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What is an Independent Contractor Agreement?
An independent contractor agreement (also known as a contractor agreement) is an agreement between two parties. The first party is the principal who hires the second party, the independent contractor, to do work or provide a service.
When should you use a Contractor Agreement?
These agreements can cover a one-off job or project or they can provide the parameters for an ongoing relationship. They are similar to service agreements in that they can cover a broad range of work and services. Therefore the agreement plays an important role in clarifying the obligations of both parties and it pays to have it in writing!
You should use this type of agreement to set out services, payment amounts and times, confirm who owns any new IP that is created, ensure that there are confidentiality clauses in place if confidential information is being provided and generally to make the roles and responsibilities of both parties clear.
Contractors are not Employees
Sometimes people confuse independent contracting with an employment relationship. This can happen when employers look to contract people to do freelance work and when organisations hire independent contractors on an ongoing basis. The law doesn’t give a clear-cut definition on the differences between an independent contractor and an employee. In cases where independent contractors are being treated as employees, or vice versa, courts look at the substance of the relationship (i.e. what is really happening between the parties) rather than what the contract is called or what it says.
Key Differences Between a Contractor and an Employee
Some of the important differences between an employment relationship and an independent contractor are:
- Independent contractors are self-employed. This means they need an ABN, they are responsible for paying their own tax and super and making sure they are covered by insurance.
- Independent contractors are generally able to sub-contract their work to others.
- Independent contractors have control over how they complete their work, unlike employees who are under ongoing supervision by their employer.
- Independent contractors are able to accept or refuse work that is additional to what they originally contracted for. Employees are obliged to perform all tasks that are reasonably within their job description.
- Independent contractors supply the tools and materials they need for the job.
- Independent contractors have a lot more flexibility than employees over the hours and timeframe in which they complete tasks.
- Independent contractors do not have any leave entitlements.
A Quick Overview: Contractor vs Employee
|Ability to subcontract or delegate||An employee can’t pay someone else to do the work.||A contractor can subcontract or delegate the work.|
|Payment||An employee is usually paid for the time worked or a price per item/activity or a commission.||Contractors are paid for a result achieved based on a quote provided by the contractor to the business.|
|The employer usually provides most or all of the equipment and assets that are needed to do the work, or an allowance or reimbursement for it.||The contractor provides most or all of the equipment and assets that are required to do the work and typically does not receive an allowance or reimbursement for the associated costs.|
|Commercial risks||Employees take no commercial risks – the employer is legally responsible for the work done by the employee.||Contractors take commercial risk and are legally responsible for their work. They are also liable for the cost of rectifying any defects in their work.|
|Control over work||The employer has the right to direct the way in which the employees do their work.||Contractors have freedom to choose the manner in which the work is done, subject to specific terms in the contracting agreement.|
|Independence||Employees work within a business and are considered part of the business. They do not operate independently||Contractors operate in their own business independently and are free to accept or refuse additional work.|
So, what should you put in your independent contractor agreement?
- Services – the agreement should set out the nature of the work and the timeframe for its completion
- Fees – the contract should state the rate of payment for work and how and when the independent contractor will be paid.
- Term– the duration of the agreement needs to be clear. Is a one-off service being provided or will this be an ongoing relationship? Include the start and end date of the agreement if applicable.
- Whether or not the contractor is able to sub-contract their work. Generally it is ok to allow a contractor to sub-contract their work as long as the principal is able to approve (or reject) the proposed sub-contractors (if for instance the principal thinks the proposed sub-contractor will not be able to perform the subcontracted services properly) and also the principal will generally want to make it clear in the agreement that even if work has been subcontracted the contractor is still responsible for the delivery of the services (so if the sub-contractor does not deliver then the principal can sue the contractor for breach of contract.)
- That the independent contractor will be responsible for paying his or her own superannuation and tax.
- That the independent contractor will need to take out and obtain insurance.
- Whether the contractor is obligated to comply with the principal’s workplace health and safety procedures if the contractor works on site at the principal’s premises.
- Does the independent contractor provide guarantees and warranties as to the quality of their work?
- Think about confidentiality – are there elements of the contract or the service that need to be kept confidential?
- Is there any Intellectual Property that will be developed from this service agreement? If there is, who will own it? Is any background Intellectual Property being provided by the principal to the contractor so that the contractor can provide the services?
- Finally, the agreement needs to include a process for resolving disputes and for terminating the agreement if either party does not meet their obligations or there are irreconcilable differences.
Contractor agreements can be simple or complex, just depending on the commercial arrangement between the parties. We have seen hundreds (no joke), so we feel confident that we can help if you need your agreement reviewed or drafted!
Got a Contract Question?
Send us the contract with your questions or requirements. We will then provide you a fixed price quote to answer your questions, or to provide a general review of the contract.