Employee or Contractor in an Australian Medical Practice: The 2026 Classification Guide

Key Takeaways

• Three separate legal questions apply to every worker in a medical practice: is this person an employee for PAYG withholding purposes, for Fair Work Act purposes, and for the superannuation guarantee? The answers can differ across those three frameworks, and each wrong answer carries its own penalty regime.
• From 26 August 2024, the Fair Work Commission applies the whole of relationship test under section 15AA of the Fair Work Act 2009 to determine employment status, considering not just written contract terms but how the arrangement actually operates in practice.
• For ATO/PAYG purposes, Taxation Ruling TR 2023/4 makes the written contract the primary starting point, but only if it is comprehensive, genuine, and consistent with actual conduct.
• The contractor high income threshold is $183,100 from 1 July 2025. Workers earning above this can formally opt out of the whole of relationship test under section 15AB. Below this threshold, practices cannot rely on contract labels alone.
• GP service fee arrangements, where a doctor receives a percentage of billings and pays a service fee to the practice, are common but not automatically safe. The ATO and Fair Work Ombudsman have both signalled healthcare as a priority enforcement sector.
• ATO Practical Compliance Guideline PCG 2023/2 sets out a four-zone risk framework (very low, low, medium, high). Arrangements that lack a comprehensive written agreement, or where actual conduct departs from that agreement, sit in the medium or high risk zone. Retrospective assessment of PAYG and SG liabilities can reach back up to five years.
• Sham contracting under section 357 of the Fair Work Act attracts civil penalties of up to $82,500 per contravention for a corporation. Each pay period is a separate contravention. Criminal wage theft provisions have been in force since 1 January 2025, with individuals facing up to ten years imprisonment.

Most medical practices in Australia have at least one worker arrangement that would not survive simultaneous scrutiny by the ATO and the Fair Work Ombudsman. GPs under service agreements, allied health practitioners billing on a percentage split, locum doctors engaged informally, and administrative staff contracted rather than employed have all attracted regulatory attention in 2025 and 2026. The problem is not that independent contracting is prohibited in healthcare. It is not. The problem is that three different laws apply three different tests to the same arrangement, and the consequences of getting even one of them wrong are serious.

This guide explains what each test requires, where GP and allied health arrangements typically create risk, and what practices need to do to reach a defensible position before payday super takes effect on 1 July 2026.

Three Laws, Three Tests

The first mistake most practice managers make is treating worker classification as a single question. It is three questions.

Question 1: Is this person an employee for PAYG withholding? This determines whether the practice must withhold income tax from payments. The ATO applies TR 2023/4. Under this ruling, the written contract is the starting point. If it genuinely and comprehensively reflects the relationship as a contractor arrangement, and if both parties behave consistently with that contract, the classification will generally hold for PAYG purposes.

Question 2: Is this person an employee under the Fair Work Act? This determines whether the person has entitlements to minimum pay, leave, unfair dismissal protection, and similar rights. From 26 August 2024, section 15AA applies the whole of relationship test. The contract is the starting point, but how the arrangement actually operates is equally relevant. A contract that says "independent contractor" but where the practice dictates hours, patient allocation, billing methods, and branding will not hold up.

Question 3: Is this person an employee for superannuation guarantee purposes? The SG has its own definition under the Superannuation Guarantee (Administration) Act 1992. A person who is a contractor under the written contract may still trigger an SG obligation if their contract is principally for their personal labour rather than for a specific deliverable. Locum doctors and allied health contractors engaged primarily to attend and treat patients, rather than to deliver a defined outcome, often fall into this category.

The answers to these three questions can diverge. A GP may be a contractor for PAYG purposes but an employee under the Fair Work Act, and still trigger SG obligations as a separate matter. Each finding carries its own financial consequences.

GP Service Agreements: Healthcare-Specific Complications

The most common arrangement in Australian general practice is a service fee agreement, where a GP receives a percentage of Medicare billings generated under their provider number and the practice deducts a service fee for rooms, staffing, administration, and billing support. This arrangement, when properly structured and documented, can represent a genuine contractor relationship.

The complications arise in how these arrangements operate day to day.

Several features of a typical practice arrangement pull towards the employment side of the tests:

• Rostering and hours: If the practice determines when the GP works through a roster system, and if the GP cannot decline shifts or work elsewhere without restriction, this resembles employment. A genuine contractor sets their own hours.
• Patient allocation: If patients are assigned to the GP by reception rather than the GP building and managing their own patient list, this is an employment indicator.
• Non-compete clauses: A clause preventing a GP from working within a defined radius after the arrangement ends is a significant indicator of employment for both the ATO and the Fair Work Ombudsman.
• Practice branding: If the GP practises entirely under the practice name, uses practice-supplied templates, and has no independent market presence, the arrangement looks like employment.

None of these factors is individually determinative. Under TR 2023/4 and the whole of relationship test, the full picture matters. But practices where multiple of these features are present in a written agreement that calls the doctor a contractor are carrying an unquantified liability.

ATO PCG 2023/2 rates arrangements against its four-zone framework. A practice whose agreements have not been reviewed by a lawyer and tax adviser to confirm they reflect the actual arrangement will almost certainly sit in the medium or high risk zone. Industry advisers have estimated retrospective PAYG and SG liabilities of up to $500,000 per full-time equivalent GP if a five-year assessment is applied.

Allied Health: The Same Tests Apply

Allied health practices use contractor arrangements for physiotherapists, occupational therapists, psychologists, speech pathologists, and others working under a percentage or flat-session model.

The whole of relationship test applies in the same way. An OT who works scheduled days at a single practice, sees patients booked by reception, uses practice equipment and documentation systems, and has no independent practice identity is likely to be an employee in practice, regardless of what the written agreement says.

For allied health practitioners in NDIS-registered practices, an additional layer applies. Where a registered provider sets the billable rate for a contracted practitioner rather than allowing them to set their own fees, this further indicates an employment relationship. The NDIS billing for allied health guide covers the charging rules under the NDIS Price Guide that intersect with these classification questions.

The High Income Opt-Out

For contractors earning above the contractor high income threshold, the whole of relationship test can be formally opted out of. From 1 July 2025, that threshold is $183,100 per year.

The opt-out operates under section 15AB of the Fair Work Act. The worker gives an opt-out notice to the engaging entity. Once given, the relationship is assessed under the common law approach, which focuses primarily on written contractual terms rather than how the arrangement operates in practice.

For GP contractors earning above $183,100 in service fee income, an opt-out notice is a meaningful protection against Fair Work Act reclassification. It does not affect the PAYG or SG tests, which apply separately. It also requires the contractor's active participation. A practice cannot issue the opt-out notice on behalf of the contractor.

Practices with GP service agreements where the annual billing split would place the GP above the threshold should confirm with their employment lawyer whether opt-out notices have been executed and retained on file.

Consequences of Getting It Wrong

PAYG withholding: If the ATO determines that a person was an employee, the practice is liable for all PAYG amounts that should have been withheld, plus interest and penalties. This is a direct practice liability.

Superannuation guarantee: The SG charge applies if super is not paid on time and in full. The charge includes the missed super amount, interest at 10% per annum, and an administration charge. The SG charge is not tax-deductible. With payday super taking effect on 1 July 2026, misclassified workers who are employees will generate SG charge obligations on each pay cycle rather than once per quarter. The healthcare practice manager employment law guide covers the payday super transition and what practices must configure before July.

Fair Work Act entitlements: A worker reclassified as an employee is entitled to back-pay for all entitlements not received: annual leave, personal leave, overtime, and award penalty rates for every period of the misclassified engagement.

Criminal wage theft: Since 1 January 2025, intentionally failing to pay an employee their entitlements, including superannuation, is a criminal offence under the Fair Work Act. The maximum penalty for an individual is ten years imprisonment and a fine of $1.56 million. For a corporation, the fine is $7.825 million. A practice that structured an arrangement as a contractor engagement specifically to avoid Award entitlements it knew were owed is at risk of meeting the intentional threshold.

How to Protect Your Practice

Four actions reduce risk materially.

1. Audit existing arrangements. For every person engaged as a contractor, work through the three tests with your employment lawyer and tax adviser. Consider both what the written agreement says and how the arrangement actually operates in practice. Flag divergences between the two.

2. Obtain a PCG 2023/2 review. A comprehensive written agreement that reflects the actual arrangement, reviewed by legal and tax advisers, is what the ATO looks for to place an engagement in the low or very low risk zone. Without this review, the arrangement sits in medium or high risk by default.

3. Execute opt-out notices where applicable. For any GP or allied health contractor earning above $183,100 annually, arrange execution of an opt-out notice under section 15AB. Document the process and retain signed notices on file.

4. Review annually. Classification risk changes as arrangements evolve. A GP who started as a genuine contractor but became progressively more integrated into practice operations may have drifted into the employment zone. An annual review with your advisers costs significantly less than a retrospective liability assessment.

For AHPRA registration and credential verification obligations that sit alongside workforce engagement, the AHPRA registration compliance guide covers what practices must verify before and during engagement for every registered practitioner on their roster.

How ClinicComply Helps

ClinicComply provides a structured environment for tracking workforce compliance obligations, including the annual contractor arrangement review cycle, AHPRA registration verification, and the payday super transition arriving on 1 July 2026.

Store your contractor arrangement review records, service agreement versions, and classification advice in the policy library, with version history and evidence links so that when an ATO review or Fair Work inquiry arises, documentation is structured and accessible. Assign the annual contractor audit as a tracked task with a named owner and deadline, and use the compliance calendar to schedule it alongside accreditation tasks and registration renewals.

See the full feature set at cliniccomply.com.au/features or start a free 30-day trial at cliniccomply.com.au/signup.

Frequently Asked Questions

Can GPs operate as independent contractors in Australian medical practices?

Yes. A genuine contractor arrangement is lawful and common in Australian general practice. The question is whether the arrangement meets the tests applied by the ATO under TR 2023/4, by the Fair Work Commission under section 15AA of the Fair Work Act, and by the SG rules under the Superannuation Guarantee (Administration) Act 1992. A properly documented service agreement that reflects actual practice conduct, reviewed by a lawyer and tax adviser, is the foundation of a defensible position.

What is the whole of relationship test and when does it apply?

The whole of relationship test was introduced into the Fair Work Act by the Closing Loopholes amendments that took effect on 26 August 2024. Under section 15AA, when a question arises about whether a person is an employee for Fair Work purposes, the Fair Work Commission considers the real substance, practical reality, and true nature of the relationship, including both the written contract and how the contract is performed in practice. A contract that says "contractor" does not determine the outcome if the person is actually operating as an employee.

What is the contractor high income threshold and how does the opt-out work?

From 1 July 2025, the contractor high income threshold is $183,100 per year. Workers earning above this amount can opt out of the application of the whole of relationship test by giving an opt-out notice under section 15AB of the Fair Work Act to the engaging business. Once the notice is given, the relationship is assessed under the common law approach based on written contractual terms. The opt-out does not affect the PAYG or superannuation guarantee tests, which continue to apply separately. The worker, not the practice, must give the notice.

Does the ATO test for contractor status differ from the Fair Work test?

Yes, and this difference creates one of the most common compliance gaps in healthcare. For PAYG purposes, the ATO applies TR 2023/4, which makes the written contract the starting point provided it is comprehensive and genuine. For Fair Work purposes, section 15AA also examines how the arrangement operates in practice, not just what the contract says. A GP could be a contractor for PAYG purposes but an employee for Fair Work purposes simultaneously. This is why practices need to assess classification under each framework separately.

What is the superannuation guarantee obligation for medical contractors?

The superannuation guarantee applies not only to employees but also to contractors whose contracts are principally for their personal labour and services. A GP or allied health practitioner engaged primarily to attend and treat patients, without bearing meaningful commercial risk or delivering a defined outcome independent of their labour, is likely to trigger SG obligations even if classified as a contractor for PAYG purposes. The SG charge for late or unpaid super includes the outstanding amount, 10% annual interest, and an administration charge, and is not tax-deductible.

What are the penalties for sham contracting in Australia?

Sham contracting under section 357 of the Fair Work Act attracts civil penalties of up to $82,500 per contravention for a corporation and up to $16,500 per contravention for an individual. Each pay period in which the misclassification results in withheld entitlements is a separate contravention, so a 12-month arrangement with fortnightly pay creates up to 26 separate contraventions. Where the conduct is intentional, criminal wage theft provisions apply: individuals face up to ten years imprisonment and fines of $1.56 million; corporations face fines of $7.825 million.

What is ATO PCG 2023/2 and why does it matter for GP service agreements?

PCG 2023/2 is the ATO's practical compliance guideline that describes how it will approach reviewing contractor arrangements for PAYG withholding compliance. It applies a four-zone risk framework: very low, low, medium, and high. To achieve the very low risk zone, a practice needs a comprehensive written agreement reviewed by a lawyer and tax adviser, with actual conduct consistent with that agreement. Arrangements that lack professional review, or where actual conduct departs from the written terms, fall into the medium or high risk zone, where the ATO can assess retrospective PAYG and SG liabilities going back up to five years.

How does payday super from July 2026 affect contractor classification risk?

From 1 July 2026, payday superannuation requires employers to pay super on the same cycle as wages rather than quarterly. For practices where workers are misclassified as contractors but trigger SG obligations under the superannuation guarantee legislation, the shift to payday super means a new SG charge liability arises on each pay cycle rather than once per quarter. The volume and frequency of potential liability increases substantially. Identifying and resolving misclassified arrangements before 1 July 2026 substantially limits exposure to the new regime.

What should a medical practice do right now to reduce classification risk?

Four actions reduce risk most efficiently: commission a review of all contractor arrangements against the three applicable tests (PAYG, Fair Work, SG) with your employment lawyer and tax adviser; confirm each arrangement has a comprehensive written agreement that matches actual conduct; arrange execution of opt-out notices under section 15AB for any contractor earning above $183,100; and schedule an annual classification review using the compliance calendar so drift between the written arrangement and how it operates in practice is caught before it becomes a liability.