Why is it important to define your business relationship?

Clearly defining the relationship

It is crucial to be clear at the outset about how a party (say, an employee, contractor or licensee) is entering into any relationship agreement with your business. Conducting relationships on “hand-shake” agreements or ignoring the differences in the different types of legal relationships (often mixing them together), will likely expose business owners to unnecessary taxation consequences (such as payroll tax), sham contracting; underpayment claims; and unfair dismissal claims under the Fair Work Act, superannuation guarantee contributions and where there is a contractors’ injury or illness related to the relationship.

It is, therefore, imperative to determine what the true legal nature of the relevant relationship is. For example, there is the popular common law tests also known as the “multi factor test” which assists in determining whether a relationship is one of independent contract or employment.

The common law tests set out the key distinguishing factors between these two types of relationships that a court will use to assess the true nature “at law” of the relationship. Such distinguishing factors are control, exclusivity, ability to delegate, basis of payment, equipment and tools, commercial risks, hours of work, leave entitlements, method of engagement and integration in business.

Having said that, the factors are not the end of the matter and a court will still look behind a contract to determine the relationship. No factors are determinative, they are only used as ‘indicia’ and the entire arrangement will be considered. In addition, other legislation throughout Australia also has an impact on the definition of employer-employee and independent contractor.

There have been a number of recent cases where it has been found that despite the written agreement in place between the parties, a party has been held to be engaged as employee rather than as (the intended) independent contractor.

Although the indicia and case law make it clear that determining the true nature of a relationship is very much a case by case assessment, it is evident that the form of the relationship (being what is included in the written agreement between the parties) and, more importantly, the substance of the relationship (being what occurs between the parties) are vital. It is an area of high and increasing risk and has been subject to differing interpretations by the judiciary and members of various courts and tribunals.

Accordingly, we recommend that business owners talk to an appropriate legal expert about the transactions and relationships they are contemplating and get advice about how the relationship can be clearly and safely defined in a written agreement and implemented in practice.

The team of lawyers from our Commercial & Disputes Division are highly experienced and can provide advice on any matters relating to the preparation of any agreements relating to employees, contractors or licensees.

Please don’t hesitate to reach out to us at any time for assistance via our switchboard on +61 3 9822 8588 or via email on

Insight written by Elizabeth Ong & Meghan Warren

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