Why not having a contractor agreement could cost you thousands of dollars

Normally a letter postmarked “Employment Relations Authority” would fill Peter with dread. But this time it could only be good news as Peter has successfully fended off a spurious claim brought by an ex-contractor who claimed he was an employee. The only outstanding issue was how much this contractor would be paying him in costs. Peter scanned the decision...everything looked good until he reached the final line. His heart sank: "$100!! That's not even half of my lawyer's hourly rate".

Normally a letter postmarked "Employment Relations Authority" would fill Peter with dread. But this time it could only be good news as Peter has successfully fended off a spurious claim brought by an ex-contractor who claimed he was an employee. The only outstanding issue was how much this contractor would be paying him in costs. Peter scanned the decision...everything looked good until he reached the final line. His heart sank: "$100!! That's not even half of my lawyer's hourly rate".

Why Peter was thousands out of pocket

The claim had been spurious from the outset. Peter had agreed with the contractor that he was to be self employed and not an employee. The contractor had even set up a limited liability company and submitted GST invoices to Peter for his services. So when Peter terminated the relationship on 2 weeks notice the last thing he expected was a claim for unjustified dismissal.

Defend the claim at all costs

The claim was for over $100,000 and Peter was furious. He immediately gave instructions to his lawyer to defend the claim at all costs. Fortunately, his lawyer was no pushover and some very forceful letters directed to the contractor persuaded him to withdraw his claim on the eve of the hearing. But that was not the end of the matter…

Peter wanted his costs back

The claim had put Peter to a lot of expense and he was looking at a legal bill over $2000. Since the contractor had withdrawn his claim Peter was entitled to claim his costs and that is what he did. However, the contractor pleaded financial hardship and the Authority took sympathy with him. What Peter ended up with was an insult and it was easy to blame the “system” for his misfortune. But, looking back on what happened this all could have been avoided.

Legally Peter was in the right

Legally Peter had done nothing wrong but his mistake was not requiring the contractor to sign a contractor agreement. Unlike employment agreements, the law doesn’t require contractors and their principals to have written agreements. However, in this case the absence of a contract had given the contractor enough of an incentive to have a punt in the Employment Relations Authority.

The gamble nearly paid off for the ex staff member

At the end of the day the whole exercise had cost the contractor $175 ($100 for Peter’s costs and a $75 filing fee). For Peter his costs were still over $2000 despite the $100 contribution. Weighed against that the contractor was claiming $100,000 in compensation. Admittedly, the chances of getting that compensation in the Authority was extremely slim in this case, but how many employers would have settled at an earlier stage?

Learn from Peter's mistake

Peter did the right thing by defending the claim all the way and not giving in to settlement. His mistake was not getting the contractor to sign an agreement. So if you don’t want to end up $thousands out of pocket then make sure you get your contractor agreements drafted now.


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