Hiring contractors: Four questions to ask

- April 9, 2014 3 MIN READ

Need to hire a contractor? There are four questions you need to ask first. Find out what they are; as well as what to include in a contractor’s agreement.

Question 1: Are there rules for hiring a contractor?

Yes! Both the Australian Taxation Office (ATO) and the Fair Work Ombudsmen have guidelines to help you understand when your contractor may be considered an employee.

It’s important to know what these rules are, otherwise, if you have contractors who are deemed to be employees, you could end up with a nasty bill in back taxes and employee benefits.

There is also a Decision Tool on the ATO website that helps you to determine whether an individual would be considered an employee or contractor. It generates a report that you can keep on file for your records. But remember, this is not definitive for any argument with the ATO.

Question 2: What if my contractor ends up being deemed an employee?

It can be expensive! There are a number of consequences if the contractor is properly classifiable as an employee. You’ll be assessed to pay: taxes (PAYG, Payroll etc.), superannuation, sick and annual leave entitlements, and insurances for the period they worked for you. In some cases, where you may be seen to be intentionally avoiding hiring an employee, Fair Work inspectors can also seek penalties.

Question 3: How do I ensure I hire a contractor not an employee?

There is no fixed test or set rules to decide if a worker is properly classified as an employee or contractor. Just because you call someone an independent contractor doesn’t mean the ATO considers them as such.

Want more articles like this? Check out the project management section.

However, some factors can help to guide you:

  1. Invoicing and Tax. Contractors invoice for their services, pay their own superannuation and tax.
  2. Contract term is for a fixed project or timeframe. A contractor is contracted and paid for a set project or time period, not paid hourly.
  3. Control of working conditions. A contractor may decide their hours and working conditions, i.e. when they work, how long they work and where they work.
  4. No Leave Payments. Contractors do not get paid holiday or sick leave.
  5. Risk and Responsibility. Contractors can decide what work they do, carry the risk for defect in their work, have their own insurance and control the performance of the work.
  6. Skills and Tools. Contractors normally have specialised skills, organise their own training and provide the tools necessary to perform the work.
  7. Delegation of work. Contractors can delegate their work to other colleagues or sub-contract to a third party, and are responsible for the output if they do.
  8. No Exclusivity.  Contractors can work for other companies and businesses, not exclusively for you.

Question 4: What else can go wrong when I hire a contractor?

If you have decided to hire a contractor, there are still a few things to consider. You are exposing your business to a new person who will have access to your business, that’s a huge risk. So you need to ensure you protect your business.

Three things you need to include in your Contractor Agreement:

  • Confidentiality is key
    If you hire a contractor, ensure you have a good confidentiality clause to cover your client list, the work they’re doing, and the information they come in contact with or have access to.
  • Ownership of work
    Make sure it’s clear in your contract that you own all the work they do for you, including the software code, the website, and all intellectual property developed during the project.
  • Clear timelines:
    Have clear and defined timelines, payment terms and expectations. This will help ensure a good working relationship and outcome.

Once you have sorted out the contractor arrangement, the agreement and the understanding, you can move on and grow your business. Best of luck!

What has been your experience when hiring contractors?