13 November 2013
Independent contractors - what's the deal?
Many businesses make the decision to use independent contractors rather than employees to help them carry out their business. Under the right circumstances that might be a sound economic decision, but independent contractors ought not be treated as third party suppliers.
Whilst independent contractors are not in the same boat as employees, they do have options for challenging the terms of their engagement. Independent contractors can make claims that ordinary contractors could not.
In this bulletin, we deal with some of the peculiarities of independent contractors, whether as individuals or corporations. We don’t deal with the vexed question of whether a particular independent contractor might be or might have become an employee, although that is always an issue that needs careful consideration. This bulletin focusses on independent contractors where there is no dispute about their status as independent contractors.
Independent contractors are seen as making a valuable contribution to the economy, as they’re flexible and adaptive. But there’s also an understanding that whether or not there’s a corporation involved, independent contracts are essentially “self employed” and deserve some protection against exploitation.
Independent Contractors Act
First of all, let’s look at the protections. The Independent Contractors Act operates as a companion piece to the Fair Work Act and its predecessor the Workplace Relations Act. The Act is designed to give some protections to the “self employed”. It contains a fairly restricted definition of independent contractor to mean somebody who’s providing services either as an individual or through a closely held private corporation. Domestic arrangements are excluded. And there is also a technical exclusion for family members of directors performing work the company.
What are the protections?
Basically, the court has jurisdiction to review the contract of an independent contractor to see whether it is unfair or harsh. The assessment is made at the time the contract was agreed. The court can assess the relative strengths of the bargaining positions; whether there was any undue influence exerted or unfair tactics used; whether the agreement provides for remuneration less then what an award employee would receive; and other subsidiary relevant matters.
This isn’t the broad jurisdiction that used to operate in the unfair contract jurisdiction of the Industrial Relations Commission of New South Wales, but it certainly gives enough to an independent contractor to claim that the terms of the contract are somehow harsh or unfair.
A good early example (Keldate Pty Limited & Ors v Ritway Transport Pty Limited ) involved a number of independent contractors engaged as truck drivers. The contract required them to renew their vehicle every few years. The trucking company argued the clause meant that the company could require the truck drivers to replace their vehicle with a different type of vehicle.
The truck drivers argued that such a clause was harsh and unfair and the contract ought to be read as only permitting replacement with a similar type of vehicle. Although the strict wording of the contract was in favour of the trucking company, the court found that the clause was unfair and made a declaration to that effect.
Although, the truck drivers did not receive as much compensation for their losses as they might have wanted, the case still stands as a good demonstration of how the Independent Contractors Act can work.
There haven’t been a great many cases since. Whether that’s because there are no contracts that are harsh or unfair, or whether there’s no great benefit in running the cases, is still unclear.
But the fact remains that the jurisdiction exists. If you are going to engage independent contractors keep in mind that the contract can be challenged if it’s harsh or unfair.
Quite often the work of an independent contractor is essentially the work of the principal. If that is the arrangement you have with your independent contractors, keep in mind you might have some unexpected liabilities, and some of those liabilities can arise even if the independent contractor operates through a corporation. A principal can be liable for superannuation for labour only subcontractors. Principals can also be responsible for the payroll tax obligations of their independent contractors, or workers compensation insurance and claims, and also the payment of award wages to employees of the subcontractor.
All of these exposures can be managed through the contract though it is important to make sure that compliance with all terms of the contract is maintained.
Keep in mind that independent contractors have no obligation to look out for your interests as principal, so you really need a comprehensive contract to deal with issues like intellectual property, insurance, indemnities, and duties and obligations issues that are often neglected.
Your relationship with an independent contractor is all about the wording of the contract and maintaining compliance with the contract. Get that right (but don’t be unfair or harsh) and you’ll solve most problems.
Author: Mark Paul