Engagement of contract staff

Overview

Contractor or employee?

Independent contractors might be used by architects from time to time and for a variety of reasons such as to meet peaks and troughs in workloads. There are both common law and legislated provisions that determine whether a person is an employee or an independent contractor.

A contractor differs from an employee in that:

• they work for themselves and are their own boss
• a contractor is usually engaged for a specific task
• there is a written agreement specifying time for completion, contract costs and liability of the individual performing the work
• they are operating independently of their client’s business
• they have a high level of control over the work they perform
• they are at liberty to accept other work
• they choose how and where they work
• they choose their own hours
• they choose how they do the work
• they can pay another person or entity to do the work
• they are usually personally responsible for the quality of the work and bear the commercial risks
• they will use their own tools and equipment
• they pay their own taxes and GST
• they are free to accept or reject assignments and/or additional work.

Just because a person has an Australian Business Number (ABN) it doesn’t automatically make them a contractor.

One of the best ways of assessing whether the person or entity is an employee or a contractor is to use the employee or contractor decision page provided by the ATO. It helps an employer assess whether the contractor is genuine in the eyes of the ATO and the employer can print the result to be submitted in the case of an ATO or Fair Work audit.

Penalties and charges

Employers are at risk of being penalised by the ATO or fined by the Fair Work Commission for hiring sham contractors, i.e. people who are actually employees under the law. These include:

• PAYG withholding penalties for failing to deduct income tax
• the Superannuation Guarantee Charge for failing to pay the amount of superannuation contributions that should have been sent to a complying superannuation fund
• interest charges
• administration fees
• additional superannuation guarantee charge (SGC) up to 200%
• additional penalties up to 200% of the SGC.

Employee

In respect of employees, the principal controls how, when and where the work is done and who does it. If the control test is inconclusive, the integration test is used. An individual carrying out business on their own account will be considered an employee of the principal if the:

• relationship is continuous
• the individual's activities are restricted to one principal
• the individual does not profit from their own efficiency.

If the individual is under contract and the contract is principally to provide labour, then the individual is an employee.

There are many legitimate instances of independent contractors providing services to architectural practices, and it can be a perfectly appropriate mechanism for resourcing a short-term or specialist activity.

However, legal and contractual provisions covering such relationships are complex, with most of the potential liability falling on the employer. Principal-contractor relationships should only be entered where there is a high level of certainty about the status of the independent contractor, and where there is a properly formulated written agreement.

For expert advice in a specific instance, your professional adviser or government and other agencies such as the Australian Taxation Office, state workers' compensation authorities and relevant departments of small business should be consulted.

Back to top

Contract employment implications

There are a number of legal and insurance matters that must be considered when engaging contract staff.

Tax

A person is more likely to be considered an independent contractor if their services are provided by a family company or trust, although that fact alone will not be enough to ensure that the contractor is regarded as such by the ATO. In every case where such a relationship is contemplated, specialist advice should be sought from your lawyer or other professional adviser.

Breaching the obligation to pay or collect tax is a very serious matter, whether done on purpose or inadvertently. The employer will be responsible for all unpaid tax and may be fined as well.

Negligence

The common law provides that an employer is vicariously liable for the acts of the employee, that is, the employer is responsible for the employee's acts even though the employer has not been personally negligent.

Where the relationship exists between the principal architect and the independent contractor, the principal is not vicariously liable for the acts of the independent contractor, but where the plaintiff is the principal architect's client, the effect is the same. If the independent contractor does work for the principal architect as part of the principal's service to the client, the client will have an action in contract against the principal architect if the contractor's part is performed negligently, even though the principal architect has not been personally negligent.

Insurance

Under most architects' professional indemnity insurance policies, the employer architect is covered for their liability including any negligence caused by the employee. Further, while employees (other than directors) are not usually named as insured under such policies, insurers tend to cover the personal liability of employees where the employer is also liable and most policies waive the right of subrogation against employees.

The same does not necessarily apply to independent contractors. Unless the policy covers acts of agents as well as the negligence of the named insured, the principal architect may not be covered for their own liability arising out of the independent contractor's negligence. Also, even where acts of agents are covered, there is no standard provision that the insurer will waive the right of subrogation against the independent contractor.

Workers compensation

An employer cannot lawfully contract out of liability for workers' compensation, but if there is a genuine subcontract which is not caught by the local legislation, the employer has no liability. It should be noted that the employer may have a responsibility to ensure that a subcontractor has proper workers' compensation insurance. Where the independent contractor is the employee of their own company, the company would usually cover them for workers' compensation.

Copyright

Under section 10 of the Copyright Act the author of artistic works (which includes architects' designs) is the owner of the copyright. Under section 36(c) the employer is the owner of the copyright in works created by the employee in the course of employment. In the absence of an agreement in writing it would appear that independent contractors own the copyright in the works that they create. However, this can be managed by having an agreement signed by each independent contractor before they commence work.

Agreement provisions

Never contrive an agreement with an employee to be treated as an independent contractor. If the agreement is a sham, it is most likely to rebound on the employer. The existence or wording of such an agreement has little, if any, effect upon the liability to pay tax or workers' compensation contributions.

However, there could be serious copyright and insurance consequences of a sham agreement. On both counts, the existence of an agreement could be produced by the 'contractor' as evidence that the employee is a contractor at common law, and the employer might have difficulty arguing that the person is an employee.

Principals hiring independent contractors directly should ensure that:

• they advise their own professional indemnity insurer or broker
• the independent contractor is a Pty Ltd company or Trust
• the independent contractor has an ABN and is registered for GST
• the independent contractor is appropriately insured
• superannuation and workers' compensation payments are made by the contractor, where required
• a contract for service is signed by both parties stating the project and a fixed price
• the contract clearly states that the independent contractor is responsible for 'making good' at their expense any errors or omissions
• the independent contractor provides their own equipment
• there is a signed agreement covering copyright and moral rights.

Back to top

Contractors and professional indemnity insurance

Employing staff on contract may have implications for your professional indemnity insurance cover. Employers are usually indemnified for the negligent acts of employee staff committed in the performance of their duties. Contract staff, however, are unlikely to be regarded as employees as technically their engagement is similar to that of other secondary consultants (e.g. consulting engineers, consulting quantity surveyors) in that they are independent consultants providing services for a professional fee.

There are two possible consequences:

1. Insurance cover for the 'employer'

Unless the insurance policy specifies otherwise, insurers are entitled to treat a contract staff member as a separate legal entity from the architectural practice. The policy should thus specifically extend indemnity to the insured for liability arising from the negligent acts of agents (i.e. contract staff or subconsultants), for whom the insured is legally liable. The insured's legal liability for the activities of contract staff is then covered by the policy wording irrespective of whether they are employees or independent consultants of the insured architectural practice. However, policies that do not cover the insured for acts of agents could leave a firm uninsured for the negligence of contract staff.

2. Subrogation

Subrogation is the insurance company's right to bring an action against the person who caused the loss. Most policies waive the right of subrogation against employees, unless the loss is associated with dishonest or malicious conduct, but insurers may not agree to extend the same privilege to contractors. The result is that while you may be covered for the actions of contract staff, the independent contractor is ultimately unlikely to be covered by your policy.

Employers should consider carefully the definition of 'employee' under their professional indemnity policy. It may be that staff who are called 'independent contractors' by the practice will still fall within the definition of 'employees' under the policy. This would be the case if a staff member who has entered into a contract for service but gains 100% of their income from that practice for the duration of the contract and works under the direct supervision of the insured practice could be regarded as an 'employee' for the purpose of the policy and ATO obligations.

Employers should advise contractors and consultants to the practice that they are not covered by the practice's professional indemnity policy and should obtain their own policy to adequately protect themselves from liability.

Check your policy carefully regarding cover for liability arising from the use of independent contractors.

Back to top

Disclaimer

This information is provided for general information only and should not be relied on as specific advice for your own circumstances.

Further resources

For further information about the engagement of contractors, including resources regarding the rights and obligations of independent contractors, please visit the Institute's HR Hub.