Australia is fast becoming a country of contractors. Be your own boss, work when you want to, set your own rates; it sounds appealing but the reality is often very different. Anyone considering becoming a contractor should understand what they are getting into before they do so. In this bulletin, we are primarily considering individuals who provide services to one business. Firstly, understand the terminology. Employees have employers. Contractors have principals. There is no such thing as an employed contractor. An employment agreement is a contract “of service”. A contracting agreement is a contract “for services”.
Secondly, principals should understand that contracting is not a solution to all of their problems – see https://www.australianworkplacelawyers.com.au/bulletin/contracting-traps-for-the-unwary/. The safest way for principals to engage contractors is to ensure the contractor takes the form of a corporate entity, ie a Pty Ltd company. This creates a prima facie arms length relationship for many legal purposes such as the obligation to pay superannuation and workers compensation. But it is not a complete solution and there are still risks. For instance, a corporate contractor can still use the Fair Work Commission contractor disputes process if the work is done by an individual – see https://www.australianworkplacelawyers.com.au/bulletin/contractors-and-unfair-contract-disputes-a-new-sheriff-in-town/. The main risks relate to injuries, insurance, superannuation, tax and employment entitlements. There are also laws against sham contracting and the “whole of relationship” test in the Fair Work Act means the substance of how the relationship operates in practice will be considered rather than focussing on the form of the agreement.
The ideal scenario is of an arms length independent business performing work for a variety of customers. Principals should try and get as close as possible to this model in which contractors are corporate entities, preferably employing people themselves, providing services to several customers and operating their own independent business. This is often not the case. So, what should prospective contractors look out for. The starting point is that contractors are not employees and have very few of the rights of employees. For example, contractors are not entitled to a minimum wage, have no leave entitlements, no minimum terms and conditions and are not covered by workers compensation. To a certain extent, this is the price paid by contractors for operating their own business.
The written contract is all the more important in a contracting relationship. Usually, the principal will want to use their form of contractor agreement. Contractors (and principals) should consider the following factors (which is not an exhaustive list) when considering entering into a contracting agreement:
- Is it an exclusive contracting arrangement or is the principal able to engage other contractors to provide similar services?
- Is the contract for a fixed term or is it indefinite subject to termination?
- Is there a guarantee the principal will provide a certain level of work and how regular will the work be?
- Are the services properly defined and limited in nature? How is performance of the services to be measured? Are the indicators objective or subjective? Is there any provision for variation of the services?
- Is the contractor expected to take part in training and will the contractor be compensated?
- To what extent does the contractor have to follow the policies and procedures of the principal and how much control does the principal have over the way the work is done?
- Who does the contractor report to?
- Are there terms about when the work is to be done, eg during business hours, or can it be done at any time?
- Are there any terms about where the work is to be done? Is the contractor expected to work at the principal’s premises or from their own office or home?
- Does the contractor have to provide their own equipment to perform the services?
- Is the contractor expected to wear the principal’s uniform or brand if working with clients of the principal?
- Is payment by fixed sum or a daily rate or an hourly rate? Is the principal going to pay for or reimburse expenses? Is GST to be charged on top of the services fee or is it included?
- Are there any additional incentive payments detailed and are they contractually binding or discretionary?
- Is there any provision for periodic review of the rates to be charged by the contractor?
- Where the services involve primarily labour, is the principal paying superannuation as well or is this included in the rates being charged?
- Will the contractor provide an invoice and if so how regularly and what detail is required? What is the time for payment?
- Is there any provision for taking leave and will the contractor be paid during this time?
- Can the contractor subcontract the work or employ someone else to perform the services?
- Is the contractor responsible for any losses suffered by the principal due to their work?
- What insurances are required by the principal – are they affordable?
- Can the principal suspend the services on any grounds and what entitlement, if any, does the contractor have to payment, if any, during any period of suspension?
- Is there a dispute resolution procedure involving independent mediation and arbitration for resolving disputes short of termination?
- Are there any post engagement restraints on the contractor performing similar work for others and/or dealing with the principal’s clients?
- Who retains the intellectual property in the documents prepared by the contractor as part of the engagement? Is the contractor signing over their rights to the principal?
- What is the scope of confidentiality requirements including post engagement?
- Is there any requirement for just cause for termination? Is there a requirement to give a notice to remedy defects before termination? Are there grounds to terminate with immediate effect for misconduct?
- If notice of termination is given, is there opportunity to continue to work during the notice period or be provided with some other financial payment in lieu?
The maintenance of a business relationship depends on the goodwill of the parties but agreeing on a comprehensive contract from the start may assist in avoiding disagreements. Please contact us if you would like any further information or help.