#230 - The Independent Contractor discussion you need to have
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Independent contractors versus employees has been a hot topic in my inbox lately. I sent an email to my list about it recently and the response was loud and clear. A lot of business owners are growing their teams, feeling the pressure of getting it right, and wondering whether contractors are the “easier” option. Sometimes they are. Often they are not. Either way, this is one of those areas where a small mistake can turn into a big, expensive problem.
Growing a business is worth celebrating, but only if your foundations can hold it. No two businesses operate the same way, and deciding whether someone should be a contractor or an employee is not a vibe-based decision. It is a legal classification, and the ATO and Fair Work Ombudsman take it seriously. Misclassification can lead to back pay, unpaid entitlements, superannuation issues and penalties. In other words, it is not something you want to guess your way through.
When it makes sense to engage a contractor
A contractor is usually the right fit when you need a specific skill set, specialist support or help with overflow work. Think VAs, social media managers, designers, editors, bookkeepers. You are engaging someone who is running their own business, and you are bringing them in to deliver a service, not to become part of your internal team.
The key word here is autonomy. Contractors should have control over how they do the work. They should be able to accept or decline work. They should not be tightly managed like an employee. The more control you apply, the more you risk the relationship looking and functioning like employment, even if you call it contracting.
What actually defines a contractor relationship
Having an ABN and sending invoices is not enough. A contractor should genuinely be operating independently. They should have their own systems, their own processes, and their own insurance. Professional indemnity and public liability are common examples, depending on the work.
Your agreement also matters. It should clearly cover things like scope, deliverables, payment terms, confidentiality, intellectual property, termination and how the relationship works day to day. Not in a generic way, but in a way that reflects the reality of what is happening in your business.
The myths that trip business owners up
Here is one I need to say plainly. Just because the contractor asked for a contract does not protect you from misclassification. And just because you have a contractor agreement does not automatically mean the person is legally a contractor. If the working relationship looks like employment, the label will not save you.
This is why templates are risky. If the agreement is ever challenged, that document becomes a key piece of evidence. It needs to be clear, accurate and aligned with how the relationship actually operates.
Superannuation is not as simple as it used to be
Another area that catches people out is super. The old assumption was that contractors handle their own super. That is not always the case anymore. Depending on how the contractor is paid and how the relationship is structured, you may have super obligations. This is where it is worth speaking to your accountant so you are not accidentally creating a liability you did not plan for.
If you are unsure, get advice early
If you are feeling uncertain about classification, contracts or super obligations, do not sit on it. This is one of those areas where getting advice early is far cheaper than cleaning it up later. Talk to your accountant or your business lawyer. Ask the questions now, while you still have options.
Because growing your team should feel exciting. It should not feel like walking into a legal minefield with your eyes closed.
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[00:00:50] Tracey: I send emails to my list fortnightly. I draft them myself. I sit down and I think about what's topical, what changes in the law are impacting business owners right now. What do business owners really need to know right now to help in their business? Writing these emails is something that I love, and so when I receive feedback, I'm really, really grateful.
[00:01:11] One of the most popular emails I've ever sent to my list was two weeks ago, and it was in relation to the topic of independent contractors and employees. That's what I'm gonna talk about in today's episode. I didn't realize just how much my beautiful audience and my listeners wanted to hear about the law when it comes to independent contractors and employees.
[00:01:34] So I'm gonna dive in today. Let's have the conversation. If you're growing a team, if you have a team in your business. This is a conversation that you need to tune into because there are changes to the law, which I hope you know about, but you may not, and even if you do, sometimes it can be a bit tricky to unpack it.
[00:01:49] So let's get started. Growing your business is a milestone worth celebrating. It's something that business owners embrace. Many put it off for a very long time, but once you're there and [00:02:00] once you're ready, it's worth embracing.
[00:02:02] However, only if you get it right and you're probably thinking, sure, Tracey. That's like everything, isn't it? Only if you get it right, but it's not because there are some really tricky considerations that we need to understand as business owners when it comes to growing our team, when we are thinking about engaging independent contractors.
[00:02:20] So let's start with back in the day when we used to hear independent contractors, everybody would think, I'm gonna get a contractor because it's so much easier. They're responsible for their own tax, their own super. They take care of everything. They just invoice me. It's easier. That may have been the case back then, but it's no longer the case now.
[00:02:40] It's not necessarily easier. So the test as to whether you're going to engage an independent contractor shouldn't be: is it easier than an employee? That's the first thing that I wanna flag. It shouldn't be because it's easier. Pausing there, stepping back. You'll ask then, well, when should I engage an independent contractor?
[00:03:01] And the answer is, when it suits your business. It has to suit your business. You've heard me say on here so many times, no two businesses are the same. That is so when it comes to growing the team. You'll need to make a decision. Am I better off engaging an independent contractor right now or am I better off employing somebody. Full-time, part-time casual, but employing. What's going to suit the business?
[00:03:28] And you can make that decision once you understand the difference between the two options. What's an independent contractor and what is an employee? The reason this has become really important is because when businesses get the classification wrong, the ATO and the Fair Work Ombudsman can get involved, and the business can be subject to scrutiny and if they've got it wrong, so if they've classified a team member as an independent contractor, but they're really an employee, there's back pay entitlements that apply. [00:04:00] And there can be penalties, so it's not worth the risk. No small business that I know has a war chest of funds just sitting aside to deal with and mop up issues like this when things go wrong.
[00:04:13] None. That means it's just really important to get it right. So when you are thinking about engaging an independent contractor, be really clear on what is an independent contractor, and if I'm engaging, one is this legitimate? Or is this really going to sit under the umbrella, as I call it, the umbrella of an employer employee relationship, and if it does engage that way properly from the start. Let's unpack Independent contractors.
[00:04:42] Independent contractors are precisely that. They're independent. You engage them in your business to provide services to you because you need those services, those specialized services that perhaps you don't have or services to help with overflow. Either are great problems to have and the most common examples that I can think of are things like VA, you go, great, I need some support. I'm gonna bring in a VA.
[00:05:05] Or social media management or content creation. Or if you're a service-based provider, I need somebody to come in and help me with my client work. So think Allied Health, think design. I need someone to come in and provide some services because there's just so much here. I can't do it myself.
[00:05:21] I wanna bring in a contractor. The contractor is an independent contractor. They legitimately run their own business. This means more than just having an ABN and just issuing an invoice. Because here's something to know. Just because a business has an ABN and issues invoices, that does not automatically mean that will be a legitimate independent contractor arrangement.
[00:05:45] It needs more than that. That's what I'm talking through with you now. So the ABN and the invoicing is a start. Absolutely. They must have an ABN, they must issue you invoices. I've had business owners say to me along the [00:06:00] way, it's all too difficult for the contractor to send me invoices, so I just pay them or I put them on the payroll or I do the invoices for them.
[00:06:09] All of that is a hard no. All of that is not consistent with an independent contractor arrangement, so just keep that in mind. Bear in mind here that when you're engaging a contractor, you as the business owner are carrying the risk. That's why it's really important for you to take the time to understand what constitutes genuine, independent contractor and to make sure that you've got all those legal ducks in a row because the risk sits with you.
[00:06:34] The next thing we wanna have a look at is insurance. An independent contractor is required to hold their own insurance, professional indemnity, public liability, all the insurances they need. They're required to have their own. I'm not talking about your workers' compensation insurance obligations here.
[00:06:51] That is very separate. We are talking here about what makes a contractor a legitimate, genuine independent contractor. So insurance is something that's really important to include in your agreement that the obligation on the contractor to have insurance sits with the contractor. They need to be able to be free to accept or reject work as in when you offer it.
[00:07:10] So if you've put them onto your roster and they've gotta make a leave request, for example, if they're not able to do it or if they don't have any flexibility in that rostering, that is not consistent with an independent contractor agreement. That very much sits under the umbrella of employer employee, so keep this in mind.
[00:07:26] They need to be free to accept or reject work as and when you offer it. Independent contractors don't have probation periods. They have a termination provision in the agreement where either party can terminate in certain circumstances and either party can terminate for whatever reason upon giving x days notice.
[00:07:46] Usually, most commonly what I see it sits around that 30 days. Sometimes it's a bit longer, but there are no probation period that they need to satisfy in order to be able to continue with you as an independent contractor. Keep that in mind too because as soon as we start using [00:08:00] language which is associated with your employer employee, we're compromising the integrity of this independent contractor relationship.
[00:08:08] So that's the next thing. Then we need to look at how the contractor is working. Contractors come in, as I've said, to provide their specialist expertise and services to you, which means they know how to do their job, which means you don't micromanage them. They are representing their own business when they come in to provide services to you.
[00:08:28] So the minute you start doing things like you have to come to this training, you have to come to my staff meetings, here is our business branded email for you so that clients think you're my employee. As soon as we start interfering and micromanaging the way the contractor is providing the services, we are moving away from that independent contractor relationship, and we're starting to sit closer and closer to the umbrella of an employer, employee relationship.
[00:08:55] So be really mindful of that. Independent contractors, because I've said a moment ago, they're legitimately running their own businesses, which means they should have other clients. They should be providing services to many clients, not just you. And in doing so, they should have the right to delegate any part of the services to their team members.
[00:09:19] And it doesn't matter if they don't have team members, I'm not saying practically, they must delegate. I'm saying they need to have the right to delegate. They should have the right to delegate part of the services if they need to, to their team members. It's perfectly okay for you to ask in your contractor agreement that the independent contractor seek your prior consent before delegating, because it's perfectly okay for you to want to know who's involved in your business and who's providing services, but give careful consideration to the right to delegate the services as set out in the contractor agreement. It's a very important component of establishing that independent contractor [00:10:00] relationship. As I've said a moment ago, there is a termination clause, so there is a termination provision in that agreement, which says if either parties in breach, then this will happen, and if party wishes to terminate for convenience, this is the process and it's usually within X days notice, usually 30 days, I see. But it can be another timeframe as agreed. So that is a high level overview of a genuine, independent contractor arrangement. You'll set out in your agreement how the fees are to be calculated and how the fees are to be paid.
[00:10:34] You set out the services that need to be provided, and you've got all the provisions there in relation to your ownership of your intellectual property that will remain yours as the business, your dispute resolution clause. All of those things need to form your properly tailored independent contractor agreement that you enter into between your business and the contractor you wish to engage.
[00:10:57] I say it all the time on here, so I'm sure it goes without saying now, but your properly tailored agreements in this case, the independent contractor agreement is crucial for setting this relationship up for success because if ever your independent contractor arrangement is challenged, the first thing anybody needs to go to is that independent contractor agreement.
[00:11:18] So you must have it, it must be tailored for the arrangement and it must work. This is where I say, stay away from templates. Don't Google, don't put something together from what you've seen online, the cost is just too high. The risk is too high. I won't go into my views on templates here. I've talked about that on so many previous episodes.
[00:11:38] But DIY is for Bunnings, not for legals. To be really clear, template documents have their place, but not when it comes to legal documents. So when we're talking independent contractor agreements, make sure yours works for your business and your contractors. Templates won't do that. Make sure it's tailored and make sure you understand it.
[00:11:55] And then once it's in place, make sure the parties [00:12:00] are acting consistent with what you've outlined in your independent contractor agreement. The thing I wanna say now is once we have an independent contractor agreement on foot and we have an arrangement and it's working really well, you as the business owner have an obligation to check in on this arrangement from time to time to make sure it is still an independent contractor arrangement and that it hasn't morphed into that of an employer employee.
[00:12:26] And what I mean by that is you have the obligation as the business owner to keep tabs on what's going on in your business. You need to know. Often what happens when we have a really fabulous, independent contractor, we give them more and more work, and they become more and more integrated into our business.
[00:12:42] Not always, but it does happen often. What What that can mean is that that relationship can move away from being a genuine, independent contractor relationship, and it can morph into that of an employer employee. And an example of when that happens is when the contractor does less and less work for anybody else and more and more work for you, they're integrated more deeply and intimately into your business and your business operations, they're building relationships with your clients and your clients think that they're an extension of your business, they don't appreciate that the contractor is actually running their own business. They're more involved in how the services are being provided.
[00:13:21] You are more involved. So there's now a collaboration and sometimes that contractor starts training other members of your team as to how you like services to be provided. So you can see the shift and it's just a gradual shift, but it morphs into one that's more closely resembles a relationship between an employer employee, and it's losing the hallmarks of that genuinely independent contractor arrangement where the contractor's running their own business for their own purposes, advancing their own interests, serving all their beautiful clients. So it just shifts, as I say, not always, but sometimes. When that happens, the obligation is on you as the business owner to [00:14:00] identify it and make changes to either shift back to stay very clearly anchored in that independent contractor arrangement or make changes to bring that contractor on as an employee employee agreement and move forward that way.
[00:14:16] The next thing I wanna address is a common misconception that I hear almost on the weekly at the moment, and that is, but the contractor asked to be a contractor. That's what they want. Surely that's fine, isn't it? Hmm. The answer to that is only, it's only fine if the arrangement is that of a genuine contractor, and we go through all the criteria that I've spoken about already, we step through all of those and we need to satisfy all of those to ensure that yes, it's perfectly fine that you've asked to be an independent contractor.
[00:14:47] We've ticked all these boxes, we've got all our legal ducks in a row. Absolutely no problem. However, if the person is genuinely, genuinely sitting under that umbrella of an employer employee relationship, so they're not sitting under the umbrella as an employee, it doesn't matter if they ask you to be a contractor and tell you that they've got an ABN, and they'll issue an invoice because all the hallmarks of that relationship are consistent with an employer employee.
[00:15:14] Therefore, you as the business owner, have an obligation to get it right and to bring that person on as an employee. It doesn't matter then that they've asked to be a contractor. If they want to be a contractor and you want to facilitate that, go for it. But make sure all the criteria are satisfied. Don't fudge the lines, don't do it to be a nice person.
[00:15:35] Sit down with the contractor, reach out to your lawyer and get advice if you need to, but make sure you're both on the same page and you both clearly understand what a contractor arrangement involves, what an employer employee relationship involves, and then act consistent with whichever one applies.
[00:15:54] You can't contract out of the law, so if somebody really is sitting under that umbrella of an [00:16:00] employer, employer relationship, you can't simply say oh, but we've agreed that we're going to call it something different, therefore we've signed a contractor agreement. Therefore, it is so. Because that's not necessarily the case.
[00:16:12] You need to make sure that having a proper written agreement in place is a crucial first step. Yes. But you then need to make sure that the way the relationship works is legitimately either an independent contractor relationship or an employer employee relationship. Can't contract out of it just because you want to.
[00:16:34] Those are some really big misconceptions, and I wanted to just bring those here in this forum and just talk about them head on, because they need to be talked about, Those things need to be understood really clearly for business owners because getting that wrong can leave the business exposed later.
[00:16:51] So if you are independent contractor who's not really a genuine independent contractor but wanted to be, so you've agreed because you're lovely and you've signed an agreement and they've issued invoices, but everything else about the relationship suggests it's an employer employee, in six months, 12 months time, whatever the timeframe is, that contractor leaves your business and comes back to you later and says, actually, I was really an employee. You owe me these unpaid entitlements. You owe me this super, and guess what? Fair Work are gonna investigate this and there could be penalties. It then does not matter if you had a beautiful conversation with this contractor who you adored, and they'd said, but I want to be a contractor.
[00:17:34] That becomes wholly irrelevant and all of the risk and exposure sits on you as the business owner. I've seen that happen too many times. It's not pretty, as you can imagine, for the business to have to absorb that. So that's why it's really important to get that right. Now. Just before we wrap up, I wanna just touch on superannuation for contractors because this is the conversation we need to have as well.
[00:17:57] Again, back in the day, contractors [00:18:00] used to be responsible for their own super. Absolutely. Enough said. That's no longer the case. So now the law states that sometimes independent contractors will be responsible for their own super payments, yes. But sometimes they won't, and sometimes the business will be responsible.
[00:18:18] This is a relatively new conversation. This is a relatively new change and it's something that business owners need to be aware of. If you are not sure, please talk to your accountant about this, because this one can really sting when you get it wrong because the obligation is retrospective, which means the law will look back and you've gotta make up all the back payments.
[00:18:40] In short, at a high level, if you engage an independent contractor for their skills on a project or an outcome basis, an example of that would be your social media manager, when you engage your social media manager and you pay a thousand dollars a month and you get four blogs, two posts, and something else, you are paying per outcome.
[00:19:00] So your social media manager will receive that a thousand dollars. Regardless of if she or he has spent an hour or 10 hours, they still get the same amount because you've engaged them for that outcome. That arrangement does not attract the obligation to pay super.
[00:19:15] There we go. However the changes come about, because the law now says if you engage your independent contractor to provide services primarily by their labor, by providing their labor to you, so their time and you pay them per hour, so think your VA, your virtual assistant. Think when they, you agree to pay $50 an hour, they invoice you at the end of the month, however many hours they've worked.
[00:19:40] You pay them $50 per that many hours, you are paying for their labor on a time spent basis. That arrangement will typically attract the obligation to pay super. So you can see the difference. So this is something to be mindful of. One, do I have a genuine independent contractor or an [00:20:00] employee? And once you've worked through the criteria and you are very clear that you have engaged or you are engaging an independent contractor, great.
[00:20:07] Then though, next question, do I need to pay superannuation to this contractor? Think, am I paying on an outcome basis or per project basis, or am I paying predominantly for their labor on a per hour basis? If you are, superannuation is likely payable, and that needs to be factored into your discussions, negotiating the rate.
[00:20:29] But if you're not sure about either of these things, reach out to your lawyer, your business lawyer, and if you don't have one, you are so welcome to reach out to me. I give advice on these things for business owners all the time. Or reach out to your accountant and ask the question because the accountant should be all over the obligation to pay super as well.
[00:20:46] I really hope that's been helpful. I appreciate there's a lot in here. I've tried very hard to keep this a short and sharp episode. Just so you can start thinking about whether or not you are certain and confident that you have the right classifications for your team members. If you are not, that is the time to reach out and have a conversation, as I say, with your business lawyer, if you don't have one with me and or with your accountant, because it's so important as a business to get this right, because you as the business owner, carry the risk and the obligation sits with you.
[00:21:17] Saying, but I didn't know or I wasn't aware, is not going to prevent you from having to pay back payments to contractors that were really employees or to contractors who should have been receiving super and haven't, and it's certainly not going to be a defense or an argument if a penalty is imposed. If you found this helpful, if you know other business owners that you think need to hear this, please share the episode.
[00:21:40] Please provide it in any way that you can, because my intention here is to be able to assist as many business owners as I possibly can to get this right so that they don't find themselves in a whole world of pain later, when things start coming unstuck, we wanna avoid that. As always, thank you so much for listening.
[00:21:57] I appreciate your time. I'll catch you next time. [00:22:00]
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