While short-term low-risk contract work can be a good way of gaining experience, recent graduates should be aware that some unscrupulous employers can use contractor arrangements to avoid their employment obligations.  This information is provided as background for those who may have recently graduated and have been offered a contract but are not sure whether they're being offered work as an employee or an independent contractor.

Professionals Australia doesn't generally encourage young professionals to take on contracting and consulting roles firstly because of the need to gain experience and judgement, secondly because of the problems buying professional indemnity insurance without this experience, and thirdly, the imperative to undertake professional development under appropriate supervision and direction in the early stages of your career. It is however not uncommon for recent graduates to be offered short-term contracting work to fill skills gaps or temporary shortages, and it can be a good way to gain further work experience to add to your CV or get a foot in the door with a possible future employer. In the longer term though, it pays to be clear on whether you're being taken on as an employee or contractor because significantly different rights and obligations accrue to each type of arrangement. While it can be a grey area, there are some good indicators which will help you understand the nature of the role that's on offer.

What to look out for:

1.   A statement which defines the relationship between the parties

      A contracting arrangement based on a contract for service will generally include a statement making it clear that there is no mutuality of obligation between the client and contractor. This can take various forms but these are some of the more common ones:

            "Nothing in this Agreement constitutes a relationship of employer and employee. The Contractor must not act in any way other than as an independent contractor of the company" or

            "The parties to this agreement do not intend to constitute or create an employer/employee relationship, agency, joint venture or partnership between the contractor, the agency or the client."

      In these clauses, the arrangements are explicitly defined as between client and independent contractor.

2.   Entitlements attached to the engagement

      A contractor is by definition not an employee. This means that the contract is not underpinned by employment law and minimum standards. If your contract doesn't provide for annual leave, parental leave, sick leave, long service leave or allowances, this could be an indicator that the benefits which normally accrue to employees are not part of the arrangements under which you're being engaged pointing to a contractor relationship.

      In the case of contractor arrangements, a typical contract clause would state that the contract fee covers items such as leave, expenses, allowances, etc. or could state something like:

            "The client will not be responsible for any payments in respect of annual leave, sick leave, long service leave, superannuation, workers' compensation, accident, sickness and life insurance for the contractor or his/her personnel."

      Termination entitlements - significantly different termination rights and obligations also attach to contractor and employment arrangements. While a contractor can sometimes negotiate a limited right to termination notice, they do not have access to unfair dismissal provisions, minimum notice periods or termination standards set out in employment legislation.

3.   Professional liability

      In Australia professionals have a legal duty to do their work to the standard of their profession. Where they perform work without due care, causing damage, they (or their employer) can be held liable to pay compensation. Professional liability is the term used to describe the liability at law professionals have for any act or omission that is in breach of a duty of care.

      Vicarious liability is the principle of law by which an employer is deemed liable for the negligent acts of employees committed in the course of employment. Clients are not liable for the actions of contractors, and contractors engaged under a contract for service must provide their own professional liability cover.

      A contract for service applying to a contractor is therefore likely to include a clause like the following:

"The contractor must indemnify the client against any loss caused by the negligent or wilful acts and omissions of the contractor and its employees and agents, and obtain and keep in force suitable public liability and professional indemnity insurance."

4.   Access to superannuation

      Contractors are not generally entitled to superannuation so if your terms of engagement say your contract fee includes superannuation, or is simply silent on the matter, you can be fairly sure the client's not paying super on your behalf and this is a good indicator that you're not being taken on as an employee.

5.   Payment method

      If payment is subject to you invoicing the client rather than expressed as a salaries clause, this is a critical indicator that your engagement is not an employment arrangement.

6.   Professional development

      Normally contracts for service are simply silent on the matter of professional development - other than a possible requirement to undertake an induction - because contractors are required to undertake any necessary training and development at their own expense. Contracts for service may sometimes make this explicit by including a "warranty around the contractor's ability" clause which states something along the lines of:

"The contractor will have the necessary qualifications and experience and maintain all necessary licences and standards to provide the contract services."

7.   Intellectual property rights

      While the circumstances around intellectual property vary widely and recent case law has created some uncertainty around an employer's absolute right to the intellectual property generated by employees (University of WA v Gray [2009] FCAFC 116 (3 September 2009), generally speaking an employer owns the intellectual property created by employees in the course of their employment while contractors maintain ownership of intellectual property rights they bring to a client.

      This right is normally reflected in a clause such as:

            "The ownership of any intellectual property, unless in the public domain, generated by or introduced into the services by the contractor remains at all times with the contractor unless otherwise specifically agreed in writing."

8.   Right to substitution/delegation

      While this right is usually subject to the approval of the client and the individual substituting having appropriate qualifications and experience, because a contracting arrangement is usually structured around delivery of a specific result, a contractor generally has discretion to delegate or provide the personnel he/she chooses to achieve that result.

      This is typically reflected in clauses such as:

"Where agreed, the work carried out to achieve the services set out in this Agreement can be undertaken by another person provided by the contractor. This arrangement will be subject to the substitute contractor having the appropriate qualifications and relevant experience, and to the client's approval. The client maintains the right to veto the choice of substitute" or

            "The contractor may delegate the performance of the contract services to a person or company other than the contractor provided the contractor obtains the client's prior written approval of the delegation."

9.   Direction/reporting/supervision/checking work/control

      The courts rely heavily on the control test in determining contested employee/contractor status matters. While the contract may include a requirement to report or meet regularly or even set out hours of work, contractors in principle have discretion as to how they achieve the agreed result.

This is usually reflected in clauses such as:

            "The Contractor will not be subject to the supervision, direction or control on the manner in which he or she renders the agreed services, and will maintain a high level of discretion, flexibility and professional judgment as to how the work is performed and results achieved" or

"The client shall not exercise any control or direction or supervision over the contractor in the performance of any day to day duties for the client performed under the Agreement."

10.  Tools and equipment

      Contractors are generally required to provide their own tools and equipment. A clause which says:

"The contractor agrees to supply, at the contractor's own expense, all labour, plant, equipment, tools, appliances or other property and items the contractor requires to fulfil the contractor's obligations under this Agreement"

      will indicate a contractor/client rather than an employee/employer arrangement.

Having your contract checked by Professionals Australia is critical, particularly when you're offered a role but are unsure on what basis you're to be engaged. If you require further advice, please contact our Workplace Advice and Support Centre on 1300 273 762.