How to Hire an Independent Contractor, Freelancer or Consultant – This comprehensive guide outlines everything you need to know from an Australian legal standpoint about hiring independent contractors, freelancers and consultants. We cover:
- Why you need an ‘arms length’ relationship with your contractor
- What to do about insurance and copyright ownership
- Why you should use an independent Contractor Agreement, and
- How to get the best out of your service providers
Hiring contractors, freelancers and consultants – rather than taking on full-time or part-time employees – is often the smart business choice. But you need to know what you’re doing to avoid any legal issues and protect you and your business from lawsuits.
Legal issues covered in this guide
Click on any of the questions below to jump to that section of this legal guide.
- What is the difference between an independent contractor, freelancer and consultant?
- What is the difference between an independent contractor and employee?
- What are the pros and cons of hiring an independent contractor?
- Where do I find the right independent contractor?
- Do independent contractors need insurance?
- Do independent contractors own the copyright to their work?
- What is a Contractor Agreement?
- Why use a Contractor Agreement?
- What are the risks of not using a Contractor Agreement?
- Why do I need to ensure an ‘arms length’ relationship with my contractor?
- What type of services should a Contractor Agreement be used for?
- Do I need to get legal advice before negotiating a Contractor Agreement?
- Does a Contractor Agreement need to be in writing?
- How do I sign or ‘execute’ a Contractor Agreement?
- Does a Contractor Agreement need to be witnessed?
- In which Australian States is my Contractor Agreement valid?
- How to get the best out of contractors, freelancers and consultants?
- How do I ensure no disputes about services provided or the project terms?
- What happens if there is a disagreement on progress or quality of the work?
- What happens if my contractor and I can’t resolve an issue?
- How to terminate an independent contractor?
If after reading this guide you still have a question, get in touch as we’d love to keep adding your questions to this comprehensive guide.
Definitions and Differences
What is the difference between an independent contractor, freelancer and consultant?
Independent contractors, freelancers and consultants all work for businesses (or individuals) on a project-by-project basis, providing services. The terms are often used independently, however, there are (subtle) differences between them:
Independent contractors typically work:
- To deliver a service or complete a task
- For one client at a time
- For an extended period
- At the client’s site
- Directly or through a contracting company
- With a strong contract (e.g. non-compete clause)
- And have professional qualifications
Independent contracting is common in: accounting, bookkeeping, engineering, freelance photography, IT, technical service, real estate, sales, truck driving, plumbing, electrical work etc.
Freelancers typically work:
- To deliver an output or product
- For multiple clients at the same time
- For short periods
- From home (and maybe with client site visits)
- Often without a contract but with agreed Terms
- And with specific experience (but not necessarily professional qualifications)
Freelancing is common in: journalism, writing, copywriting, computer programming, software development, graphic design, film production, translation, etc.
Consultants typically work:
- To deliver expert advice
- For one (or more) clients at a time
- For an extended period
- At the client site or from their company offices
- Directly or through a contracting company
- With a strong contract
- And have professional qualifications and specific experience
Consulting is common in: financial planning, strategic planning, marketing, research, training, business planning, business review, computing, law, etc.
What is the difference between an independent contractor and employee?
The difference between an independent contractor and employee is important. If your service provider is deemed to be an employee, rather than an independent contractor, then you could be liable to pay their Superannuation, holiday pay, health insurance, other benefits, tax, etc.
The following factors help to determine whether an independent contractor is an employee or not. In general an independent contractor:
- Hired for a single project or specific period only
- Operates their own business independently of their clients
- Submits invoices under their own company name and with their own ABN
- Pays their own GST, tax, Superannuation, etc.
- Is often paid on an hourly rate or for the result achieved
- Is responsible for their work and liable for the cost of rectifying any poor work
- Completes the work with their own tools and equipment
- Has freedom in the way and where the work is done (subject to any contract)
- Can subcontract or delegate the work to another independent contractor
More information on the ATO’s website here.
What are the pros and cons of hiring an independent contractor?
There are many pros and cons of using independent contractors. But here are what we believe are the 3 most important pros and 3 most important cons.
Pros of using independent contractors:
- Potential cost savings, including office space, equipment, benefits, etc.
- Staffing flexibility and ability to hire on an as-needed basis, and
- Access to specialist skills, without the need for additional training
Cons of using independent contractors:
- Less direct control over priorities, timing and methods
- Less certainty of availability, and
- Loss of skills because they are not transferred to employees of the client
Where do I find the right independent contractor?
There are literally dozens of websites where contractors, freelancers and consultants advertise and respond to project requests. Each service has a slightly different focus, so you’ll need to do some research and maybe test a couple. Here are a few of the largest outsourcing sites (with an emphasis on online businesses):
- Upwork (the merger of Elance and oDesk)
Specific industries also have contracting sites, for example, construction or truck driving. In addition, good contractors often know other good contractors – so don’t forget to ask.
Do independent contractors need insurance?
The type of insurance an independent contractor needs depends on the risks involved in the services they provide. Your Contractor Agreement should specify if you require your contractor to have any of these types of insurance:
- Public Liability: To cover any claims by members of the public for damaged property, injury or losses suffered as a result of the actions or negligence of your contractor.
- Professional Indemnity: To cover any claims you might make against your contractor or consultant for losses suffered from poor advice or recommendations given.
- Workers’ Compensation: To cover the costs of the contractor’s employees if they become injured or sick at work.
You are responsible for a contractor’s safety if they are on your premises. Workplace Health and Safety Legislation in most States requires employers to provide for the health and safety of their employees. Whilst your relationship with your service provider is not one of ’employee/employer’, it is recommended that you check with your insurance provider to ensure service providers and contractors are covered for any injury or harm they may suffer when they are on your premises.
Do independent contractors own the copyright to their work?
Yes. Unless a written Contractor Agreement states otherwise, a contractor or consultant owns and retains the intellectual property and copyright of any work they create. It is the opposite situation for an employee. In an ‘employee/employer’ relationship, the employer generally owns the intellectual property and copyright of any work created by the employees during the course of their employment and created during work hours.
It is advisable to have a copyright clause in your independent Contractor Agreement to ensure that you own or agree to have the intellectual property and copyright of any work created during your project transferred to you on completion.
What is a Contractor Agreement?
A Contractor Agreement is an agreement between a business owner (or individual) and an independent contractor, freelancer or consultant to provide business-related services. The agreement should detail the terms and conditions under which the services are provided to the business owner. A Contractor Agreement should be used with an independent contractor, freelancer or consultant, not an employee.
Why use a Contractor Agreement?
A Contractor Agreement provides a number of benefits, for both the business owner (or individual) and the service provider, including:
- Detailing the outputs or outcomes required, project timing and terms of payment
- Clarifying expectations between the business owner and service provider
- Protecting the ownership of the completed work and any confidential information that is shared with the service provider, etc.
What are the risks of not using a Contractor Agreement?
There are a number of possible risks arising from not using a Contractor Agreement, including:
- Disputes over services provided
- Disputes over non-payment
- Disputes over terms of payment
- No indemnity for the business owner against the service provider’s actions
- Loss of ownership of confidential information, client lists, business ideas or brand identity, etc.
Why do I need to ensure an ‘arms length’ relationship with my contractor?
You want to make sure you have an ‘arms length’ relationship with any contractor, freelancer or consultant to help ensure that you don’t incur Superannuation, holiday pay, health insurance, other benefits, tax, etc. obligations. You also need to hire your service provider on a short term contract and ensure they are not performing ‘normal everyday business functions’ on an ongoing basis. If not, you risk triggering ATO ‘employee’ provisions.
A well written Contractor Agreement (plus your contractor having their own business structure and ABN) will help clarify the contractual relationship and help ensure no ’employee/employer’ relationship can be implied.
What type of services should a Contractor Agreement be used for?
A Contractor Agreement can be used for almost any service provided to a business owner or individual, for example:
- Business, management or financial consulting advice
- Project management assistance
- Online business consulting and website services
- Specialist, short-term contract work (e.g. marketing, product launches, etc.)
- Offering trade services (e.g. electrical, plumbing, maintenance, etc.)
Do I need to get legal advice before negotiating a Contractor Agreement?
No. Most Contractor Agreements are very straightforward to negotiate between business owner/individual and contractor, freelancer or consultant. However, if the work you are engaging the service provider to do is large or complex, or if large sums of money are involved, it is recommended that you do get legal advice.
Does a Contractor Agreement need to be in writing?
Yes. It is recommended that you use a formal Contractor Agreement to clarify expectations for work, payment and delivery between the business owner/individual and the service provider. In addition, it is recommended that verbal communication is confirmed in writing with an email to avoid any misunderstandings.
How do I sign or ‘execute’ a Contractor Agreement?
If the business owner and service provider meet in person, both parties must sign 2 copies of the Contractor Agreement and exchange them (i.e. business owner and service provider sign two copies and each keep one).
However, if a face-to-face meeting is not possible, the next best alternative is for one party to sign 2 copies of the Contractor Agreement and post them both to the other party. The other party then signs both copies and sends back one of those copies.
If this is not possible, then we suggest you use an e-signature service to sign your Contractor Agreement. E-signatures have been legally valid since 1999, when the Electronic Transactions Act was made law.
Does a Contractor Agreement need to be witnessed?
No, a Contractor Agreement does not need to be witnessed. However, both the business owner and service provider need to be over 18 years of age for the agreement to be a legally binding contract.
In which Australian States is my Contractor Agreement valid?
The Legal123 Contractor Agreement is valid in all Australian States and the jurisdiction can be specified in the ‘Schedule’ that forms part of the agreement. It is recommended that your home State be specified as the jurisdiction. Otherwise, in the event of a dispute and you have not specified your home State, you will have to pay for advice from someone who is familiar with the specified jurisdiction and possibly incur further costs for travel and dispute resolution in that State.
Working with Independent Contractors
How to get the best out of contractors, freelancers and consultants?
Here are 3 suggestions for getting the best out of your service providers:
- Be very specific in what you need – the clearer your request the easier it will be to deliver. And if you don’t know the right technical terms, then learn the “language” (e.g. software code functionality)
- Give constructive feedback promptly, so your contractor can fix problems and deliver quicker. If your contractor feels your project is not a priority to you, why should it be a priority to them?
- Pay promptly and generously. In contracting, as in so many things in life, you get what you pay for. If you want to pay rock bottom prices, then don’t expect the world.
How do I ensure no disputes about services provided or the project terms?
The best way to minimize misunderstandings and ensure clarity of expectations between both parties is to define the project or services, delivery and payment terms clearly in a Contractor Agreement. The more detail a business owner provides to the service provider, the more likely it will be understood and delivered.
Ensure that the service provider knows that all information provided is part of your idea for your business and forms part of the confidential information that is not to be disclosed to or used for other clients. This will help ensure your ideas are protected.
This requirement of confidentiality should be extended not only to a service provider’s own workers, but to other persons who may be required to work on the service provider’s premises or to persons who carry out work under the direction of the lead service provider.
What happens if there is a disagreement on progress or quality of the work?
The Legal123 Contractor Agreement specifies that in the event that progress on the project or the quality of the work is not meeting expectations, the business owner may inform the service provider to cease work and only pay for the work completed to date. The business owner will own the IP and all work done up to the time the project ceased.
This provision in the contract does not mean that the business owner can choose some of the completed work and only pay for that part but requires fair payment to be made for all work completed. In addition, a business owner cannot change their mind arbitrarily. They need to communicate effectively with the contractor, freelancer or consultant if they are not happy with the results to-date and must genuinely try to resolve the issue before discontinuing any services.
What happens if my contractor and I can’t resolve an issue?
Your Contractor Agreement should include a clause that, in the event the business owner and service provider dispute the quality of the work, ownership or any payments, both parties agree to submit to an independent, specialist arbitrator who will decide the matter. Further, both parties agree to abide by whatever the arbitrator determines and to pay their own costs.
How to terminate an independent contractor?
If you have a Contractor Agreement with your service provider then strictly follow the provisions of the termination clause in that agreement. Take particular notice of the number of days or weeks notice you must give your contractor. In this way you’re most likely to avoid any breach of contract.
If you don’t have a written agreement with your contractor then discuss the situation with them and mutually decide how best to terminate the project. Be particularly careful if the contractor has invested in materials or equipment specifically for your project or to work with you. Compensation for any investment made might be warranted and allow you to exit the relationship cleanly. If at all possible work out a mutually agreeable plan to terminate the work.
We hope you found this legal guide on hiring independent contractors, freelancers and consultants helpful.