Employee or Independent Contractor? A Dental Example

Darius Hii, Director at Chat Legal, shares a case note of Li v KC Dental Pty Ltd & Ors [2019] FCCA 104, where he considers whether a dentist was classified as an employee or contractor. In doing so, he highlights the key takeaways in consideration of tax obligations and advice.

Our previous article  considered the tax obligations between engaging an employee or independent contractor before discussing a recent case outlining the various factors to be considered in determining the relationship in existence.

This article will consider the 2019 case of Li v KC Dental Pty Ltd & Ors [2019] FCCA 104, which considers whether a dentist was classified as an employee or contractor.

The case related to a dentist (Dr Li) who was engaged by a dental clinic (KC Dental) in late 2012 to provide dental services pursuant to an oral agreement.

Many years later (in 2016), the dental clinic attempted to formalise the arrangement under a written agreement backdated to the original commencement date.

Dr Li refused to sign the agreement on the basis that she did not believe it reflected the agreed oral terms of engagement. Dr Li entered the relationship believing she would be engaged as an employee; whilst the agreement was drafted to reflect an independent contractor arrangement.

Due to a breakdown between the parties, KC Dental terminated Dr Li’s engagement and Dr Li sought to claim various workplace rights offered to employees pursuant to the Fair Work Act 2009 (Cth).

KC Dental argued that Dr Li was in fact an independent contractor, and therefore, was not entitled to any workplace rights.

The case for Dr Li

Dr Li argued that she had accepted an offer of full-time employment made by KC Dental, which was reflect due to the fact that:[1]

1. she was not personally permitted to book in patients for dental work and that such bookings were undertaken by KC Dental;
2. she worked regular and systematic hours for KC Dental (being full time work, five days per week, 9:30am to 5:30pm, including Sundays and receiving a 40% commission minus laboratory fees);
3. she was unable to access the surgery of KC Dental with all such access being controlled by the nurses employed by KC Dental;
4. she had no ability to sub-contract her duties to another dentist;
5. she was not permitted to work for another dental practice whilst engaged by KC Dental;
6. she was not permitted to promote her own business as a dentist during her engagement with KC Dental;
7. all equipment, materials, dental assistants and office staff were provided by KC Dental;
8. she was issued with business cards containing the details of KC Dental’s dental practice;
9. she was listed as a dentist on the website of KC Dental;
10. she was otherwise under the direction and control of KC Dental in the conduct of her practice.

The case for KC Dental

In contrast, KC Dental argued that Dr Li:[2]

1. worked as a professional, registered and qualified dentist;
2. provided services to KC Dental under an Australian Business Number;
3. charged KC Dental Goods and Services Tax for her services and remitted that GST to the Australian Taxation Office;
4. received 40% commission of the income generated from the services she provided, less the laboratory fees;
5. paid the laboratory fees to KC Dental in consideration of her using the premises and equipment of KC Dental;
6. invoiced KC Dental in respect of the commissions she claimed;
7. paid KC Dental for rental of the facilities and equipment;
8. claimed that the commission arrangement between Dr Li and KC Dental was a common arrangement within the dental industry;
9. was responsible for managing her patient appointments and instructed KC Dental’s administrative staff to book patients according to the days and times which she chose to work;
10. generally worked five days per week with effect from 1 January 2013, but chose the hours and days of work and changed her roster according to her personal requirements;
11. did not have access to open the dental premises but did lock those premises at the close of business if she was the last person to leave them on a day of work;
12. could delegate her duties to other suitably qualified dental practitioners and did so. KC Dental provided particulars that Dr Li had arranged for another contracted dentist to take OPG x-rays for one of her patients and had paid that contracted dentist for that service from her own income;
13. was able to work at other dental practices and promote her dental services if she chose to do so;
14. was able to use large items of dental equipment and a dental laboratory, all of which was provided by KC Dental and the cost of which was covered by Dr Li’s laboratory fee;
    1. had the assistance of dental nurses and administrative staff provided by KC Dental with Dr Li choosing which of those staff she wished to assist her in the performance of her professional services and directing those dental nurses and administrative staff as to her requirements for her practice including the making of appointments for, and the treatment of, her patients;
15. made her own arrangements in the purchase of smaller items of dental equipment as and when required for her patients;
16. managed and controlled her own dental practice;
17. had her own business cards which confirmed she worked at KC Dental’s dental practice and was listed on its website.

What did the Court conclude?

Having considered the evidence on hand, the Court analysed the relationship based on the ‘multi-factorial’ approach and came to the following conclusion:

1. In relation to the level of control a contractor is able to exercise:
   1. Counsel for KC Dental accepted that on the whole of the evidence, there was evidence that KC Dental exercised a degree of control of Dr Li particularly reflecting on a teeth whitening example where the amount of substance used was carefully administered,[3] as well as the fact that Dr Li was bound to follow strict guidelines requiring her to delay dental treatment until payment was received by the practice.[4]
   2. To the contrary, it was submitted that Dr Li had near complete autonomy to perform general dental treatment.[5]
   3. It was further found that Dr Li had limited control in her choice of hours or days of work and that KC Dental controlled the rosters of both all staff (including dental practitioners).[6]
2. In relation to the level of integration of the contractor in the business:
   1. Although Dr Li was not required to wear any formal work uniform, KC Dental had a high level of oversight in relation to her hours as well as managing of the recoupment of fees generated by Dr Li.
   2. Such oversight was considered to reflect the level of integration seen in an employee relationship.[7]
3. In relation to whether the contractor provides their own tools and equipment:
   1. It ultimately agreed that Dr Li supplied her own tools and equipment through the payment of a service fee to KC Dental for use of the equipment and administration.[8]
   2. It was also noted that Dr Li paid for her own insurance, education and work seminar expenses, which were reflective of a contractor arrangement.[9]
4. In relation to how the contractor is remunerated:
   1. It was found that Dr Li was paid to produce a result.[10] Such an arrangement reflects the trait of an independent contractor.
   2. The Court did, however, accept the fact that KC Dental
5. In relation to the level of risk a contractor takes on and any insurance arrangements:
   1. It was agreed that Dr Li would rectify any defective work.[11]
   2. Further, the practical arrangements between KC Dental and Dr Li was such that KC Dental exercised a level of control in determining when to refund any defective work performed by Dr Li to patients.[12]
6. In relation to the tax arrangements of the contractor:
   1. Dr Li agreed that she held her own ABN and remitted quarterly instalments in GST.[13]
   2. She also confirmed that KC Dental made no superannuation contributions on her behalf, nor did she accrue any sick, annual or long services leave.[14]

Ultimately, on the balance of the above analysis, the Court found the relationship between KC Dental and Dr Li to be one of principal and independent contractor.[15]

Other issues of note

Although the immediate outcome of the case favoured the arguments of KC Dental, the case is a reminder of the need to clearly agree on arrangements from the outset.

The breakdown in the relationship between Dr Li and KC Dental ultimately began when KC Dental handed a written agreement to Dr Li and attempted to force her to sign it barring a termination of her engagement.

The case is also a reminder of the importance to ensure complex tax and legal concepts are properly explained to clients.

Much of the driving reasons to require Dr Li to sign the agreement was due to a misunderstanding of the interaction between the application of the personal services income provisions under tax law and the common law employer/employee relationship.[16]

The Court also noted various inconsistencies with the evidence of KC Dental and discrepancies in KC Dental’s accounting of payments to Dr Li.

Specifically, it was found that the first 13 payment advices issued to Dr Li referred to her as an employee before KC Dental unanimously amended the invoicing arrangement to generate an invoice on behalf of Dr Li issued to KC Dental. Further steps were taken to unanimously amend the invoicing arrangements again such that KC Dental charged a service fee to Dr Li.[17]

The Court was critical of this unanimous changing of the arrangements and accordingly referred the practice to the AHPRA.[18]

Key takeaways

Practice owners and practitioners should have a clear and agreed understanding of the intended working relationship prior to the commencement of any arrangement. Such arrangements should be clearly documented to reduce the potential for a future dispute.

Appropriate tax and legal advice should be considered prior to signing to ensure the rights and obligations of each party is properly understood.

Further, the actions of each party should be consistent with the terms of the agreement. Inconsistent actions may work against the arguments claimed by a party in the event the arrangement is scrutinised in Court.

Where parties do not currently have a documented arrangement, it is prudent for both practice owner and practitioner to mutually work towards an appropriate document as opposed to a practice owner unilaterally deciding on the terms.

Please contact the author if you have any queries about this article.

[1] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [20]

[2] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [22]

[3] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [217]

[4] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [218]

[5] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [219]

[6] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [221]

[7] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [224]

[8] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [229]

[9] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [230]

[10] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [222]

[11] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [151]

[12] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [224]

[13] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [225]

[14] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [226]

[15] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [238]

[16] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [144]

[17] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [106]

[18] Li v KC Dental Pty Ltd & Ors [2019] FCCA 104 at [277]

Darius Hii, LLB/BCom (Finance), CTA is an estate planning and tax lawyer, who works alongside private clients and advisors to provide comprehensive structuring advice.  The core of his work revolves around planning today for a headache free tomorrow and relates to personal and business succession planning.  This often involves preparing holistic estate plans and ensuring they are structured to complement a client’s succession planning and asset protection intentions, as well as implementing tax effective business succession and restructuring strategies.  He has developed a deep interest in trusts and taxation which complements his area of practice, and has spent time involved with payroll and land tax disputes with the Queensland Office of State Revenue.  He founded Chat Legal Pty Ltd to provide legal services to busy individuals and families outside office hours and at a location convenient to them. You can connect with Darius at darius@chatlegal.com.au or via LinkedIn . Copies of his publications and presentations are available for download at https://dariuschats.github.io/.