Legal Considerations when Working with Contractors

Last revision: Last revision:1st February 2021
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Most people in Australia hire contractors at one time or another. Many hire them personally, to mow the lawn, renovate the kitchen, walk the dog or run personal training sessions. Many others hire them for business, to provide a temporary solution to staffing shortfalls, or to provide specialised services for the business.

In fact, in the age of the gig economy, freelancers and other contractors are becoming more and more common, and many businesses use a variety of contractors as a permanent feature of their business.

For further discussion of how contractors fit into the employment context, see our guide What's the Difference Between an Employee and an Independent Contractor?

There are a number of legal considerations when hiring a contractor (or when working as a contractor). We will cover everything you need to know about hiring a contractor.

Please keep in mind that nothing in this guide constitutes legal advice and it should instead be taken is informational only.

What is a Contractor?

A contractor is someone that you hire to complete a service - any service - for you.

Contractors are often referred to as "service providers" or "freelancers". We will use the term "contractor" throughout this guide, but the information here is equally relevant to service providers, freelancers, or any other forms of contractor.

Many contractors operate as a sole trader. However, it is also common for them to use different legal structures, such as a company or partnership.

For further discussion of the various legal structures that a contractor may use, see our guide How to Choose the Best Legal Structure for your Business.

Builders, plumbers and electricians are contractors. So are babysitters, dog walkers, and gardeners. Freelance writers, graphic designers and virtual assistants are also contractors, even if they are based outside Australia.

There are a number of steps that you can take when working with contractors, in order to protect your legal interests. We will discuss some of the main considerations below.

1. Do your research

The first thing to do before you hire a contractor is to do some research. Although it may be tempting to simply hop on the internet and quickly find a contractor to complete the job you need done, it's much safer to take your time doing research.

There are three different options for how you can hire a service provider: hire a company that sends their employees to complete the work, hire an agency who will send you a service provider unaffiliated with them, or hire an individual.

In order to find these three options, you can use the web or ask friends and family.

It is generally more reliable to hire a company that sends you their service providers. These companies will most often have adequate insurance coverage (more on that later), and they will take care of paying the service provider, so you only pay the company. However, any of the three options are available as long as you read reviews, ensure the contractor has any required licences, and maybe even talk to former clients.

Final takeaway: Do your research on who to hire before beginning the service relationship.

2. Check on the contractor's insurance

In most cases, the contractor you hire should have adequate insurance for their job. This may be general liability insurance, or it may be insurance specific to their industry. The insurance is there to cover any damage which may happen as a result of the job.

It is a good idea to check on the contractor's insurance before you actually hire them. You need to ensure that they have adequate coverage in case something goes wrong on the job they are doing for you. The insurance should cover them for the nature of work that they are performing for you, and it should have a limit that is high enough to cover any losses that you might incur. Insurance documents can be long and difficult to comprehend so you may wish to hire a lawyer to review the insurance documents for you.

Final takeaway: Check the contractor's insurance before hiring them.

3. Check on the contractor's licence

In many industries, it is a legal requirement for contractors to hold a current licence. For example, this is common in the case of building, plumbing, electrical work and other areas of construction.

In many cases, if a contractor holds a relevant licence, then they will include the licence number or other relevant details on their documentation (such as their quotes or business cards).

If in doubt, the consumer regulator in your state or territory may provide assistance, or you may seek legal advice.

Final takeaway: Check whether the contractor needs to have a licence, and if so, whether they have a valid one.

4. Make sure the agreement is in writing

This tip cannot be overstated: you must have a written contract with your contractor.

A written contract will not only ensure that both parties are on the same page about the work to be done, but it will protect you in case of any disputes.

If the contractor does not do what they said they would, then you have written evidence of the fact that they agreed to do it. If they ask you for more money later, you have written evidence of the fact that you only agreed to pay the amount in the contract.

Our Service Agreement helps to set out the key terms between the contractor and the client, including details of the services to be provided, amount and due dates for payment, as well as apportionment of liabilities, dispute resolution, confidentiality, and intellectual property rights.

Many people also choose to use a Memorandum of Understanding which is a useful starting document, to clarify the key terms of the arrangement, in a non-binding manner. It can be a good way to make sure that both parties are on the same page, even if they are not quite ready to draft a legally binding Service Agreement.

See our guide What is a Memorandum of Understanding and is it Legally Binding? for further information about this very useful document.

Plenty of things can go wrong in a contractor relationship, and you need to ensure that you are as legally protected as possible. Making sure that the agreement is in writing is a very important step.

Each situation is different, so if you have concerns about your own situation, consider seeking legal advice.

Final takeaway: Get a legally valid, well-drafted contract written before you hire the contractor. Even if you are not ready to prepare a binding contract, use a Memorandum of Understanding to make sure that both parties are on the same page.

5. Consider whether a Confidentiality Agreement is necessary

Although our Service Agreement addresses confidentiality, if the contractor is going to be dealing with sensitive information, then it is important to consider also having them sign a Confidentiality Agreement (also often called a "Non Disclosure Agreement" or an "NDA").

These are particularly useful if the contractor has not signed a Service Agreement yet, but is having access to confidential information in advance (for example, by viewing your sensitive information in order to prepare a quote).

In addition, our Confidentiality Agreement goes into further detail about confidentiality than the Service Agreement does. By being a stand alone document dedicated to confidentiality, it also helps to signify to the contractor that confidentiality is going to be taken very seriously.

And importantly, if the Service Agreement is rendered void (for example, if you do something to void it) then this means the confidentiality provisions under it may not be enforceable. Therefore, by having confidentiality dealt with in a separate Confidentiality Agreement, you are able to add an extra layer of protection.

Final takeaway: Think about any confidential information that the contractor might have access to, and consider whether you need a confidentiality agreement.

6. Ensure that the relationship stays an independent contractor relationship

There are several ways that people may be hired to perform work in Australia - as an employee, or as an independent contractor. In most cases, you will want to ensure that your service provider is an independent contractor and not an employee.

There are several different factors to look at to decide whether it is an employment or independent contractor relationship. If you tell your contractor when to work, how to work, where to work, and you control their work, this may be considered an employment relationship. An independent contractor should be able to control their own manner of work.

If you find yourself in an employment relationship, you may become liable for employee entitlements such as annual leave, sick leave, and superannuation, so it is important not to blur the line. You should ensure that your contractor remains an independent contractor, and you do not do anything that might turn the relationship into one of employment.

With that said, if you are hiring the contractor for your business, it is not necessarily out of the question to make them aware of your workplace policies, and in some cases, this is a very good idea.

For example, if the contractor is going to be physically present at your workplace, or is going to be interacting with your employees or customers, then it may be worthwhile to make them aware of your various workplace policies such as your Employee Handbook, Drug and Alcohol Policy, Discrimination Policy, Social Media Policy or Workplace Health Policy for COVID-19/Coronavirus. However it is important to find the right balance here, and to make sure that you do not inadvertently create an employment situation.

For further discussion about the differences between employees and contractors, and how to avoid creating an employment relationship, see our guide What's the Difference Between an Employee and an Independent Contractor?

Final takeaway: Don't exert unnecessary control over your contractor, and ensure they stay an independent contractor. At the same time, consider whether they need to be made aware of your workplace policies.

7. Don't pay a deposit that is too large

Although we hope that contractor relationships go perfectly with no hitches, the truth is that at times, these relationships can fall apart if there is a disagreement about the work that has been performed. This is why it is important not to pay in advance for work that has not yet been completed.

Most contractors will want a deposit to get started on the work. This is fair to them, so you will likely have to pay that deposit. But, make sure the deposit is not too large. If the contractor is asking you to pay more than 10% of the total job, you may wish to find someone else.

Final takeaway: If paying a deposit before the work begins, try to keep it below 10% of the total costs.

8. Consider whether your insurance is affected by the contractor's work

Along with making sure your contractor has insurance, you may also need to make sure you have adequate homeowners or business insurance if you are inviting the contractor to your home or place of business.

In particular, you need to consider whether you have appropriate cover in the event that the contractor suffers an injury while working for you, or in the event that some other event occurs which is not covered by the contractor's insurance.

If in doubt, speak to an insurance broker and/or seek legal advice.

Final takeaway: Double check on your homeowner's or business insurance before allowing the contractor onto your property.

9. Wrap up the job with a receipt and a closing statement

Before paying the contractor, you should obtain a Tax Invoice from them. This will provide a written record of the costs for the work, and in some cases, may enable you to claim costs as a tax deduction.

It is good practice for the contractor to provide a Cover Letter for the Invoice, setting out further details about the work that has been undertaken.

It is also a good idea to ask the contractor to provide you with a Receipt once they have received your payment. This is especially important if you are paying in cash or do not otherwise have any proof of payment. This may be relied on in future if there is any dispute over whether you actually paid what you were meant to.

To avoid any disputes down the line, keep yourself protected by having everything in writing.

Final takeaway: The contractor should provide you with a Tax Invoice and a Cover Letter when your payment is due. You should also ask them to provide you with a Receipt once they receive your payment.

In conclusion

By following the tips on this list, you'll ensure that you have a great working relationship and successful outcome with any contractor you choose to hire.

Most of us will hire a contractor at some point in our lives. The truth is that contractors help us to complete tasks we may not be able to do on our own. The important thing is to keep in mind that it is a working relationship and to protect yourself legally each step of the way.

Templates and examples to download in Word and PDF formats

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