A guide to working with independent contractors for small business owners
Hiring independent contractors may be an effective way to get more work done without onboarding new, full-time resources, but there are a few things small business owners should be aware of before taking the plunge.
If you need to start delegating tasks in your business or don’t have the necessary expertise in-house to complete certain jobs, you may want to hire a contractor.
Here is the rundown on everything small business owners need to know about working with independent contractors.
What is the difference between an employee and a contractor?
Employees, whether part-time, full-time, or casual, are hired to work within someone else’s business.
They’re paid a wage and receive entitlements during the year, such as annual and sick leave.
Their work is performed on site, in most cases, and there are other controls about how, where, and when they do their job.
Independent contractors, on the other hand, differ in a variety of ways.
Although there is no one factor or combination of factors that determine a worker’s status, usually contractors:
- Are their own boss, working for themselves but selling their services to others
- Control their working times and work as many hours as are needed to complete a job
- Work from home or other premises of their choice, or complete work on business premises for a short amount of time
- Provide their own equipment and tools
- Create their own processes to complete tasks
- Accept or refuse work as they see fit
- Work for many clients at once
Also called ‘sub-contractors’ or ‘subbies’, independent contractors are hired to complete a set task or project based on terms set within a contract.
They’re paid per hour, per day, per task completed, or via another agreed calculation.
Contractors can choose to delegate or subcontract some of their work if they want to, too, unless this has been specifically forbidden in their contract.
Businesses often hire contractors for their specialised skills, when such skills are required for a short, or pre-determined, amount of time.
The rights and responsibilities of businesses hiring contractors
If you decide to hire a contractor for a project, be aware that your rights and responsibilities are different from those when dealing with employees.
Unlike with in-house staff, when you use contractors, you don’t have to pay them sick leave, annual leave, superannuation, or other related benefits.
You don’t have to take tax out of your payments to contractors, either (although contractors may request this in rare cases). Tax matters are up to independent contractors to sort out.
Businesses negotiate a set price for the work contractors are to perform and pay them accordingly.
Independent contractors supply an invoice for the work. Businesses must make payment within the agreed-upon timeframe noted in the contract and/or on the invoice.
If unhappy with the work done by a contractor, entrepreneurs should read the contract to understand payment terms and conditions.
Contractors usually bear the responsibility and liability for poor work, but not always.
Try to resolve payment issues amicably, or make use of a mediator. You may need to get legal advice, too.
Don’t just withhold payment if you’re not pleased with a contractor’s work. Doing this can give them the right to terminate the contract because you failed to meet payment obligations. Contractors might then claim damages from you for that breach.
Contractors are not entitled to a minimum wage, but they’re after an acceptable rate for their work. They typically always bear the financial risk for making a profit or loss for each job.
Under the Fair Work Act, contractors are protected from various adverse situations, though.
For example, as a business owner or manager, you can’t terminate a contract because a contractor made a complaint to a regulator about their workplace rights.
Businesses must not threaten to take action against contractors as a means of coercing them not to exercise their workplace rights, either. Nor can they force contractors to join (or exclude themselves from) a trade group or other relevant association.
The Independent Contractors Act also protects self-employed workers in the matter of contracts.
Contractors can ask a court to review contracts they see as harsh or unfair.
If a case goes to court, factors considered include contract terms, bargaining strengths of each party, unfair tactics used against any party, and the comparison of the total remuneration against standard industry rates.
Be aware that if courts deem a contract to be harsh or unfair, they have the power to order contract terms to be changed (e.g. added, removed, or edited), to nullify certain terms of the contract, or to set aside the entire contract so it no longer has any effect.
Since contractors typically work off-site, businesses aren’t usually responsible for keeping contractors safe.
Contractors need to take out their own insurance and legal covers to protect themselves and others, as applicable.
But, if a contractor does have to work at your business site or use your equipment, your firm could be liable if harm comes to the contractor as a result of your dangerous workspace or equipment.
Contractors are usually liable for any defects or other problems with their work, too, although again, this can vary from contract to contract.
The pros and cons of hiring contractors
There are numerous reasons to hire a contractor. Benefits include:
- Quick access to the additional skills, experience, or technology your business needs, particularly during growth stages or periods of uncertainty
- Organisational flexibility, since you hire contractors only when you need them
- Ease of termination, as you can end most contracts with just a few weeks’ notice
- Lower overheads due to the fact you don’t need to pay superannuation, holiday pay, sick leave, and other benefits
- Reduced legal liability as contractors provide their own insurance
There are also some potential downsides to be considered when hiring contractors rather than employing people in-house. For example:
- Lack of stability in your business, because contractors come and go
- Time wasted training contractors how to do tasks to your liking; contractors take knowledge with them once a contract finishes
- Less team cohesion, since contractors work independently and usually don’t get involved in team discussions or events
- When you use contractors, you don’t end up adding value to your core business. Over the long term, investing in employees often pays better dividends than spending money on contractors year after year
- While you will likely get a contractor to sign a non-disclosure agreement, there are risks in giving them access to sensitive information
Utilising contractors in your small or medium business can be a smart tactic in many circumstances. But, always do your research, be careful about which contractors you hire, and get advice from accountants and lawyers to ensure adequate protection before going ahead.
The information provided here is of a general nature for Australia and should not be your only source of information. Please consult an experienced and registered business advisor, as well as professional legal advisor, as each individual’s circumstances will vary.