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Are You Hiring Contractors? The New Legal Test Explained

  • 20 May 2022
  • Studio Legal

Written by Jennifer Tutty, Principal

The question of how to legally determine whether a person is a contractor or an employee was clarified (oh – thank goodness!) by the High Court of Australia in two landmark decisions handed down in February 2022.

The courts determined that the key factor in determining whether the legal relationship between an individual and a business was an employment relationship, or an independent contractor relationship, was the terms of the written agreement between the individual and a business, rather than how the relationship works in its entirety and in practice.

What Did the Courts Previously Say About Classifying Contractors?

Until the High Court’s decisions last month, for the past 30 years the courts have followed a well-established ‘multi-factor test’ to determine whether individual is an employee or contractor.  Under the old rules, just because a written ‘contractor agreement’ was in place between an individual and a business, it did not necessarily mean that the legal relationship was one of independent contractors.

Some of the factors considered under the old ‘multi-factor’ test were:whether a person can set their own hours,

– Whether they can delegate their duties to others,

– Whether they are paid by the hour or to achieve a result,

– Whether they have control over their work,

– Whether they can refuse work,

– Whether they wear a uniform, and

– Whether they can genuinely perform work for others at the same time. 

Should Businesses Be Happy About the Recent Court Decisions?

The ‘multi-factor’ test has made determining whether and person is a contractor or employee complex, confusing and difficult (even for lawyers specialising in employment law). In addition, because of the breadth and uncertainty associated with the ‘multi-factor’ test, there have often been inconsistent assessments of whether the same individual should be a contractor or an employee.  

Misclassifying employees is not something any business wants to do – especially consider the significant legal and financial penalties for businesses who are caught out. 

The recent court decisions have provided much needed clarity for lawyers and businesses alike (so yes to answer your question above, businesses should be happy about the court decisions!).  In accordance with the court’s findings and provided the terms of the relevant contractor agreement are lawful and not a ‘sham contract’, there no longer needs to be a broad and holistic look at the substance and reality of the legal relationship.  Businesses may rely on the express terms and conditions of the written contractor agreement.

Top Tips – What Can Businesses Do to Correctly Classify Contractors in the Future?

1. Ensure you use written contractor agreements for all contractors

If your business does not use a written contractor agreement to engage a contractor agreement and there is some doubt about the legal nature of the relationship, then a relationship of employment could more likely be found.  Engaging a contractor without a written contractor agreement will therefore put your business at risk of breaching various employment laws.

Tip: You should ensure that all new contractors sign your contractor agreement at the onboarding stage.

2. Update your contractor agreement templates

Now more than ever, you should be making sure you have well drafted contractor agreement templates on hand for use in your business.  These agreements should be tailor made for your and prepared by qualified lawyers who understand your business and the nature of your contractor arrangements.

Your contractor agreement should not include ‘employment law’ traits like the contractor being entitled to annual or sick leave or the business being entitled to withhold PAYG.  These would indicate that the arrangement is actually an employment one.

Tip: Don’t DIY this task or rip something off the internet. Get a lawyer involved to get some bespoke.

3. Make your contractor agreement count!

Your contractor agreement should state that the legal relationship between your business and your contractors is one of ‘independent contractors’. 

The contract should be comprehensive and set out all the key terms of the contractor relationship such as the length of the contract, the contractors services and duties, deliverables to be delivered, fees, payment of expenses, whether super is payable, what equipment is required and/or supplied, how fees are invoiced and other obligations your contractor are required to adhere to.

Tip: A well drafted contractor agreement can not only help you stay on the right side of the law but can bring great commercial benefit and protection to your business through the use of restraint of trade, assignment of intellectual property and confidentiality provisions.

4. Review your existing contractor arrangements

Now is the time to audit your existing contractor arrangements and written agreements. Things to consider are:

– Are your contracts well-drafted?

– Do they make it clear without doubt that the relationship is one of independent contractors?

– Do the terms in the contracts point towards the person being a true contractor at law?

– Are your contractor agreements putting you at risk of ‘sham’ contracting?

Tip: We recommend your existing contractors sign your freshly updated contractor agreement as part of a ‘review’ of their arrangements.

Written by Jennifer Tutty, Principal

Further Information

If you have any legal questions relating to employment law, contracts, or need legal advice on whether you are hiring an employee or contractor and what rules apply, please contact us through our online form or via email at hello@studiolegal.com.au.

DISCLAIMER

The information in this article is of a general nature. It does not constitute formal legal advice, and should not be relied on as such. Please see the full disclaimer in our website terms. Please contact Studio Legal if you are seeking advice about a specific legal matter.