Engaging subcontractors: contracts, sham contracting and WHS

What should a subcontract include?

A subcontract is the document you will reach for when something goes wrong, so it needs to say what was actually agreed. A handshake or a text message thread is a poor substitute. At a minimum, a workable subcontract covers:

• Scope of work. Exactly what is included and excluded, with the drawings, specification and revision numbers it is based on.
• Price and payment terms. Lump sum or schedule of rates, how progress claims are made, when payment is due and any retention.
• Program. Start date, key milestones, completion and how delays and extensions of time are handled.
• Variations. That variations must be directed and priced in writing before work proceeds.
• Licences and insurance. Which licences the subcontractor must hold, and which insurances, with certificates of currency supplied before starting.
• WHS obligations. Compliance with the site WHS management plan, inductions, SWMS for high risk work and incident reporting.
• Defects and warranties. The defects liability period and how rectification works.
• Disputes and termination. Notice steps, and how either party can end the subcontract.

If you use the same standard terms with many small subcontractors, remember that the unfair contract terms laws in the Australian Consumer Law can apply to standard form contracts with small businesses. Since 9 November 2023, proposing, using or relying on an unfair term in those contracts has been prohibited, according to the ACCC. Our guide to building contracts covers what to check in the head contract that sits above your subcontracts.

Is your subcontractor really a contractor, or an employee?

This is the question that causes the most trouble. From 26 August 2024, the Fair Work Act includes a definition of employee and employer (section 15AA) that requires the whole of the relationship to be considered, including the real substance, practical reality and true nature of the working relationship. The Fair Work Ombudsman (FWO) calls this the whole of relationship test.

The practical effect is that how the arrangement works on site counts, not just what the contract says. The FWO lists factors such as:

• Control. How much control the business has over how, when and where the work is performed.
• Financial risk. Who carries the commercial risk, and whether the worker can make a profit or loss on the job.
• Tools and equipment. Who supplies them, and at whose cost.
• Independence. Whether the worker runs their own business, can work for others and can delegate or subcontract the work.

A worker who turns up when told, works only for you, is paid by the hour, uses your gear and cannot send anyone else looks a lot like an employee, whatever their invoice says. Having an ABN does not settle it.

There is one narrow exception. A worker earning above the contractor high income threshold can give a written opt-out notice so the whole of relationship test does not apply, and the FWO says the notice must be given within set time limits. The threshold is indexed each year, so check the current figure on the FWO website.

What is sham contracting, and what changed in 2024?

Sham contracting is disguising an employment relationship as an independent contracting arrangement. The Fair Work Act contains three sham arrangement prohibitions:

• Section 357. Misrepresenting employment as an independent contracting arrangement.
• Section 358. Dismissing, or threatening to dismiss, an employee in order to re-engage them as an independent contractor to do the same, or substantially the same, work.
• Section 359. Making a statement you know is false to persuade an employee or former employee to become an independent contractor for the same, or substantially the same, work.

The defence in section 357 was tightened from 27 February 2024. Previously, an employer could defend a claim by showing it did not know and was not reckless as to whether the contract was one of employment. Now it must show that, when the representation was made, it reasonably believed the contract was a contract for services — an objective test that is harder to meet.

A sham contracting finding can leave the business liable for the unpaid award wages, leave, penalty rates and super the worker would have received as an employee. Our guide to Fair Work basics for building businesses covers those employee obligations.

What licence, insurance and tax checks should you run?

Licences. Check the subcontractor’s licence on the state or territory regulator’s public register before they start, and check that the licence class covers the work. In Queensland, for example, the QBCC says a licence is generally needed for building work valued over $3,300, while plumbing, drainage, gas fitting and fire protection work need a licence regardless of value. Licensing rules and thresholds differ in each state.

Insurance. Ask for certificates of currency for public liability and, where relevant, workers compensation and any professional indemnity, and diary the expiry dates. Workers compensation definitions are set by each state and can treat some contractors as workers, so do not assume your policy, or theirs, covers everyone on site.

NSW subcontractor’s statements. In New South Wales, a principal contractor can be liable for a subcontractor’s unpaid workers compensation premiums, payroll tax and wages. A completed subcontractor’s statement, with a certificate of currency attached, relieves the principal contractor of that liability — unless it had reason to believe the statement was false.

Tax and super. Building and construction businesses that pay contractors for building and construction services generally need to lodge a taxable payments annual report (TPAR) with the ATO by 28 August each year. If a supplier does not quote an ABN, you may need to withhold 47% of the payment. And under super law, a contractor paid wholly or principally for their labour can be treated as an employee for super guarantee purposes, even if they have an ABN.

How are WHS duties shared with subcontractors?

Every business on site is a person conducting a business or undertaking (PCBU) with its own primary duty of care. Engaging a subcontractor does not transfer your duties to them, and it does not take theirs away.

Under the model WHS Act, which applies in every state and territory except Victoria:

• Section 16 says more than one person can have the same duty at the same time. Each must comply with it fully, to the extent of their capacity to influence and control the matter.
• Section 46 requires each duty holder, so far as is reasonably practicable, to consult, cooperate and coordinate activities with all other persons who have a duty in relation to the same matter.

For a builder, that means setting the site rules, inducting subcontractors, coordinating trades so one crew does not create hazards for another, and checking that work is done as planned. For the subcontractor, it means managing the risks of its own work and following the site plan. Victoria has its own Occupational Health and Safety Act 2004 with different wording, so work from WorkSafe Victoria’s guidance on Victorian jobs.

Who prepares the SWMS for subcontracted work?

A safe work method statement (SWMS) is prepared by the business carrying out the high risk construction work, which is usually the subcontractor. On a construction project, the principal contractor must take all reasonable steps to obtain a copy of each SWMS before the high risk construction work starts, and its WHS management plan must say how SWMS will be collected, assessed, monitored and reviewed.

Do not just file the SWMS. Read it against the site and the sequence of work, and check that the crew is actually working to it. Our guide to a principal contractor’s WHS duties explains the full set of site-wide obligations.

How should subcontractors be paid?

Pay according to the subcontract, on time, and keep records of every claim and payment. Subcontractors also have statutory rights under the security of payment Act in each state and territory, which you cannot contract out of:

• Payment claims. A subcontractor can serve a payment claim for work done.
• Payment schedules. If you dispute the amount, you must respond with a payment schedule within the statutory deadline, which ranges from 10 to 15 business days depending on the state.
• Pay when paid. Clauses making your payment conditional on being paid by the client generally have no effect.

Missing a payment schedule deadline can make you liable for the full amount claimed. See our guide to security of payment in each state for the deadlines that apply where you work.

Subcontractor engagement checklist

• Written subcontract. Scope, price, payment terms, variations, insurance, WHS and termination.
• Relationship test. Check control, financial risk, tools and independence against the whole of relationship test.
• Licence check. Search the regulator’s register and confirm the licence class matches the work.
• Insurance on file. Certificates of currency, with expiry dates diarised.
• State-specific paperwork. For NSW jobs, a subcontractor’s statement for each payment period.
• Tax details. ABN on every invoice, TPAR records, and super where the contract is mainly for labour.
• WHS induction. Site rules, emergency arrangements and the WHS management plan.
• SWMS obtained and checked. Before any high risk construction work begins.
• Payment system. Diary every claim, schedule and due date under the security of payment Act.

Frequently asked questions