When engaging in any employment relationship, it is essential to understand what you specifically require from the agreement. Contractor and subcontractor agreements are not the same, and it is essential to understand these differences. Read on to find out more about subcontractor agreements.
What is a contractor?
A contractor is considered to be someone who is hired by a client for a specific job that is within the contractor’s expertise. The contractor is under a contractor agreement to work for the client. This means that the contractor is not working for the client on a full time basis, but on a contractual basis.
As a contractor, you are responsible for fulfilling the contract and its terms. This means that you’re liable to the client for the entire project that you are assigned to complete. This liability is not shifted onto any other party, including those who you hire to complete the project for you.
What is a subcontractor?
A subcontractor is defined as the person hired by the contractor to perform specific tasks or services in their own area of expertise. Subcontractors are the parties that contractors hire to complete work for them, which was mentioned in the previous section. As such, the contractor and the subcontractor enter into a subcontract agreement. This means that the subcontractor is responsible for any work assigned by the contractor, and is therefore liable to the contractor. Although the subcontractor is liable to the contractor, they are not directly liable to the client. As mentioned previously, the contractor cannot pass on the liability to the client to another party.
Some examples of this hierarchy are as follows:
- A general contractor, hired by a millionaire homeowner, may hire subcontractors in the form of electricians, plumbers, and carpenters for a house construction project. Here the millionaire is the client, the general contractor is the contractor, and the electricians, plumbers, and carpenters are the subcontractors – all three are under a subcontracting agreement.
- IT consultants may hire a group of white hat hackers to ensure their client’s information is safe. Here the client is the one who wants to secure their information, the contractor is the IT consultancy, and the subcontractor is the white hat hackers that the IT consultancy hires.
What are the advantages to subcontract agreements as a subcontractor?
- For contractors, you do not have to invest significant resources into completing a client assignment;
- For new subcontractors and small businesses, subcontracting can be the first step in gaining tender experience;
- Private sector contractors may be keen to partner with a subcontractor to help increase the level of potential social impact within the tender response; or
- Subcontractors can negotiate intellectual property rights with the lead contractor and buyer.
What are the disadvantages to subcontractor agreements as a subcontractor?
- Depending on your position in the supply chain, there could be problems managing cash flow, particularly if the main contractor is experiencing delays in payment;
- Often the main contractor will introduce clauses into the subcontracting agreement which may ban you from carrying out any direct business with the end customer;
- The main contractor may include clauses that prohibit you from entering into similar subcontract relationships with one of their competitors for a specified period of time;
- You may have to cut your margins to deliver better returns for private companies;
- You may not gain any practical experience in developing a tender;
- As you are not the ‘lead partner’ or main contractor, there may be no brand recognition for your business;
- You may have different business values and ethics from the contractor which could cause friction;
- There may be a breach of contract by the main contractor that will impact your business;
- If you fail to deliver on your subcontract, the main contractor may take legal action; or
- You may not be in a position to become involved in negotiations or management discussions about the tender, but your business will be impacted by these decisions.
What are subcontractors contractors entitled to and protected from?
Subcontracting agreements pose several risks to independent contractors, so the risks should be mitigated by purchasing insurance, like general liability insurance, errors and omission insurance, etc.
In addition to insurance, there are several contracting rights and protections in place in Australia. Under the Fair Work Act 2009, independent contractors are protected from:
- Adverse action: for example, a business cannot terminate a contract with an independent contractor because they make a complaint to a regulator about their workplace rights;
- Coercion: for example, a business cannot threaten to take action against an independent contractor to coerce them not to exercise their workplace rights; and
- Abuses of freedom of association: independent contractors are free to join, or not join, a trade union or employer group.
The Independent Contractors Act 2006 also allows independent contractors to ask a court to review a contract on the grounds that it is ‘unfair’ or ‘harsh’. The court may consider:
- The terms of the contract;
- Relative bargaining strength of parties;
- Whether there was any pressure or influence, or any unfair tactics used;
- Whether the contract provides remuneration that is less than that of an employee doing similar work; and
- Any other matter the court thinks is relevant.
As such, the court may order the contract to be changed or part of the contract to be set aside (which means that it has no effect).
Although there is a distinction between employment and independent contracting agreements (contract or subcontract), there are instances of sham contracting. A sham contracting arrangement is when an employer attempts to disguise an employment relationship as a contractor relationship to avoid certain taxes and employee responsibilities.
As such, it is illegal for an employer to:
- Misrepresent an employment relationship as an independent contracting agreement;
- Dismiss or threaten to dismiss an employee for the purpose of engaging them as a contractor; or
- Say something false to persuade an employee to become a contractor.
Contracting and subcontracting agreements are a great way to gain tender experience and spread out responsibilities for projects. Although they pose their own risks and liabilities, there are protection and insurance policies around that protect independent contractors from some of these risks. Each business will have to mediate and balance their risk and business preferences when deciding on a contracting or subcontracting agreement.
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