3. How to Structure an Independent Contractor Relationship
a. How to Properly Document the Relationship
Prior to engaging an independent contractor, a company should first consider whether the work can properly be the subject of a contract of employment. It is unlikely that some types of work would ever be considered as independent contractor work, such as a receptionist, factory worker and clerical employee. At the other end of the spectrum, the fiduciary duties owed by senior executives to their employer companies may also preclude the possibility of their being engaged as independent contractors.
If the work is suitable for being performed by a contractor, it is important to ensure that the parties enter into a properly drafted independent contractor agreement, which sets out the rights and obligations of each party. The contract should make clear that the relationship is that of an independent contractor and principal, and clearly set out rights and duties consistent with a contractor-principal relationship, including (where appro-priate):
i. That the principal does not have an inherent right to control the manner in which the work is performed;
ii. The work should be identified by reference to a specific task or tasks;
iii. The contract should avoid seeking to establish fixed hours of work;
iv. The contract should not be open-ended, but rather it should have a fixed term of operation;
v. The contract should be entered into between the principal company and the trading entity operated by the independent contractor and should not require that the work be performed only by the contractor;
vi. The contractor should be required to maintain their own licences and policies of insurance for public liability and workers’ compensation. It is recommended that companies also include a term in the contract that the contractor must provide certificates of currency for all relevant insurances and licences;
vii. Payment under the contract should be linked to the completion of tasks rather than by reference to the number of hours or days worked;
viii. Contractors should be required to prepare and submit their own invoices for payment;
ix. Where it is expected or anticipated that a contractor will create a product or work capable of being traded for value, the contract should clearly state whether that work is to be assigned to the principal company and include an acknowledgement by the contractor that their payment received under the contract is sufficient valuable consideration for any work created by them in performance of the contract;
x. Further, contracts of employment imply a term of confidentiality, so it is necessary for the protection of the business to ensure that the contractor agrees to protect the confidential information of the principal company.
Ideally, the independent contractor should be an incorporated entity with an Australian Business Number, which itself employs an employee to perform the services. In circumstances where the principal contracts with an independent contractor, which is a company, it is far more difficult for a court to find that the individual actually doing the work is an employee of the principal.
In addition, the fees payable to the contractor should at least be equivalent to the base remuneration that the contractor might have received if they performed the same work as an employee. In the event of an adverse finding of sham contracting, evidence that the contractor had been remunerated at or above minimum wages can mitigate against a claim that the worker suffered a disadvantage an independent contractor relationship in order to have a clear and enforceable understanding of the rights and obligations between the parties.
b. Day-to-Day Management of the Relationship
A well-drafted contract will not be sufficient to protect a company from an adverse finding of sham contracting. The substance of the relationship, as evidenced by its day-to-day nature, must also be maintained. The principal should therefore ensure that its managers manage the relationship with the independent contractor in a manner that is consistent with its independent nature, rather than in the same manner and with the same expectations that the Principal may have of its own employees.
It is important to prepare for the possibility that the nature or characterisation of a relationship may be questioned. In keeping this in mind it may be useful to keep a record of any information that supports a verbal contract or the interpretation of a written contract, this may include; email communications, notes from meetings, quotes from conversations, diary entries, lists of specifications and any form of reporting or tasks lists.