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Guidelines for the use of contractor agreements

Contractor vs Employee

From 1 July 2000, the Federal Government introduced taxation legislation that required the University to review the method by which contractors are engaged. Consequently the University has developed standard contractor agreements for engaging contractors, who are providing "personal services" to the university. "Personal services" are defined as services provided for reward by an individual's personal efforts or skills, but it does not include trade services.

From both the University's and the individual's perspective, it is important that a contractor agreement is entered into only when there is a genuine contractor relationship in existence. Where a contractor agreement has been used improperly, the University is exposed to legal, insurance and tax risk, hence it is imperative that these guidelines are adhered to by all University staff.

Before engaging any individual or business as a contractor, the responsible University department should assess whether it is the most appropriate form of engagement. For each service provider, the department must first determine whether the provider is most appropriately classified as a contractor or an employee. The facts surrounding each engagement must be analysed by the department - the Employment / Contractor Tests and Contractor Checklist will assist this analysis. A Contractor Checklist must be completed by the department and included as part of the Contractor Agreement package sent to Corporate Finance.

If the business is an incorporated entity or partnership, a contractor agreement is likely to be most appropriate, provided the department is satisfied the structure is legitimate and not a mere redirection of an employee's salary or wages. If payments are, or are perceived to be, a mere redirection of a staff member's salary, the staff member must be paid through the Payroll.

If an individual is providing contractor services, the department must be satisfied that at the completion of the Employment / Contractor tests outlined, the facts surrounding the individual service provider's engagement as a contractor would lead any reasonable person to the same conclusion.

Scope of Policy Guidelines

When can you use the Contractor Agreements?

You can use the contractor agreement if you wish to engage a contractor who will provide 'personal services' to the university, provided that it does not fall into one of the categories listed below. 'Personal services' are defined as services provided for reward by an individual's personal efforts or skills, but do not include 'trade services', refer below.

When are you not allowed to use the Contractor Agreements?

You are not able to use the Contractor Agreements for:

  • Contractors who provide goods only (eg. Stationery, leases, furniture etc).
  • Trade services contractors (eg. plumber, electricians, cabinet makers, cleaners etc). Facilities and Services engage all trade services providers on approved service contracts. Departments must contact Facilities and Services Division for their recommendation of supplier or to engage an alternate trade service provider. All trade service engagements will be subject to usual Facilities and Services terms and conditions.
  • People who are currently employed by the university in any capacity, including part time or full time, continuing or fixed term, casual or sessional appointments. Conversely a staff appointment should not be offered to a person during the period of a Contractor Agreement with Monash University.
  • Where the individual is providing core services such as teaching, lecturing, tutoring, research, marking, academic services or standard administrative work that is covered by the enterprise agreement. However an individual may be engaged as a contractor if:
    • the University does not 'control' the individual offering the services; and
    • the services are a one-off lecture / tutorial or short term lecture / tutorial (short term is defined as a period not exceeding 5 days) in a calendar year; and
    • the individual is not merely acting as a substitute for academic lecturers, tutors or teachers in the delivery of course curriculum.
  • Where a person is to provide non-core services and that person does not have a company with an ACN or a business with an ABN. In these circumstances the department/faculty should seek advice from Employee Relations and Consultancy in relation to the options available to engage the person. Ordinarily, the person would need to be engaged as a staff member, in accordance with normal Monash staff appointment procedures. The appointment may be part time or full time, ongoing or fixed term, casual or sessional and paid in accordance with the appropriate rate in the University's current enterprise agreement.
  • If the contractor does not qualify for one of the seven Payroll tax and Workcover exemptions (Appendix A to both Contractor Agreements) for the provision of services under a 'relevant contract', or the services provided are not of a type exempted by the Payroll Tax and Workcover legislation, payments must be made through the University Payroll and PAYG will be deducted. The Cost Centre will incur normal salary on-costs.

When is it optional as to whether you use the Contractor Agreements?

For one-off payments for services less than $400 where the Contractor has an ABN. Such payments must be forwarded with a completed Contractor Checklist, to the Accounts Payable Manager on a claim form for payment.

Departmental Responsibility

It is the sole responsibility of the delegated officer within the department to ensure that the correct method of engagement, contractor agreement and contractual arrangements are utilised. In the event that there is litigation surrounding the nature of the contractor agreement or the university is subject to penalties from either federal or state taxation authorities, the financial costs resulting from these actions will be borne by the department.

It is therefore very important that, if there is any uncertainty in relation to the engagement of a contractor providing personal services to the university, the department seeks appropriate advice from relevant areas of the university, particularly the University Solicitors office and/or Employee Relations and Consultancy Branch and/or Risk and Insurance Office and/or Corporate Finance Division.

Staff members are not permitted to pay Contractors out of Cash Advances or from their own pockets. All contractors must be paid through recognised University systems.

Departments must ensure that Contractors do not have access to University credit cards, financial delegation or access to SAP.

In order to ensure that the University Officer signing the contractor agreement has proper authority to do so, refer to the University Solicitor's guidelines.

Which Contractor Agreement Should I use?

If the business has an Australian Company Number (an ACN) and an Australian Business Number (an ABN), and meets the standard requirements set out below, the business will usually be engaged on the Standard Contractor Agreement A [PDF].

If the business does not have an ACN but has an ABN and is able to meet the standard requirements set out below, the Non-corporate contractor agreement B [PDF] should be used.

Requirements for Standard Contractor Agreements

Signed Contractor Agreement

A contractor agreement must be completed and executed prior to the commencement of the work. No work should occur until a contractor agreement is signed. If a contractor agreement is not signed before the commencement of work, the department/faculty will be responsible for any costs, taxes or liabilities associated with the failure to have a signed agreement.

Out of Pocket Expenses

The contractor's out-of-pocket expenses must be built into the fee detailed in the Contractor Agreement. However, if an agreement has been reached between the Head of Department and the contractor for unexpected out-of-pocket expenses, an invoice from the contractor must be submitted to cover such expenses. Wherever possible, invoices should itemise personal services separately from out-of-pocket expenses. This is particularly important for Consultancy Agreement B arrangements as superannuation is not payable on the out-of-pocket expenses, but is payable on the personal services payment component. It is not acceptable to reimburse contractor expenses through Accounts Payable on third party invoices attached to claim forms. Departments must not pay directly for contractor expenses.

Superannuation Contributions for Contractors

Brief Background to Superannuation and Contractors

The Superannuation Guarantee (SG) requires employers to contribute 9% of eligible earnings base to a complying superannuation fund or retirement savings account (RSA) for most employees and some contractors on (at least) a quarterly basis.

Extended meaning of "employee"

The Superannuation Guarantee (Administration) Act 1992 (SGAA),  contains an extended definition of “employee” for SG purposes. SGR 2005/1 - " Superannuation guarantee: who is an employee?" (PDF) provides further clarification of the extended meaning of employee.

"10. The classification of a person as an employee for the purposes of the SGAA is not solely dependent upon the existence of a common law employment relationship. While the definition includes persons who at common law would be regarded as employees, it also extends to: …

  • a person who works under a contract that is wholly or principally for the labour of the person (subsection 12(3)) (see paragraph 11); …"

"11. For the purposes of subsection 12(3), where the terms of the contract in light of the subsequent conduct of the parties indicate that:

  • the individual is remunerated (either wholly or principally) for their personal labour and skills;
  • the individual must perform the contractual work personally (there is no right of delegation); and
  • the individual is not paid to achieve a result [Further information on “result” can be found in paragraphs 42 - 47 of SGR 2005/1],
  • the contract is considered to be wholly or principally for the labour of the individual engaged and he or she will be an employee under that subsection."

A contract is principally for labour if more than half of the value of the contract is for the person's labour. SG contributions will only apply to the labour component of the contract.
If a contract is to produce a given result, then the SG does not apply. Examples of this type of contract are:

  • where a contactor is engaged to prepare a report for a fixed sum on completion of the report; and
  • where a contractor is engaged to provide a specific output for a set fee  (Note: If the contract is for a daily or hourly fee, SG would apply).

ABNs and SG

Even if the person quotes an Australian Business Number (ABN), the person may be considered to be a staff member for superannuation guarantee purposes.

Exceptions

If the Contractor Agreement is with someone other than the individual who will actually be doing the labour, then the SG does not apply. Examples of instances where this would occur are:

  • if the Contractor Agreement is with a company (hence no SG payments on Contractor Agreement A)
  • if the Contractor Agreement is with a partnership
  • if the person you have the Contractor Agreement with is free to hire other people to perform the work, even if the person ends up performing the work themselves (Note: Contractor Agreement B does not allow this liberty - see clause 5).
  • if the Contractor Agreement B is an entity other than an individual (eg. Australian Universities do not have company structures and would sign a Contractor Agreement B - however there would be no SG liability on Contract payments.)

Payment of Superannuation Guarantee obligations

SG means that employers are required to make superannuation guarantee contributions on behalf of their eligible staff members at least once each quarter. Contributions are due by: 28 January, 28 April, 28 July and 28 October each year.
To comply with SG requirements, the University must:

  • Calculate 9% of the earnings base for each eligible staff member (contractor)
  • Pay SG to a complying superannuation fund at least quarterly
  • Keep a record of when, what and how SG contributions were paid to staff member (contractors).

If SG contributions are not made by the cut off dates penalties will apply.

Summary

A contractor will be a staff member for SG purposes where more than half of the contract is for the labour of an individual and they are not contracted to achieve a 'result'. The department engaging the Contractor will be liable for SG contributions (9%) on the labour component of Contractor Agreement payments.
SG payments to contractor superannuation funds will occur once a quarter.

Monash University, Superannuation and Contractors

SG payments must be made for many individual service providers utilizing the University's Contractor Agreement B. The Contractor Checklist requires superannuation fund and account details to be completed for all Contractor Agreement B service providers where SG will be applicable.

Departmental Responsibility

It will be the department's responsibility to determine whether superannuation will apply to Contractor B Agreements. The department must indicate in the SAP Contractor transaction whether the Contractor will be subject to the SG on Contractor Agreement payments. Regard should be paid to the commentary above and the SGR 2005/1 in determining the Contractor's SG status. If the department has grounds for not paying SG to the Contractor, justification must be provided on the Contractor Checklist, which will be subject to scrutiny by the Australian Taxation Office in the event of an audit. Departments must be aware that penalties will apply if the ATO does not agree with your assessment. Where a department is in doubt in respect of the SG liability on an individual contractor, the department should contact the Superannuation Manager on ext 56834.

The department must negotiate with the contractor as to whether the superannuation will be included in the contract price (hence contractor invoice will be less than the total amount detailed in the Agreement) or in addition to the contract price. Departments must be aware that 9% will be charged to their cost centre in addition to the payment for services.

Superannuation Office (Human Resources Division) Responsibility

The Superannuation Manager will be responsible for advice regarding SG payments for Contractors. The Superannuation Office will be responsible for obtaining fund details from Contractor Checklists from Corporate Finance Division (CFD); ascertaining whether superannuation fund are complying; requesting superannuation fund vendors to be opened in SAP finance; reporting on payment made to Contractors during the quarter; calculating the SG on Contractors payments; reporting SG contributions to Contractors; providing payment details and amount to CFD for Contractor SG payment.

Corporate Finance Division Responsibility

CFD will file all Contractor Agreements and supporting documentation received from the Departments. The SAP Contractor Agreement database records the Departments selection in terms of the University's liability for SG on the Contractor Agreement type B.

In the case of “Non-Standard” Agreements, CFD will complete the SG field on registering the Agreement. Completion of the SG field will be based on supporting documentation, usually in the form of the contractor Checklist.

CFD will make prompt payments to SG vendors by 28th day of the month following the end of the quarter on advice from the Superannuation Office.

Insurance Cover

The standard contractor agreement require contractors that are incorporated bodies (i.e. they have an ACN and ABN) to be insured for public liability and professional indemnity, for a minimum of $5 million in each case. For non-incorporated contractors who operate as a business (i.e. they have an ABN only) this requirement is reduced to $1 million for public liability and $1 million for professional indemnity.

This Public Liability insurance cover provides a level of protection to the University from claims arising from injury to third parties or damage to property caused by the actions of the contractor's staff whilst undertaking work for the University. 

The Professional Indemnity insurance requirement provides a level of protection to the University from claims for financial loss, discrimination, defamation, breach of copyright, etc. arising from the negligent action of the contractor whilst undertaking work for the University.

Variation To Insurance Cover

Having regard to the risk, cost and nature of the work covered by the contractor agreement, it is possible, in some circumstances, for the University to enter into a contractor agreement which reduces the insurance requirements of the contractor.

While the insurance amounts outlined above are considered to be minimum amounts, it is recognised that from time-to-time the University may wish to engage contractors that do not carry the required amount of insurance.  In these instances an assessment MUST be made of the work to be undertaken by the contractor to determine the level of risk associated with those activities and the necessary insurance type and levels.

If seeking to alter the type and/or level of insurance, the following process MUST be undertaken PRIOR to the execution of the contractor agreement AND PRIOR to the commencement of the work to be performed under the contractor agreement.

  • Use the Contractor Risk Assessment Checklist [Word] [PDF] ('the checklist') to evaluate the risk of reducing or waiving the insurance requirement. This checklist has been developed to assist departments in undertaking a risk assessment. The checklist also provides a format to enable Deans/Divisional Directors to evaluate proposals from departments, to vary the University's normal insurance requirements for contractor agreements. 
  • If, after completing the checklist, there appears to be a risk in reducing the level of insurance contact Manager Insurance Services, Financial Resources Management Division on extension 56365 for advice.
  • Prepare a written recommendation for the approval of the Dean or equivalent - memo format is acceptable.  The request must contain the completed and signed checklist and - if sought - the recommendation from the Risk and Insurance Office.
  • The approval or rejection by the Dean or equivalent, of the variation must be in writing.
  • Alter the contractor agreement (item 11 of the Schedule) to reflect the variation to the type & level of insurance required as approved by the Dean or equivalent.
  • The written approval of the Dean or equivalent must be attached to the contractor agreement together with the completed and signed checklist and proof of the type & level of insurance agreed.
  • Note:  If the Dean or equivalent rejects the requested variation or waiver of the type & level of insurance, then the standard insurance type & levels will apply.

If an insurance clause has been varied with approval of the Dean, it does not need to be referred to the Solicitor's office.

The risk of varying the insurance requirements in the Standard Contractor Agreement lies with the cost centre approving the variation.

Variation to the Standard Contractor Agreement (A or B)

In some circumstances, it may be necessary to vary a term in the body of the Standard Contractor Agreement. If a faculty/department has received a request to vary the body of the standard agreement, a copy of the agreement and a request for the variation must be sent to the University Solicitor for approval together with all other associated documentation. The variation must be approved by the University Solicitor in writing prior to execution of the agreement and prior to the commencement of the work. The written approval of the University Solicitor's Office to vary a term of the contractor agreement must be attached to the contractor agreement.

Decision Tree for the Use of Contractor Agreements

The decision tree is intended to assist university staff in:

  • Which of the two standard contractor agreements (A or B) is appropriate;
  • The documentation required to be provided with the completed contractor agreement; AND
  • The process required to ensure payment for the work performed under the contractor agreement.

Contacts

For further advice please contact Employee Relations & Consultancy Branch on ext 56936

Employment/Contractor Tests

The following criteria can be used as an aid to determine whether an entity is a staff member or a contractor. If the entity is a staff member then PAYG, payroll tax, workcover and superannuation must be paid. No one single criterion is determinative but all of these criteria should be taken into account when determining if a person is an employee or a contractor.

If the entity is an individual, the facts surrounding the engagement of the individual should fall mainly within the general criteria for a staff member or contractor. If the outcome is the individual fits most of the criteria for a staff member, the department should contact their HR Officer for advice on how to appoint the individual. If the outcome is the individual fits most of the criteria for a contractor, the department should continue working through the Contractor Agreement Policy.

Employment Criteria Contractor Criteria
1. Payment must be made to an individual Payment is to a company, partnership or trust (the company, partnership or trust must not be a sham arrangement)
2. The payment is principally for the provision of labour Employed to achieve a result / undertake a specific job of work
3. The employer controls the how, when and where of the labour Flexibility in respect of hours worked, manner of work and how result is achieved
4. No delegation of duties is permitted Undertakes the commercial and financial risk associated with the job and the delegation to staff
5. Provision of tools, work space and accessories is by the employer Provides own tools, place of work and conditions
6. Employer has exclusive right to labour or service during the hours of employment Available to perform work for other entities and contract to the public at large
7. Paid according to time worked / award conditions apply Not subject to sick pay, holiday pay or other employment conditions
8. Staff member will not directly benefit commercially or financially from improved efficiency or early completion Benefit commercially or financially from efficient performance or early completion

Taxation Ruling TR2000/14 provides information on PAYG withholding for staff and offers the following cautions which should be noted by departments: -

Taxation Ruling TR 2000/14, paragraph 24 - "A clause in a contract that purports to characterise the relationship between the parties as that of principal and independent contractor and not that of employer and employee must be considered with all the other terms of the contract. Such a clause cannot receive effect according to its terms if it contradicts the effect of the agreement as a whole; the parties to an agreement cannot alter the true substance of the relationship by simply giving it a different label…. However, the parties may use such a clause to overcome any ambiguity as to the true nature of the relationship."

Taxation Ruling TR 2000/14, paragraph 16 - "The mere fact that an individual has an ABN does not mean that they can never be an employee. Each individual contract must be examined in order to determine whether the person is engaged as an employee or as an independent contractor.'