Contractor hires at your startup - what you need to check first
Are you hiring a contractor at your startup ?
Importantly, what you will want to check first is that you have correctly classified your worker as a contractor and that they should not be an employee.
Because if you get the classification wrong, you could face a sham contracting claim from your worker.
Most important, when reading this post, you want to check that you can answer yes to most of the questions in the boxes under each of the headings below.
Tip - you can download the key points in this article as a checklist below.
For the purpose of testing whether a worker is a contractor or employee, the courts look at these points collectively.
So, this means...
There is no one point that is more important than the other... and you ultimately want to avoid a situation where your worker's classification is tested in any court.
Will you be giving the worker a great deal of control over how they do their work ?
Following this question ... if you ARE giving the worker instructions about how to perform their work, you are treating the worker as an employee.
Likewise, hours of work are a good indicator of your workers classification as contractor or employee.
Will the worker be able to set their own work hours ?
Unlike a contractor, an employee cannot set their own work hours. They may be given a roster or there is an expectation for them to turn up to work on certain set days of the week.
In addition to hours of work can the worker expect ongoing work ?
Is the worker being hired for a specific task ?
In contrast to being hired as a contractor, an employee’s work is ongoing, they are not just hired for a specific task.
So what you want to watch out for is a situation where the specific task becomes several other tasks without any clear finish date.
Tip - if a project has turned into a couple more, you should have any new tasks clarified in a new contractor agreement or if you want to bring a worker on board on an ongoing basis, it may be more appropriate to call them an employee and get an employment agreement drafted. As always, get advice if you are in doubt.
Do you expect the worker to bear the risk of completing work for your startup ?
To clarify, if something goes wrong during or after the work, will the worker be responsible ?
Unlike a contractor, an employee should not have a requirement to take on risk for completing their work and they certainly should not have to hold an insurance policy.
So from this point, there are two practical applications for your startup:
For contractor agreements - you may want to include a requirement in your contractor agreement for your contractor to have run off insurance after their contract term in case any claims come up after they complete their work for your startup.
For employee agreements - avoid any unreasonable clauses that require an employee to pay for damage while doing their job because these clauses likely won’t hold up.
In addition to risk, superannuation is another factor to consider.
Will the worker be responsible for paying their own superannuation ?
Generally, contractors pay their own superannuation BUT your contractor could also be entitled to superannuation in some situations e.g. if they are mainly paid for their labour.
Tip - the Australian Tax Office has a tool you can use to determine if you need to pay superannuation to a worker. You can access the tool right here.
Will the worker provide their own tools and equipment ?
While contractors usually supply their own tools and equipment, employees have these supplied to them.
Will the worker pay their own tax ?
Unlike contractors, employees have tax deducted from their pay.
In addition to tax, the payment method for your worker is another important consideration.
Will the worker have an ABN and submit an invoice for the work they complete ?
In contrast to a contractor, an employee will not submit an invoice for their work. They will be paid regularly for example weekly, every 2 weeks or monthly.
Finally, leave is another indicator of your worker’s classification.
Will any absence by the worker be unpaid ?
Unlike contractors, employees get leave entitlements like annual leave and personal/carer’s leave.
Now you can download this article as a checklist below.
A checklist to help to correctly identify and classify a worker as a contractor.