Contractors and Subcontractors

Employers and workers must understand the distinctions between employees and contractors (including subcontractors) and how these differences affect workplace legal issues. Independent contractors are not employees and do not have the same rights and responsibilities as employees. However, they do have rights, protections, and obligations under legislation, contracts, and common law.

What are contractors and subcontractors?

A contractor is an individual or business that works directly with a client to deliver materials, offer a service, or complete a task. On a day-to-day basis, a contractor may undertake the same work as regular employees of the business and may be treated in much the same way by the employer. However, contractors are not employees of the business.

The critical difference between an employee and an independent contractor is that an employee serves in the business while an independent contractor provides services to the business. There are several indicia that suggest that a worker is actually an independent contractor.

A contractor is a worker who:

• can choose how, where, and when their work is done;
• is generally contracted to achieve a specific result;
• performs work to further their own business;
• does not usually offer exclusivity of service;
• is generally paid when they have completed a specific result, often a fixed fee;
• is permitted to delegate or subcontract their work to others;
• provides the equipment or tools necessary to complete the work; and
• bears the commercial risk for any costs arising out of any defect in their work.

Subcontractors are typically hired by contractors to contribute to a larger project that requires specialised expertise or additional labour. In such cases, the subcontractor deals directly with the head contractor, rather than with the primary client of the project. For example, a client may hire a contractor to build a new website, and the contractor may then engage a subcontractor to provide all the graphic design components of the job. In such a case, there is typically no contact between the client and the graphic designer, although this does vary across projects.

Contractual and subcontractor agreements

When a client hires a contractor, it is essential to set expectations of each party’s role and responsibilities through a legally enforceable contract. Ideally, a solicitor should draft an Independent Contractor Agreement tailored to the specific project. This ensures the contract terms convey the client’s exact expectations and specify what the business must provide to enable the contractor to complete the work to the required standard.

A contractor typically negotiates the terms and conditions of the agreement, including the fees and working arrangements. A contractor should carefully review the deliverables outlined in the contract and ensure they are confident in their ability to achieve these outcomes within the project’s scope.

The head contractor should also have a properly drafted agreement with any subcontractors they engage on the project. These agreements must specify the contractor’s expectations for the subcontractor and detail what the contractor will provide to facilitate the completion of the work. Careful drafting of these contracts is crucial because the contractor will be held accountable for the quality of the subcontractor’s work.

Workplace protections for contractors

Under the Fair Work Act 2009, independent contractors and subcontractors have some legal protections and workplace rights, including protection against adverse action, coercion, and abuse of freedom of association. For instance, a client cannot terminate a contractor because they make a complaint to a regulator about the workplace, and contractors have a legal right to join or decline to join an employer group or trade union. However, these rights are not as extensive as the workplace protections for workers under the national workplace relations system. In fact, contractors are not entitled to the minimum employment standards outlined in the National Employment Standards (NES). For example, contractors are not protected by the maximum work hour limits that apply to regular employees.

Although some contractors are sophisticated professionals offering niche services at a premium price, many contractors are low-skilled and/or in poorly compensated fields. These contractors must have legal protections to ensure that they are not exploited. As such, contractors have the right to judicial review of their contracts, even if they entered into them voluntarily. Under the Independent Contractors Act 2006, a contractor can ask a court to review their agreement to determine if it is harsh or unfair. In this circumstance, the court may consider:

• the terms of the contract;
• the relative bargaining position of the contracting parties and anyone acting on their behalf;
• whether one of the parties used undue pressure or influence, or unfair tactics against the other party;
• whether the contract provides less remuneration to the contractor than an employee doing similar work; and
• any other relevant matter.

If the court finds that the contract is unfair, it may order a variation of the contract terms or order that the contract, either in whole or part, be set aside.

Sham contracting

When a client engages a contractor under work conditions that are akin to an employee, it may be a “sham contracting” arrangement. This arrangement occurs when an employer attempts to disguise an actual employment relationship as a contractor relationship to avoid taxes and employee entitlements (such as superannuation, leave, and minimum wage). It is prohibited for an employer to misrepresent an employment relationship as an independent contracting arrangement. It is also against the law for an employer to persuade an employee to become a contractor under false pretences.

In Fair Work Ombudsman v Happy Cabby Pty Ltd [2013], the Federal Circuit and Family Court of Australia found a transport company guilty of seven breaches of s.357 of the Fair Work Act, misrepresenting employment as an independent contracting arrangement. Happy Cabby Pty Ltd engaged seven individuals purportedly as independent contractors to drive buses. The Court found that these drivers were, in fact, not independent contractors but employees. The company was found to have underpaid these workers by over $26,000 and failed to keep adequate employment records. The respondent was ordered to pay $252,120 in penalties, and the sole director/company secretary was ordered to personally pay $47,784.

Workplace health and safety

All businesses must comply with their state or territory’s workplace health and safety laws, and provide a safe and healthy workplace for all workers. Under workplace health and safety laws, a worker is defined to include contractors and subcontractors. This means that the business owes a non-delegable duty of care to contractors performing work on their premises to ensure that the workplace is as safe and healthy as possible. 

The employment law team at GTC can assist with any contractor and subcontractor issues. Please telephone or contact the team on 1300 636 846 for assistance.