What are the legal requirements for an independent contractor?
Hiring contractors gives your business flexibility, but in Australia, the line between ‘Contractor’ and ‘Employee’ is thinner than you think. Getting it wrong is called ‘Sham Contracting,’ and the penalties are severe.
The 2025 Reality: New Rules, Higher Stakes
Under the new Closing Loopholes laws (Fair Work Act s 15AA), the game has fundamentally changed. Courts now examine the “real substance, practical reality, and true nature” of your working relationship, not just what your contract says. This means that beautifully worded agreement you downloaded? It’s worthless if the actual working arrangement tells a different story.
The courts can impose penalties of up to $99,000 for businesses with fewer than 15 employees and $495,000 for businesses with more than 15 employees. That’s before considering back-pay for entitlements, superannuation guarantee charges, and potential payroll tax liabilities stretching back seven years.
Why Free Templates Fail Australian Businesses
That generic template you found online, whether from the US or a poorly crafted Australian version, likely fails to address critical elements:
- Delegation Rights: Most templates ignore the fundamental requirement that contractors must have the genuine power to subcontract their work.
- The “Results” vs. “Time” Distinction: If your agreement pays by the hour for indefinite work, you’re describing an employee.
- Australian-Specific Case Law: Recent decisions like Jamsek and Personnel Contracting have reshaped the landscape. Your agreement needs to reflect these precedents.
Don’t risk compliance. Have your Independent Contractor Agreement written by one of our employment lawyers.
What should be in an Independent Contractor Agreement?
1. The Right to Delegate
If your contract demands the worker perform the work personally, the ATO likely views them as an employee. This isn’t about whether they actually delegate, it’s about whether they genuinely can.
The delegation clause needs teeth. It should specify that the contractor bears full responsibility for their subcontractors’ work quality, insurance, and compliance. Without this, you’re creating an employment relationship by default.
2. Indemnity & Insurance (How to protect yourself)
Your agreement must clearly shift liability for faulty work to the contractor. This means comprehensive indemnity clauses that protect you from claims arising from the contractor’s work, including:
- Professional indemnity for service errors
- Public liability for third-party claims
- Workers’ compensation for the contractor and any subcontractors
3. Intellectual Property (IP) Clauses
Unlike employees (where you own the work automatically), contractors retain ownership of their work unless your contract explicitly assigns the IP to you. This is where most businesses discover, too late, that they don’t own the website, design, or code they paid thousands for.
Your agreement needs watertight IP assignment clauses. One misplaced word could mean you’re paying for work you don’t own.
What is the 80/20 rule (ATO)?
The ATO’s 80/20 rule creates a specific trap for contractors. If a contractor derives 80% or more of their income from your business, they may fail the PSI test. This means:
- The ATO may deny their business expense deductions
- You might become responsible for PAYG withholding
- Their tax structure advantages disappear
The financial implications cascade both ways. A contractor losing their deductions might seek reclassification as an employee to recover losses.
What rights do Independent Contractors have to Superannuation?
Many employers mistakenly believe contractors never receive superannuation. Wrong. Contractors are entitled to Super (currently 11.5%, rising to 12% in July 2025) if they’re paid wholly or principally for their labour. This applies even with a written contractor agreement in place.
If your contract doesn’t account for this distinction, you could face a Super Guarantee Charge (SGC) audit years later.
Can Independent Contractors be told what to do?
You cannot dictate how a contractor does the job, only the result. This distinction sounds simple but proves complex in practice.
- Acceptable direction includes: Quality standards, deadlines, milestones, and safety rules.
- Unacceptable control includes: Mandating specific working hours (beyond site access), requiring personal attendance at meetings, or dictating specific work methods.
The “Uniform” & “Hours” Myths
Requiring uniforms or set 9-5 hours are immediate red flags for Fair Work.
- Branded PPE for site identification? Generally acceptable.
- Company polo shirt for “team unity”? You’re describing an employee.
Diagnostic: Signs Your Current Contractor Might Actually Be an Employee
If you recognise more than two of these signs, you are likely in breach of sham contracting provisions:
- They can’t subcontract the work
- They use your equipment/laptop exclusively
- They are paid an hourly rate for ongoing, indefinite work
- They are integrated into your organisational structure
- They receive the same training as employees
Unsure if your workers are truly contractors? Contact us for a review or a fresh Agreement.
Protect Your Business with Compliant Agreements
Why Professional Drafting Matters
- Fair Work Compliant: We keep up with legislation changes so you don’t have to. Our agreements reflect the latest case law and regulatory guidance, updated for the 2025 Closing Loopholes amendments.
- ATO Defensible: Clauses specifically designed to support independent contractor status.
- IP Protection: Ensure you actually own the work you pay for.
Frequently Asked Questions
Can I write my own legally binding contract?
You can, but it is highly risky. Self-written contracts rarely account for Australian-specific case law or the nuances of the Closing Loopholes legislation. A single vague clause regarding “delegation” or “control” can render the contract ineffective against a Sham Contracting claim.
Do I need an ABN if I earn less than $75,000?
Yes, if you are operating as a business/contractor. The $75,000 threshold applies to GST registration, not having an ABN. Without an ABN, other businesses must withhold 47% of payments to you for tax purposes.
What happens if you break an independent contractor agreement?
This depends on the termination clauses in the contract. Unlike employment (which has unfair dismissal protections), contractor agreements are commercial contracts. Breaking them without following the notice period or dispute resolution clauses can lead to lawsuits for damages or lost revenue.
Is it illegal to 1099 a full-time employee?
In Australia, we don’t use “1099” (that is a US term), but the concept is the same. It is illegal to treat a worker as a contractor (on an invoice) if they are legally an employee. This is known as “Sham Contracting” and attracts significant penalties from the courts.