Man working hard grinding a piece of metal

Contractor – using or being one

by Angus Jones
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Your small business may not be ready to take on an additional employee so a contractor may be a better solution or perhaps you would like to start your own business as a contractor.  This guide will look at both sides and help you understand the implications of using or being a contractor.

A contractor or sub-contractor, freelancer or consultant is a person that provides goods or services under a written contract or a verbal agreement. Unlike employees, contractors do not work regularly for an employer but work as required. Contractors are usually paid on a freelance basis and often work for themselves using their own tools and processes.

WHY should you use or consider becoming a contractor?

By Using a contractor, you can:
  • Increase or decrease workers based on business needs
  • Get fast access to skilled workers for different tasks
  • End contacts quickly with no reason
  • Normally no payments for Superannuation, holiday or sick pay and payroll taxes
  • Save on liability insurance, as contractors must have their own
By Becoming a contractor, you can:
  • Be your own boss
  • Earn more money if your skills are in demand
  • Work the hours that suit you including part-time
  • Test out a company before committing to a full-time job

WHAT do you need to understand about contractors?

Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation, and superannuation. In Australia, the Independent Contractors Act 2006 in conjunction with the Fair Work Act 2009 protect the rights and entitlements of independent contractors.

Under the Fair Work Act 2009, independent contractors are protected from:
  • adverse action – for example, a business cannot terminate a contract with an independent contractor because they make a complaint to a regulator about their workplace rights
  • coercion – for example, a business cannot threaten to take action against an independent contractor to coerce them not to exercise their workplace rights
  • abuses of freedom of association – independent contractors are free to join, or not join, a trade union or employer group
The Independent Contractors Act 2006 allows independent contractors to ask a court to review a contract because it is ‘unfair’ or ‘harsh’. The court may consider:
  • the terms of the contract when it was made
  • the relative bargaining strengths of the contract parties and, if applicable, anyone acting on their behalf
  • whether there was any undue influence or pressure, or any unfair tactics used against, a party to the contract
  • whether the contract provides remuneration that is less than that of an employee doing similar work
  • any other matters the court thinks is relevant
The court may order:
  • the terms of the contract to be changed (for example, they may be added or removed)
  • the whole contract or part of the contract be ‘set aside’ (that is, have no effect)

All workers in Australia are entitled to a safe and healthy workplace. This means that employers — including self-employed contractors — must comply with the relevant state or territory’s workplace health and safety laws.

Sham contracting is illegal and is when an employer attempts to disguise an employment relationship as a contractor relationship. This is usually done to avoid responsibility for employee entitlements.

HOW do you hire a contractor or become a contractor?

In Hiring a contractor, you should be careful in checking their credentials to ensure they have the right experience, attitude and skills.  You will need to carefully plan how they will integrate into your workflow and ensure you pay them promptly or they may not continue to turn up.  A contractor may not be an employee but you need to treat them as part of the team to get the best result.  Make sure you engage a contractor in a legally binding way in writing and consider what other documents may be required like a Non-Disclosure Agreement. Ensure you keep accurate records of their hours and or completion of set tasks.

In Becoming a contractor, you essentially start your own business. See our guide on starting a business. This process will include writing a business plan which will help you be realistic about things like future income. You will need to keep track of your business so read our guide on Record Keeping as well as considering setting up a separate bank account.
Insurance is important as you most likely will not be covered by your employer so consider taking out liability, income protection and asset (protect your tools) insurance.

If as a contractor you are paid wholly or principally for your labour your employer must pay for your superannuation, if not you should consider making voluntary personal contributions. Be sure to review our guides on Business structure and GST as you may need a separate tax file number and your services will be subject to GST if your business turnover is above $75,000.   If you do not have an Australian Business Number (ABN) your hirer may legally withhold tax at the top rates.

HINTS

Unsure if someone is an employee or contractor? See the Fair Work Table here https://www.fairwork.gov.au/how-we-will-help/templates-and-guides/fact-sheets/rights-and-obligations/independent-contractors-and-employees

If your business engages contractors, it’s a good idea to have a Contractor Agreement in place with each contractor you engage. This sets clear expectations about the scope and standard of services to be provided, fees and payment, confidentiality, IP ownership and termination processes. A lawyer can draft a contractor agreement for your business.

Keep track of your contractors’ hours and how much they’re costing you. Use your accounting software to produce reports so you can see whether you are getting value for money. Over time you will discover the right mix of employees and contractors that works for your small business.

SUMMARY – skilled supply of labour and materials

Contractors work for themselves and offer other businesses and individuals a skilled supplier of labour and possibly materials.  Both the contractor and the hirer have flexibility around hours and hirers do not have to provide for holiday and sick pay or payroll taxes. Contractors have workplace rights and protections but have different responsibilities relating to insurance, taxation, and superannuation.

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