An independent contractor is generally understood to be a person who operates their own business and provides services to other persons or businesses.
The law around engaging independent contractors is a source of considerable confusion.
The advantages for businesses of using contractors (rather than employees) are various: whilst there are a huge amount of rules and regulations that apply to the relationship between an employer an employee, laws protecting independent contractors are less prevalent. A business is generally free to choose the terms on which it engages a contractor. For example, a business can terminate an independent contractor agreement at any time and (generally) is able to leave matters such as tax and insurance to the contractor to deal with.
Where the law frequently intervenes, however, is where a business has classified someone as an independent contractor but the law regards the person as, in reality, an employee. The important point here is that little weight is given to what the parties have agreed between themselves, or that the “contractor” has provided an ABN: the legal test is to look at the arrangements as a whole. As a rule of thumb, if the person is being treated like an employee (despite being labelled as an contractor), the law will regard them as an employee.
The difference between employee and contractor is not always clear. Factors that tend to point to an employment relationship include that:
• the person is paid by the hour (rather than by result)
• the person has to provide little in the way of their own equipment to carry out their tasks
• the business exercises a high degree of control over how tasks are performed
• the person cannot delegate the performance of work to others
• the person is presented to the outside world as being part of the business (rather than someone running their own business)
Businesses can be subject to significant financial penalties for misclassifying employees as independent contractors (see “sham contracting” below), as well as facing claims for back-pay from the worker for employment entitlements that they should have been provided (paid leave, redundancy, etc). It is therefore strongly advisable for businesses to seek legal advice when engaging contractors. EI Legal frequently advises on the employee v independent contractor distinction and can provide you with fast, cost effective advice in this area.
Another matter which causes confusion is the obligations for businesses to pay superannuation on behalf of contractors. This obligation arises where a contractor is engaged ‘wholly or principally for labour’. This usually arises where:
• a contractor is required to perform work personally (rather than being able to delegate to others)
• the contractor is paid wholly or principally for their personal labour and skills (rather than for equipment or materials they supply)
• in the arrangements for paying independent contractors they are paid for hours worked, rather than to achieve a result
The Fair Work Act 2009 (Cth) outlaws “sham contracting” (ie misclassifying someone as a contractor when they should be an employee). Sham contracting penalties can be significant. Businesses can also be subject to action from the Australian Tax Office for failure to deduct payroll tax or make superannuation contributions.
Workers wrongly engaged as contractors can also make claims for backdated employment entitlements (such as paid leave, redundancy, notice of termination and minimum wages).
At EI Legal we regularly advise clients on engaging contractors and the obligations that arise under these arrangements.
We can assist you in your arrangements with contractors to reduce risks that such arrangements fall foul of sham contracting rules.
Independent contractor agreements
A properly drafted independent contractor agreement is necessary to protect your business from disputes with contractors over fees, deliverables and termination. It is also advisable to clearly set out the respective parties’ obligations and who owns what (in terms of intellectual property, information, client relationships, etc).
It is also advisable to make sure the independent contractor agreement is structured so as to reduce the risk that the parties are found to be in an employment relationship (by including provisions that deal with the right to delegate, etc).
At EI Legal we have a great deal of experience in drafting independent contractor agreement templates to suit your business’ needs. If you do not currently have written contractor agreements in place, or if you need your current agreement reviewed, please contact our offices.
If you are in a dispute with a contractor or need advice regarding terminating an independent contractor we can also help.
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