Thinking of Becoming a Contractor?
Across Australia there are almost a million people earning their income by contracting out their services under contract or contracts. On the 1st March 2007, new independent contractor laws were introduced to streamline how contractors run their businesses. The key laws are:
- Independent Contractors Act 2006
- Workplace Relations Legislation Amendment (Independent Contractors) Act 2006; and
- Independent Contractors Regulations 2007.
This legislation was designed to protect the freedoms, rights and entitlements of independent contractors. To understand whether you are covered under these laws see the Independent Contractors Government Website.
Employers recognise this form of engagement is a major alternative to traditional salaried employment arrangements.
If you are currently operating as a contractor (also known as independent contractor) and provide your services under a contracting arrangement then the following noteworthy Australian Government publications are a must read:
- Independent Contractors – the essential handbook;
- How to guides – Starting as an independent contractor;
- Independent contractors: contracts made easy;
- Unfair contracts;
- Sham contracting; and
- The contractor decision tool. All available at the Business Government Website.
Other important sources of information can be found at the:
- Australian Taxation Office (sets out your taxation obligations);
- Fair Work Ombudsman (is the agency responsible for ensuring that the rights and obligations of workers and employees are understood and enforced appropriately; and
- The Office of the Australian Building and Construction Commissioner.
What is an Independent Contractor?
Independent Contractors run their own businesses, hiring out their services (which are usually specialist skills) to other businesses and companies. These contractors negotiate their own terms which cover fees, working arrangements, etc. and they generally work or provide services to multiple clients.
Undertaking work in this way significantly differentiates the independent contractor from an employee, and understanding these differences is critical for both the contractor and hirer. The difference in categorization has significant implications in relation to taxation, superannuation, intellectual property ownership, and insurance. In summary, as set out in the Independent Contractors – the essential handbook, the differences are as follows:
|As an Independent Contractor You Are:||As an Employee You Are:|
|paid on results achieved or output||paid for time worked and are entitled to personal leave; annual leave (long service leave); parental leave; minimum rates of pay; entitled to meal breaks|
|providing services to multiple businesses||only able to provide services to one employer|
|providing most of the materials necessary to complete the work||the employer provides everything for you|
|delegating to others||required to perform the duties of the job position|
|free to choose the way in which you conduct the work||not able to control the work you perform; the place where you work; the hours of work|
|free to accept work or reject work as you please||recognised as an integral part of the employer’s business|
|in a position to make a profit and/or loss||Paid a salary for agreed personal services and cannot make a profit or loss from work performed|
|Required to take commercial risk||Not required to take commercial risk|
Implications of Hiring Independent Contractors
For the people hiring an independent contractor they may need to withhold taxation if (i) the contractor asks you to do so, (ii) provide their services to clients under a labour-hire arrangement, and (iii) if they have NOT quoted you an ABN. There may also be requirements to cover them under insurances, and in some states there are payroll tax obligations imposed. So understanding how you hire a contractor is important if you want to avoid breaking the law.
Hirers are also required to comply with the Independent Contractors Act 2006. For example this sets out that an unfair contract is one where a person performs work on terms that are unfair and harsh, so as a hirer of independent contractors, understand your legal obligations to them. You should also make sure that your contracts clearly set out remedies for when you have disputes with your contractors. However, if the parties fail to agree (by agreement, mediation or arbitration), then there are remedies under the Commonwealth unfair contracts systems.
Then there is the issue of whether a party creates a sham contract. This is where an employer deliberately hides an employment relationship as an independent contracting arrangement. This occurs where an employer does not wish to hire a person as an employee and can lead to the individual missing out on their legal entitlements. The Fair Work Act 2009 protects genuine employees from sham contracting arrangements.
Key Issues to Consider in Becoming an Independent Contractor
The concept of contracting sounds invitingly simple. However, this is far from the truth as you are effectively running a small business, which means you have all the responsibilities of running the business as well as delivering on your service commitments. The following are a list of key issues when considering this option for earning an income:
- Set up your business properly – so get good legal, taxation and insurance advice when establishing your trading entity. This can have major implications for the contracts you enter and your liability under those contracts.
- Plan for the future – this may include establishing income protection.
- Create a business plan for yourself and your business. This should also include life work balance plans, as most independent contractors end up working flat out and tend not to take holidays. This can lead to poor decisions and poor business practices.
- Create good spending and cash-flow management habits.
- Develop key relationships – establish solid working relationships with your key clients and ‘don’t put all your eggs in one basket’. Get to know your customers and select customers who have good credit ratings. Pick your clients wisely.
- Get good taxation advice as you go along to ensure that you continually stay up to date with changing taxation requirements.
- Get good legal advice as you enter contracts as these terms set out your obligations, rights and remedies.
- Know your legal obligations and your legal rights (see essential reading as recommended above) under the contracting laws.
- Optimise your specialty and consider growing a niche service.
- Stay innovative, focused and motivated.
- Deliver a high level of service so you are not at risk of running out of work and will secure referrals.
- Decide how and where you want to work – this may be from home, shared office, etc.
- Establish a budget and targets for your business.
- Create an on-line presence and network to promote your services (the more incoming links you get, the greater the traffic to your web-site, so don’t just focus on your SEO).
- Create a clear and well written profile to market your services.
- Manage your time well and work smart.
- Network and don’t become insular, as this leads to lack of confidence, isolation and ultimately downgrading of your skills, so keep close to the hub of your industry.
- Keep yourself and your clients happy, but know your limits.