Small Businesses: Do you have written agreements with your independent contractors?

On just another humid summer day in Perth, I finished my training session at a suburban gym and said goodbye to my gym trainer and owner of the business. She stopped me and said “you are a lawyer right; can you please help me with a query raised by one of my trainers at the gym? This trainer queries why am I contributing to her superannuation fund when she never consented to it.”

In OUR investigative journey I learned that there were no written contractual arrangements in place and, she was contributing to her trainers’ superannuation funds because her accountant advised her to do so.

A significant number of businesses in Australia can be categorised as “small businesses”[1], who employ less than 20 people. Yoga studios, fitness centres, gymnasiums, hair salons, massage and beauty centres are examples of small businesses, who engage services of individuals as independent contractors on a “handshake” basis rather than having any formal written arrangements in place.

The drawback of having a “handshake” arrangement is that neither party is aware of his/her rights and obligations. The lack of knowledge often makes small business operators unsettled and apprehensive when confronted with:

(a) queries from such contractors as to their entitlements; or

(b) potential issues that may arise as to confidential information relating to their business when any contractor’s engagement with the business concludes.

Therefore, small businesses must consider preparing and executing written agreements with their independent contractors.

Key issues, which must be addressed in an independent contractor agreement between a small business and an independent contractor, are as follows:

nature of engagement between the parties – is that of a business and an independent contractor and does not constitute a relationship of employment;
nature of the specific task for which he/she has been engaged and the specific hours when he/she is to provide services to the business – for example, a fitness instructor is engaged to conduct fitness classes at a gym on certain days of a week at certain times;
the duration of the agreement – whether it is for a specific period of time or will continue until terminated by either party;
the manner in which the fees will be levied by the independent contractor to the business – will it be on an hourly basis or a fixed fee for completing a task;
the independent contractor’s obligation to periodically provide an invoice to the business for the work completed (with the GST and his/her Australian Business number on it) and, the business’ obligation to pay the amount to the independent contractor;
the independent contractor’s obligation to pay the GST to the Australian Taxation Office;
the independent contractor’s responsibility to contribute monies into his/her superannuation fund, excepting in circumstances where the independent contractor has been engaged to personally perform the task and for their personal labour and skill;
the business is responsible to contribute monies into the independent contractor’s superannuation fund if he/she has been engaged to personally perform the task and a fee in excess of $450 a month from that business;
whose responsibility is it (the business or the independent contractor) to provide the tools and equipment necessary to perform his/her tasks;
the independent contractor’s ineligibility to get any paid leave;
the independent contractor’s responsibility to take out and maintain his/her own insurance policy; and
whether the business intends to impose any restrictions on his/her ability to conduct a competing business activity (restraint of trade) and deal with confidential information (confidentiality obligations) whilst being engaged by the business and after termination of engagement.

After elaborate discussions with her, I prepared independent contractor agreements for her gym business, which she and trainers at her gym executed. She confidently proceeded to respond to the trainer’s query as to why she was contributing monies to her superannuation fund.

Takeaway Message

A Stitch in Time (Saves Nine)

Small businesses operators must consider preparing written agreements with their independent contractors to apprise themselves of their rights and obligations (a stitch in time) and minimise future legal costs in defending potential claims by independent contractors (saves nine).

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.

[1] Various regulatory bodies like Australian Securities and Investment Commission (ASIC), Australian Taxation Office (ATO) in Australia use a different definition for the term “small business”. A common understanding between the regulatory bodies is that businesses who employ less than 20 persons are classified as small businesses.

Archana Luktuke27 February 2019

Mr and Mrs Joe Bloggs contacted me to seek legal advice on a proposed commercial lease provided by the real estate agent for their upcoming coffee shop in suburban Perth.

Mr and Mrs Bloggs were being rushed into signing the proposed lease, which they were not comfortable with. They started by explaining how their friend, who runs a hair dressing salon, was provided with extensive written information and a proposed lease to review before executing it. This was in stark contrast to a small seven-page template that they received by way of a proposed lease from their letting agency. I explained to Mr and Mrs Bloggs that their friend and they are subject to separate leasing legislation, however their due diligence before signing the proposed lease will assist them in the long run. In Western Australia, leases for commercial premises can be categorised as retail leases and commercial leases. It is important to note that all commercial leases in Western Australia are not governed by the same legislation.

A summary of the safeguards that a potential lessee of a commercial lease must consider is discussed below.

Retail Leases

Retail leases are governed by Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) (the “Retail Shops Act”) and are limited to premises:

(a) with a lettable area of 1,000 m2 or less;

(b) used for carrying on a business and that are in a retail shopping centre (a group of premises, 5 or more) or otherwise; and

As at 1 January 2013, 'specified businesses' are limited to:

(a) dry cleaning;

(b) hairdressing;

(d) shoe repair (which includes key cutting and engraving); and

(e) sale or rental of videos tapes, DVDs, electronic games and other similar amusements.

Any landlord, whose commercial premises is governed by the Retail Shops Act, is bound by significant number of obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease. In comparison landlords, whose premises is governed by the Transfer of Land Act 1893 (WA) and the Property Law Act 1969 (WA), are not bound by any specific obligations as to the information he/she needs to disclose to a potential lessee prior to executing the lease.

The Retail Shops Act did not apply to Mr and Mrs Bloggs proposed lease. Therefore, began Mr and Mrs Bloggs’ due diligence journey before executing their commercial lease.

Commercial Leases

The real estate agent provided Mr and Mrs Bloggs with two documents – the Commercial Lease with Annexures and General Terms and Conditions of the Lease. Mr and Mrs Bloggs were seeking advice as to whether both these documents captured the terms and conditions of the agreement between the landlord and them.

Typically, most real estate agents would fill in the details in a Commercial Lease template published by Real Estate Institute of Western Australia (REIWA) and provide it along with the General Terms and Conditions of Lease, also published by REIWA, to any potential lessee.

The General Terms and Conditions of Lease document sets out the obligations and liabilities of the landlord and the potential lessee, however any potential lessee must review whether the following key details have been included in Commercial Lease document provided to him/her:

(a) whether the potential lessee and the landlord have been accurately identified (is the potential lessee and/or the landlord an individual or a company);

(b) whether any guarantors have been included in the lease;

(d) whether any other items (such as equipment) owned by the landlord are being included with the lease;

(e) the term of the lease;

(f) whether the potential lessee has an option or multiple options to renew the lease;

(g) the amount of rent and the frequency of payment of rent;

(h) the mechanism and frequency of rent review;

(i) what are the types of outgoings that the potential lessee is to pay and an estimated amount per month;

(j) whether a security deposit or bank guarantee will be held and for what amount;

(k) permitted use of the premises;

(l) whether the landlord has obtained approvals for the intended use and signage from the local council and the strata management (if applicable);

(m) whether the potential lessee has been provided with copies of approvals for intended use;

(n) insurance requirements to be complied with by the potential lessee; and

(o) how the agreement can be terminated and what is the notice period.

Mr and Mrs Bloggs proposed lease document had the following inadequacies:

(a) incorrect details of the proposed lessee – Mrs Bloggs was named as a lessee in place of the potential lessee company;

(b) the landlord had not obtained any approvals from the local council and the strata management for the intended use and signage although the terms stated otherwise;

If Mr and Mrs Bloggs would have signed up a lease with the inadequacies mentioned above, they would have put themselves in a financial predicament as the incorrect person would have been bound to comply with terms of the lease without any approvals to run the business at the premises and with no estimate of the costs towards outgoings.

Takeaway Message

Caveat emptor – buyers (in this case potential lessees) beware:

The clear message for any individual or entity considering a commercial (non-retail) lease is to undertake adequate due diligence and seek independent legal advice before executing any commercial (non-retail) lease.

Please note that any information included in this article is general information only and does not constitute legal advice. Please contact us to discuss your particular circumstances.