Engaging a contractor doesn't end your legal obligations. In Australia, you need to classify them correctly, pay them on the agreed terms (including superannuation if you pay them mainly for their labour), check they hold the right insurance, keep them safe under work health and safety laws, and treat them fairly. Your independent contractor agreement should record how you'll meet each of these.
Contractors are a fantastic way to grow your business without the commitment of employment. Most business owners focus on whether someone is a contractor or an employee, and you should (more on that below). But once you've engaged a contractor, you still have obligations to them, and they're easy to overlook.
Am I responsible for classifying my contractors correctly?
Yes. It's your responsibility as the business owner, not the contractor's. Since 26 August 2024, the question is decided by the real substance and practical reality of the relationship, not just what your contract says. If a "contractor" is really an employee, you can be liable for unpaid entitlements, and for penalties for sham contracting.
To protect your business:
check your contractors meet the genuine contractor factors (I've set these out in employee or contractor? A legal checklist for engaging independent contractors)
document why each person is engaged as a contractor
have a signed independent contractor agreement in place
let them control how they do the work, rather than micromanaging it
make sure they're free to work for other clients, and to accept or decline work you offer them.
What are my payment obligations to contractors?
Pay the agreed fees, on time, as set out in your agreement.
Pay superannuation if the contractor is paid wholly or principally for their labour. Under superannuation law, they're treated as your employee for superannuation guarantee purposes, even if they're genuinely a contractor.
Get their ABN. If a contractor doesn't quote an ABN, you generally have to withhold tax from your payments at the top rate (currently 47%) and pay it to the ATO.
Keep accurate records of invoices and payments.
Check whether you need to lodge a taxable payments annual report. Businesses in some industries, including building and construction, cleaning, courier and road freight, IT, and security services, must report the payments they make to contractors each year.
What insurance should my contractors have?
A genuine contractor runs their own business, so they should carry their own insurance. Depending on the work, that includes:
public liability insurance
professional indemnity insurance, if they give advice or provide professional services
workers compensation insurance for their own employees (the rules on who must be covered differ between states).
Your agreement should require them to hold the insurance, and give you the right to ask for a certificate of currency.
Do I have work health and safety obligations to contractors?
Yes. Under work health and safety laws, contractors are "workers", and as the business engaging them, you have a duty to ensure their health and safety, so far as is reasonably practicable. That includes their mental health as well as their physical safety. In practice:
provide a safe workplace and safe systems of work
give safety inductions where they're relevant
tell contractors about known hazards
check they hold any licences and qualifications the work requires
have a way to report and respond to incidents.
What other laws protect contractors?
Several laws protect contractors from unfair treatment:
General protections. The Fair Work Act protects independent contractors from adverse action, such as ending their contract because they exercised a workplace right, or for a discriminatory reason.
Discrimination and sexual harassment. Anti-discrimination laws protect contractors, and you have a positive duty to take reasonable steps to prevent sexual harassment of the people who work in your business, including contractors.
Unfair contract terms. If you use a standard form contract with a small business contractor, the unfair contract terms laws apply to it. Contractors earning below the high-income threshold can also ask the Fair Work Commission to review unfair terms in their contract.
What should I do in practice?
Be clear about your expectations and the deliverables.
Communicate professionally, and put any changes in writing.
Follow your own agreement, including your confidentiality, intellectual property and payment obligations.
Review your contractor arrangements regularly, especially as roles change.
Contractor relationships work best when they're managed carefully and intentionally. If you'd like your independent contractor agreements reviewed, or want to talk through your arrangements, book an introduction call.
This article provides general information only and does not constitute legal advice. Your obligations depend on your specific circumstances.
Frequently asked questions
What are my legal obligations to independent contractors?
You must classify them correctly, pay them on the agreed terms, pay superannuation if they're paid wholly or principally for their labour, keep them safe under work health and safety laws, and treat them fairly under laws including the general protections and anti-discrimination laws.
Do I have to pay superannuation for contractors?
Sometimes. If you pay a contractor wholly or principally for their labour, they're treated as an employee for superannuation guarantee purposes, and you must pay super for them.
What happens if a contractor doesn't give me an ABN?
You generally have to withhold tax from your payments to them at the top rate and pay it to the ATO.
Do work health and safety laws apply to contractors?
Yes. Contractors are workers under work health and safety laws, so you must ensure their health and safety, including their mental health, so far as is reasonably practicable.
What insurance should a contractor have?
Usually public liability insurance, professional indemnity insurance if they give advice or provide professional services, and workers compensation insurance for any employees. Your agreement should let you ask for a certificate of currency.
