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Understanding contracts

Independent contractors may enter into verbal and written contracts to do work for other individuals, businesses, government bodies or organisations. This may include people who describe themselves as 'self-employed', a 'consultant' or a 'subcontractor'.

When you agree to do a job for another person or business in exchange for money or some other benefit, you are probably entering into a commercial contract. If so, this contract is legally enforceable regardless of whether it was a just a 'handshake deal' or a written agreement.

By better understanding the contracts you enter into, you will be well placed to negotiate contracts that work for you. However, it is important to get professional advice to fully understand your obligations.

What is a contract?

A 'contract' refers to a commercial contract made between an independent contractor and a hirer. 

The term 'hirer' refers to the person or business that engages an independent contractor. Sometimes, a contract or a law will refer to the hirer as a 'principal'.

Commercial contracts may include:

  • a contract for the independent contractor's labour or skills where payment is made on the basis of hourly or daily rates
  • a contract for the independent contractor to achieve a result where payment is made on the basis of a fixed fee.

These commercial contracts are different to the 'employment' contracts that apply to employers and employees.

Find out more about the types of contracts used by Independent Contractors.

Things to consider before signing a contract...

Do you know your status?

Find out if you are considered an 'employee' or 'independent contractor' for a particular job or if you are working under an illegal 'sham' contracting arrangement. Knowing your status is important for tax, superannuation and insurance purposes.

Is the contract in writing?

Verbal contracts can be risky, so it's always best to get your contract in writing. However, if a written contract isn't possible, make sure you have some documentation that will help you identify what was agreed: emails, quotes, specifications and even notes about your discussions.

Do you understand all the terms?

If possible, make sure the contract terms are written in plain English. Get advice before you sign a contract you don't understand. Be careful with standard form contracts where you are expected to simply agree with what's already written and just fill in the blanks: read the fine print in any contract carefully.

Does it include important basic information?

The contract should identify each party to the contract (including Australian Business Numbers), state that the contractor is not an employee and be signed and dated by all the parties.

Does it contain a detailed description of services or the result to be achieved?

The contract should state, in as much detail as possible, what work will be done, when the work will be done and where the work will be done.

Does it set out how and when payments will be made?

The contract should set out whether payment will be by fixed fee or hourly/daily rate. Be careful of terms that provide for payment only on full completion of the contract unless the contract is for a short duration. Consider payments for completion of each stage—progress payments.

Is there an arrangement for settling disputes?

A contract should outline a process to assist in resolving disputes quickly without going to court. The process might require informal discussion and negotiation first, followed by alternative dispute resolution procedures if necessary.

Working with contracts

Working with contracts is a large part of small business management. Once in place, the requirements of a contract dictate the way in which small businesses operate. In short, they underpin the viability and security of any business, large or small.

The Treasury provides a guide on Working with contracts which outlines:

  • the essential ingredients of a contract, supported by useful and practical examples relevant to small business
  • the more frequently encountered and important legal jargon used in contracts
  • the different types of contracts
  • the basic content and structure of contracts
  • what standard form contracts are and some useful pointers on constructing your own
  • some of the basic issues relating to specific types of small business relationships.

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