Contractors and employees are different – you don’t want to confuse one for the other. So, when outsourcing or looking to engage with a contractor, there are a few items that you should understand.
Ideally, contractors should be engaged through a contractor agreement and detail:
- the services being performed by the contractor
- what the payment will be and how it will be made
- the dispute resolution process
- who owns intellectual property or enhancements made to products or processes during the contract
- contact information, and
- how and when either party can terminate the agreement.
Employees vs Contractors
There are some key differences between an employee and an independent contractor. The following table outlines the differences:
| Employee | Independent Contractor | |
|---|---|---|
| Rights | Entitled to receive obligations such as the minimum wage, paid leave, sick leave etc. | Not entitled to paid leave or minimum wage. Paid either flat fee or hourly rate |
| Responsibilities | Works a set number of hours | Works as much as required to complete the job |
| Duration of Employment | Indefinite employment status | Hired for a set period or until a job is done |
| Tax | Income tax deducted from wages | Pay their own tax and GST. Contractors have their own ABN |
| Superannuation | Employer Contributes to superannuation | Typically pays their own superannuation (unless specified in the agreement) |
| Level of Control | Work is directed and controlled by the employer | High-level control over how the work is done. May also hire others |
The Scope of Work Required
The contractor agreement should specify the services that the contractor is required to perform. This should include:
- Hours of work required (if applicable)
- A detailed description of the work to be performed
- Payment details, which may include lumpsum payments or payment upon invoice issued by the contractor, and
- Timeframes required, key milestones and other key indicators.
The Contract Length
The length or period of the contract should also be specified. There are three different types of contractor agreements:
- Project-specific arrangements: This type of agreement lasts for the length of a specific project. The start and end date of the project are usually the contract period.
- Ongoing arrangements: this type of arrangement is more indefinite in nature with no readily identifiable end date. It’s important that these ongoing arrangements are kept at arms-length and don’t expose the business to the Fair Work Commission viewing the relationship as an employer/employee.
- Service orders: These arrangements are provided on an as-needed or a single job basis. An example may be a cybersecurity expert who periodically reviews the business’s internal affairs from time-to-time and may contract on an hourly rate basis.
Client and Contractor Obligations
The obligations of the client and the contractor should be specified in the agreement. While this will depend on the service offered, some standard terms are:
- access to any building
- whether the contractor may subcontract or use third parties to perform the contract requirements
- which party will provide the equipment (almost always the contractor)
- any requirements for licences, and
- any specific expectations of either party.
Confidentiality and Intellectual Property Ownership
If a contractor’s agreement doesn’t include any intellectual property (IP) ownership provisions, it is usually determined that the contractor will own any IP that the contractor creates. There may be an implied licence allowing you to use the contractor’s IP, but you will not own the IP. This means that if your contractor creates a wild new way of doing something that your business currently undertakes, then you won’t own this or reap the benefits. If you are hiring a contractor and you wish to own any IP developed from the arrangement, you must expressly provide for this in the contract.
These are only a few tips and tricks to help you and your startup stay protected when it comes to engaging contactors. We highly recommend engaging a legal professional to help you draft the contract. Think of these contracts as an investment – a poorly written contract can lead to significant legal disputes and be an expensive process. See our fixed pricing arrangements and invest in a contractor agreement that protects you and your business.