of annual earnings.1
- An additional week annual leave if they are available for call, worth 1.9% of annual earnings.
- Continuing Medical Education Leave of 2 weeks per annum worth 3.85% of annual earnings.
- Salary packaging worth a minimum of 2.55% of annual earnings.2
A Specialist employed by a Victorian public hospital would be at least 40.27% better off than an independent contractor on the same hourly rate. (Doctors in Training cannot practice medicine independently and without supervision, and arguably cannot be in business for themselves, and cannot lawfully be engaged as independent contractors).
Other benefits available under the Enterprise Agreement include employer obligations to consult in the event of major change; a legally enforceable disciplinary procedure; and access to the FWC for dispute resolution.
Unless equivalent provisions are specifically included in contracts, none of those entitlements apply to independent contractors. However, not everything can be negotiated in. An agreement between a contractor and a principal about dispute resolution cannot confer jurisdiction on the FWC to deal with disputes if there is no employment relationship. Tax-advantageous salary packaging is only available to employees, and not to independent contractors.
There was an historical bias within the medical profession in favour of independent contractor status and against being an employee. Working as an employee was thought to compromise clinical independence and the centrality of the doctor-patient relationship. In the 1949 High Court Civil Conscription Case3 Chief Justice Latham described private medical practice as involving employment by a patient of a doctor who provides the service for which the patient is bound to pay a fee. Justice Rich spoke of the essential confidential relationship of doctor and patient, "a relationship akin to that of solicitor and client and priest and penitent."4
Those descriptions still apply, but the growth of employment of doctors by public hospitals,5 the introduction of Medicare in 1973, the establishment of bulk-billing (now 81% of medical services provided), and the growth of pseudo-employment of doctors by corporate medical businesses has affected the perceived professional / ethical landscape. The view that being an independent contractor preserves clinical and professional independence in a way that employment does not is difficult to sustain.
The option of being engaged as an employee is frequently not available. If the option is available, there are few identifiable advantages to being engaged to work as an independent contractor.
This article does not advise on tax. In some circumstances a doctor may obtain more favourable tax treatment of their earnings by structuring their practice as a company, and being engaged by a principal as an independent contractor. However, since the introduction of the personal services income rules in Part 2-42 of the Income Tax Assessment Act 1997 (Cth) tax benefits are limited and should not be assumed. Obtaining professional business and accounting advice is essential when considering business structure options and preferred legal relationships.
1 Calculated on the top Specialists' rate. CME support will be a higher percentage of annual earnings for many doctors.
2 Also calculated on the top Specialists' rate. Salary packaging will be a significantly higher percentage of annual earnings for doctors employed less than full-time.
3 British Medical Association v Commonwealth (1949) 79 CLR 201.
4 The view is echoed in Breen v Williams (1996) 186 CLR 71, 123.
5 It was not until 1959 that there were enough Specialists employed in Victorian Public Hospitals to warrant the state government commissioning the Dillon Report to consider how much they should be paid.