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I Am Engaging a Contractor. What Should I Include in a Contractor Agreement?

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Engaging a contractor for one-off work or specific projects can be an excellent option for your business as opposed to hiring employees. However, if you plan on engaging a contractor, there are some issues you should consider. This article outlines what you should include in a contractor agreement. 

What is a Genuine Contractor?

The existence of the contractor agreement itself is now also a crucial element in determining whether or not someone is a genuine contractor. Recently, the High Court found that where a written agreement defines the relationship between the parties, the agreement will generally decide whether a person is an employee or an independent contractor. Therefore, if you have a contractor agreement, it is imperative to ensure you understand your obligations under it.

1. Pay and Expenses

The first issue you should ensure the contractor agreement covers is the method and timeframe you will pay the contractor for their work.

The contractor agreement should set out:

  • methods of invoicing;
  • payment terms;
  • the fee schedule for the particular kind of work you are doing, for example, an hourly rate for design work or consultancy; and 
  • whether your business will reimburse any travel expenses.
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2. Description of Services and Work Allocation

The contractor agreement must set out a detailed description of services, as various other obligations will depend on this definition. It should set out:

  • the term of the relationship; and
  • the time and length of any projects.

Project-based contractors often use a “Framework Agreement” for repeat projects, where the terms of the larger agreement govern each project. However, the specifics of each project are defined in a separate Service Order.

3. Superannuation and Insurance

In certain circumstances, contractors may be eligible for superannuation contributions. Hence, you can use the Australian Tax Office’s superannuation guarantee eligibility decision tool to determine whether superannuation will be applicable in the circumstances.

Insurance is also an important issue to consider. Typically, you will not cover your contractor’s insurance. Nevertheless, your contractor will have workplace health and safety obligations.

4. Intellectual Property

The intellectual property (IP) clause is one of the most important clauses. In the case of an employment relationship, employees typically assign their employer the rights to any intellectual property they create during their employment. 

On the other hand, contractors have more leeway to negotiate the specifics of the agreement. For example, they may carve out the rights to any existing IP created as a contractor before working with this company. In some cases, the contractor may be happy to licence this existing IP to the company for a limited purpose or time.

In some circumstances, the contractor agreement may specify that the rights in the IP of the materials the contractor develops will be assigned to the client you are working with, for example, if you have finalised a design for a client.

5. Termination

Another vital clause to review thoroughly is the termination clause. A termination clause sets out how both parties can terminate the agreement. Again, this is important to review, as you should have the opportunity to terminate the agreement if you no longer need the contractor to work with your business.

6. Exclusivity and Restraint Clauses

A contractor will likely want to collaborate with other businesses during the term of the agreement. However, your company will likely want to restrain contractors from competing with it or stealing its clients. Hence, a non-compete clause will prevent contractors from competing with your business. Likewise, a non-solicitation clause restrains contractors from soliciting your clients. 

It is important to know that such clauses are difficult to enforce in practice. As a general starting point, they are considered only enforceable if the party trying to rely on them shows they are reasonable. To do this, they must show that the restraint goes no further than is reasonably necessary to protect a legitimate business interest.

Stopping contractors from working with competitors does not usually meet this threshold. This is because protection from mere competition is not necessarily a legitimate business interest in a capitalist society where competition is commonplace. Furthermore, the Court is reluctant to restrain a person from earning a living in their chosen field.

7. Confidentiality 

It is important to ensure that your contractor agreement has a confidentiality clause. The clause should stipulate that each receiving party agrees not to disclose confidential information of the disclosing party to any third party. It should also ensure that the contractor is obliged to take all reasonable steps to protect the information from any unauthorised use. 

The receiving party should also be obliged only to use the confidential information for its intended purpose and not any other purpose. The confidentiality clause usually survives the termination of the agreement, which is something to be mindful of. 

Key Takeaways

When drafting a contractor agreement, you should include:

  • pay and expenses;
  • a description of services and work allocation;
  • superannuation and insurance details;
  • an intellectual property clause;
  • a termination clause;
  • an exclusivity and restraint of trade clause; and
  • a confidentiality clause. 

If you need assistance drafting a contractor agreement, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

I am unsure whether I am a contractor or an employee. How do I determine this? 

Previously, the nature of the relationship was the key indicator to determine whether you are a contractor or employee. The factors considered include the basis of payment, provision of equipment and tools, control over work and autonomy. Whilst these factors are still highly relevant, the contractor agreement is also a key indicator of which relationship exists. Therefore, the terms of the contractor agreement should be clear on the relationship being that of a contractor-principal to dispel any doubt on this question.

What are the most important provisions of a contractor agreement?

The key provisions of a contractor agreement are payment terms, description of services and allocation of work, intellectual property, exclusivity/non-exclusivity, restraints, confidentiality and termination. These provisions will ensure that both the business and contractor are protected in the relationship whilst setting clear expectations.

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