Have you misclassified a worker as an independent contractor? If so, your business may have committed wage theft by mistake. You could be liable for back payment of employee entitlements. Not to mention opening you up for unfair dismissal and sham contracting claims.

Is it time to check your workers’ contract agreements?

The legal angle on independent contractors

The distinction between employees and independent contractors has long been murky. Distinguishing relies on a complex analysis of the relationship between each party. An analysis is known as ‘multifactorial indicia’.

This leads to confusion and different opinions about whether a worker is, in fact, a contractor or an employee. It gives uncertainty about whether businesses and workers can rely on what they had written and agreed in their contracts.

The courts have traditionally looked beyond the terms of the contract to consider the whole work relationship.

Recent clarification on workers and contractors

The High Court has made two recent decisions. These provide increased certainty for businesses engaging workers as contractors. As a result, businesses may now be more confident to engage independent contractors instead of employing staff.

The High Court clarified that if a contract between the parties sets down the terms of a contractor relationship, then legally that is what the relationship is. The terms of the contract define the relationship unless there is a suggestion that the contract is:

  • a sham, unlawful, or
  • completely inconsistent with the conduct of the parties.

The factors in ‘multifactorial indicia’

This does not mean that simply writing in the contract that the worker is a ‘contractor’ is enough. It’s essential to make sure that:

  • the relationship is a genuine contractor relationship
  • the contract is well drafted and aligns with the ‘multifactorial indicia’.

The ‘multifactorial indicia’ are traditionally used to identify whether a relationship is that of a contractor or an employee.

These factors include:

  • the ability of the worker to subcontract/delegate
  • the basis of payment
  • provision of equipment tools and assets
  • commercial risks
  • control over work, and
  • whether the worker is conducting their own independent business.

A word on entitlements

A well-drafted contract between the parties gives businesses more certainty that the workers engaged as independent contractors cannot later claim employment-related payments, such as minimum hourly rates and leave.

In some circumstances independent contractors are entitled to superannuation – so make sure you have this one covered too! We can give you advice on when, and when not, to pay super to your contractors. Believe us, you don’t want to get this one wrong.

Update your contractor agreements

To ensure your agreements are up to scratch:

  • make sure you are clear about the nature of each one of your employment relationships
  • have a strong written agreement in place for your employees and contractors

These agreements need to set out the rights and obligations of both parties. Remember to regularly review your existing contracts to make sure they offer you full protection, and that you are meeting all your legal obligations.

We have recently made a number of updates to our contractor agreements. We highly recommend that you update yours in light of the new case law.

HR Guru clients on a retainer get access to the template for free.

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