Summary
- Every business should have written contracts covering its key legal relationships, including client agreements or sales terms and conditions for customers, employment contracts or contractor agreements for workers, and internal governance documents such as a shareholders’ agreement or partnership agreement.
- Client agreements are suited to service-based businesses, while sales terms and conditions are used for goods-based businesses, with many businesses requiring a hybrid document covering both.
- Businesses must distinguish between employees and contractors carefully, as misclassifying an employee as a contractor constitutes sham contracting and carries significant legal penalties under the Fair Work Act 2009.
- This article explains the essential legal contracts businesses need when starting up, for business owners operating in Australia.
- LegalVision, a commercial law firm specialising in advising clients on business law and commercial contracts, outlines the key documents required for clients, workers, internal governance, and external parties.
Tips for Businesses
Draft all contracts in writing from the outset, as verbal agreements are difficult to enforce if a dispute arises. Ensure your client-facing documents reflect whether you supply goods, services, or both. Before engaging workers, confirm whether they are genuinely employees or contractors to avoid sham contracting liability.
Legal contracts are the foundation of every successful business. They define your relationships, protect your interests, and reduce the risk of costly disputes. Whether you are just starting out or scaling up, having the right documents in place from the beginning is essential. This article will provide you with a comprehensive starting point.
Client and Customer Legal Documents
Regardless of whether you sell goods or services, if you are operating a business, you will be establishing a legal relationship with your clients or customers. This legal relationship exists, even if you do not have a written contract. The automatic creation of a legal relationship is why you should draft legal documents to outline what goods or services you provide and the contract terms at which you provide them. Written contracts also help ensure you develop a trusting relationship with your clients or customers, who now more than ever expect professional standards when using services or purchasing goods from businesses.
The two primary client and customer legal documents are as follows:
1. Client Agreements
Client agreements are primarily used for service-based businesses, including:
- electricians;
- building contractors;
- designers;
- architects;
- consultants;
- HR agencies;
- massage therapists;
- marketers; and
- real estate agents.
2. Sales Terms and Conditions
Goods-based businesses primarily use sales terms and conditions, including e-commerce stores, retail stores, and manufacturers. Many businesses will only need one of the documents above, depending on the nature of the business. However, many businesses may require a hybrid legal document that would cover both the services and goods provided.
What Should I Include in the Legal Documents?
Client Agreements and Sales Terms and Conditions should outline details of the goods or services you are providing and how you will be providing these goods or services.
Some common clauses in Client Agreements include:
- details of the scope of work;
- timeline;
- pricing and invoicing;
- indemnity and liability;
- warranties and consumer guarantees; and
- dispute resolution.
Some common clauses in Sales Terms and Conditions include:
- product details;
- delivery (particularly for online-based businesses or businesses that sell big-ticket items such as fridges, furniture, etc.);
- payment terms;
- consumer warranties and Australian Consumer Law provisions; and
- refunds and returns.
Another important part of the Client Agreement and Sales Terms and Conditions is including a section on any substantially prejudicial terms. You will need to spell these out at the top of the contract if:
- you supply goods or services to consumers in New South Wales; or
- your goods or services will affect a person or result in loss or damage in New South Wales.
Workers’ Legal Documents
Many small businesses will start up as a one-person operation. So the key legal contracts they will need are those that focus on the clients and customers they are serving. However, suppose you are a business that requires employees early on. In that case, it is crucial to determine what sort of assistance you will need and the terms and conditions at which a worker will provide their services to you.
Employees
Commonly businesses can either have workers on board as employees or contractors. As an employer, you might employ your workers on a fixed-term, permanent or casual basis. The Fair Work Act (2009) (Cth) (the Act) governs the employment relationship. It includes the National Employment Standards that ensures every employee has access to the basic entitlements. Additionally, employment law is a complex area that protects employees. Consequently, you have several legal obligations as an employer, including tax and superannuation.
An employment contract typically includes clauses about:
- remuneration;
- leave entitlements;
- hours of work;
- redundancy entitlements;
- position description; and
- dismissal and probationary provisions.
Contractors
Independent ontractors are typically individuals providing their services to your business. They differ from employees as the Fair Work Act does not cover them. Here, it is crucial to note that you need to ensure that you are genuinely using a contractor, as there are penalties for “sham contracting” arrangements. A sham contracting arrangement refers to a situation where you use a contractor, yet the nature of their engagement is that of an employee. The standard terms of a Contractor’s Agreement are similar to that of a Client Agreement. However, you should provide the agreement to your contractor.
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Your Internal Legal Documents
Internal legal documents refer to those dictating how you operate and govern your business internally with your business partners. The legal document you will need depends on your business structure.
These documents are crucial to protecting you against any disputes that may arise. It also helps to ensure you have a process set up for how your business makes decisions and conducts its operations. Commercial law can be a complex area to navigate. Hence, it is best practice to seek legal advice for your business’ certain circumstances and what legal contracts you need.
Reviewing contracts across your business? Download this free checklist to ensure clear terms, fair risk allocation and stronger commercial outcomes
Legal Documents for External Parties
Even if you are a sole trader, it is unlikely that your business runs in isolation. There are many possible legal relationships that your business forms which you can protect through legal contracts, including:
- investors;
- financiers;
- manufacturers;
- distributors;
- suppliers;
- franchisors; and
- lessors.
Key Takeaways
You should cover any legal relationship that you create with an external party through the appropriate legal contract. In some cases, the law requires a legal contract, such as renting premises or being a franchisee. It is crucial that you think about these legal documents and understand the legal relationships you are creating. This is the case with all your business relationships, such as with your:
- clients;
- workers;
- internal business team; and
- external parties.
Additionally, it is a good idea to draft the entire contract in writing, as it is difficult to rely on verbal agreements if a dispute arises.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 1300 544 755 or visit our membership page.
Frequently Asked Questions
Yes. Your business should seek to draft legal contracts with all those it has a business relationship with. This includes contracts with your clients or customers, plus your employees, internal business relations and external parties.
An employee generally works for your business on a fixed-term, permanent or casual basis. The Fair Work Act governs the employment relationship and that ensures every employee has access to the basic entitlements. Conversely, contractors are typically individuals providing their services to your business. They differ from employees as the Fair Work Act does not cover them.
Sham contracting occurs when you engage a worker as a contractor when the nature of their work is actually that of an employee. This arrangement carries penalties, as it deprives workers of the entitlements and protections they would otherwise receive under the Fair Work Act.
Yes. Sole traders generally do not require internal governance documents, while partnerships need a partnership agreement and companies require a shareholders’ agreement. These documents protect you against disputes and establish clear processes for decision-making and business operations.
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