Independent Contractor Agreement

Businesses often hire contractors for their specialist skills or flexible availability. In the best-case scenario, contractors provide cost-effective solutions for short-term projects, bring fresh perspectives and innovation, and can quickly ramp up resources to meet urgent deadlines or address specific needs. This approach allows businesses to access specialised expertise while mitigating risks and optimising resource allocation. However, independent contractors can also introduce risk into an organisation. This article looks at how independent contractor agreements can help employers realise the benefits while managing the risks of hiring contractors.

Risks of independent contractors

There are many risks associated with introducing independent contractors into a workplace. First, the autonomy of contractors may result in less integration and commitment compared to employees, potentially impacting teamwork and company culture. Second, dependency on key contractors can disrupt operations if they later become unavailable for hire. Third, disputes over contracts and breaches of confidential information and intellectual property ownership can escalate into significant legal issues.

A final major risk associated with engaging independent contractors comes from the misclassification of these workers. It is not uncommon for employers to claim that a worker is a contractor when they, in fact, should be considered employees and enjoy the associated benefits and protections. Misclassification of employees as contractors, sometimes called ‘Sham Contracting’, can lead to legal and financial penalties.

These factors highlight the importance of carefully managing contractor relationships and ensuring clear contractual agreements to effectively mitigate risks.

Independent contractor agreements

A written independent contractor agreement should outline the contractor’s duties, the remuneration package, the contact information of all parties, and any other terms inherent to the role. It is also critical that these agreements directly address high-risk issues such as confidentiality of proprietary information, protection of intellectual property, and processes to allow early termination of the contract.

Payment

The first point that the contractor agreement should cover is payment, including the payment terms, reimbursements for expenses, methods of invoicing, and the fee schedule for the particular work (for example, an hourly rate for consultancy or design work).

Description of Services

The contractor agreement should give a detailed description of the contractor’s services, establishing the terms of the relationship and the start and duration of any projects. Project contractors often use a Framework Agreement on repeat projects, where the terms of the agreement govern each project. The specifics of each project are then defined in a separate Service Order.

Insurance and Superannuation

Typically, an employer does not cover a contractor’s insurance, though this does not mean that the employer is free from workplace health and safety obligations towards contractors. In some circumstances, contractors are eligible for superannuation contributions.

Intellectual Property

Contractor agreements need to have an intellectual property (IP) clause. In an employment relationship, employees usually assign their employer the rights to intellectual property created during the employment. Contractors, on the other hand, have more liberty to negotiate the specifics of intellectual property ownership in the agreement. For example, the contractor may retain the right to their IP, or license the IP to the company for a set time or purpose.

Termination

A termination clause sets out how either party can terminate the agreement. This clause is essential as the process of ending a contractor’s engagement differs from the process of terminating an employee.

Exclusivity and Restraint Clauses

A restraint clause, such as a non-compete agreement, can prevent contractors from competing with the business for clients either during the term of the agreement or after the end of the contract. In practice, these clauses can be difficult to enforce, as the courts are historically reluctant to restrain a contractor from earning a living in their profession. Such restraints are only considered enforceable if the conditions are reasonable, and the restraint goes no further than necessary to protect a legitimate business interest. Protection from mere competition is not necessarily a sufficiently legitimate business interest.

Confidentiality

A confidentiality clause can stipulate that all parties agree not to disclose confidential information to any third party. The terms of the agreement should also ensure that the contractor only uses confidential information for the intended purpose and takes all reasonable steps to protect the information from unauthorised use.

Sham contracting

There can be financial advantages to treating a worker as a contractor. An employer does not have to provide contractors with insurance, tools of the trade, or entitlements such as sick leave or holiday pay. However, the employer must ensure that they are not treating an employee as a contractor. Under Australian law, businesses are prohibited from misclassifying an individual as an independent contractor when they should be classified as an employee.

One of the chief ways that a company establishes that a worker is a contractor rather than an employee is through the use of an independent contractor agreement instead of an employment contract. If a claim of sham contracting is made, the terms of a contractor agreement can influence the outcome of the case.

Please phone 1300 636 846 or contact the employment law team at Go To Court Lawyers if you need assistance with drafting a contractor agreement, or advice about negotiating a contractor agreement.