Don't make these legal mistakes when growing your team

Growing your team is a huge milestone, but it is also one of the riskiest stages of business growth if the legal foundations are not in place. In this episode, we are talking about why hiring employees or engaging contractors is not just an operational decision, but a legal one too, and why getting it wrong can create serious problems later.

I am walking you through three of the most common mistakes I see business owners make when growing their team. We will cover the contractor trap and why having an ABN and sending invoices does not automatically make someone a contractor, the risks of relying on generic agreements that do not reflect the reality of the role, and why your business structure may need reviewing as your team and obligations grow.

This episode is all about prevention over cure. If you are preparing to hire, unsure whether your agreements are fit for purpose, or have not revisited your structure in years, this conversation will help you spot the risks early. Because team growth should feel exciting, not like the start of a legal clean-up.

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Transcript

[00:00:48] Tracey: What if I told you that one of the most exciting moments in your business journey could be the moment that leaves you the most legally exposed? It is true, and I see it all the time. Growing your team, hiring an employee, engaging a contractor can be so exciting, but it can also be one of the highest risk transactions that you take.

[00:01:11] I'm going to talk to you in today's episode about the three most common mistakes I see when people hit this point in their business and talk you through them, because prevention is always better than cure in my view. I'm going to talk you through the mistakes and I'm going to explain to you how to avoid having that really exciting moment bring you unstuck.

[00:01:32] Hi everyone. Welcome to the podcast. Thank you for joining me for another episode. I'm all about prevention being better than cure in business. If you're a long time listener, you'll know that about me. I think that when we leave things or put things off or leave things till later, they can come back to bite us.

[00:01:48] And many of the problems that business owners find themselves in, in my view, can be avoided. So let's dive into today's episode where I want to unpack the mistakes that I see far too often [00:02:00] when businesses are growing and reaching that really exciting milestone of growing their team.

[00:02:06] This can be so special and so exciting, and for many of my clients, it really is exactly that. It's a point that they've aspired to get to for so long. Bringing on support, bringing on people that are aligned so that they can help enrich their lives, but also being able to serve more people in their business.

[00:02:26] It really is a growth milestone and it's special. I know that many business owners put it off and they put it off and they put it off because of the nerves, the nervousness and the uncertainty around some of the complexities that attach to growing a team. So when they finally get to the point where they're ready, it really is exciting.

[00:02:46] So let's talk through what to avoid. The three most common mistakes. Mistake number one is getting the classification wrong. So when I'm talking about growing a team, there's traditionally two ways that small businesses will do that. They'll either hire an employee full-time, part-time, or casual, or they'll engage a contractor. So bringing in a contractor who's got specialist expertise to provide services because you've got a gap in services or you've got overflow and you can't service at all anymore on your own.

[00:03:18] Both are great, and once you work out which one's going to best serve your business, we need to make sure we've got the classification right. And this really is something that I talk about a lot, and it's the contractor trap. So that is bringing somebody in as a contractor to help your business grow and to fill the need that you have in your business without understanding the nuances between what makes a contractor a genuine contractor and what makes an employee a genuine employee. So it's getting the classification wrong. Biggest mistake, hands down, number one biggest mistake, and the way this tends to come about with for business owners is they talk to somebody who says, yeah, I've got an ABN. [00:04:00] I'll issue you some invoices, so I'm going to come in and work for your business. I'll provide services to your business.

[00:04:07] But just because someone has an ABN and issues invoices doesn't make them automatically a contractor at law. This brings businesses unstuck when things go sour down the track or when the contractor's moved on and then someone says to them, oh, actually you were really an employee.

[00:04:23] You are now owed these entitlements, and all of a sudden the business receives correspondence from the Fair Work Ombudsman saying, we've gotta claim here that this person was a genuine employee and you've gotta pay these unpaid entitlements. It's just a complex situation that we can avoid if we get it right.

[00:04:40] So when we're engaging a contractor in our business, we need to make sure they're actually a genuine contractor. We need to make sure that they're legitimately running their own business. Having an ABN does not make you a legitimate business owner. It makes you an ABN holder.

[00:04:54] There's a difference. So make sure the contract you are engaging legitimately runs their own business. They have other clients. Make sure they're free to accept or reject work from you as and when you offer it.

[00:05:06] Having somebody on a fixed schedule, having somebody on a roster system, having somebody locked in to 20 or 30 hours of support a week doesn't align with that true contractor arrangement. So think about that. As soon as we start doing that, we have to start asking the question, oh, are they really an employee?

[00:05:25] If they don't have other clients that work only for you, ah, are they really an employee? Just ask the question. We need to think about the right to delegate. This is a really important one. When you're growing your team, if you're bringing in a contractor, are you happy that they've got the right to delegate the work that they're doing for you to other team members?

[00:05:45] Big discussion. Big discussion on its own. But that right to delegate is a really key differentiator between a contractor and an employee. So really give thought to that. There's risks. If you say to a contractor, you can't [00:06:00] delegate, you must do it personally. So understand the risks is what I'm saying.

[00:06:05] How much integration do they have in your business? Do they have an email address that's linked to your business? Do the clients that they're serving think they're a part of your business? Think about that perception. Think about that integration. Think about the way that they're delivering the services.

[00:06:23] Are you micromanaging? Are you giving them specific instructions on how you want them to do it? Or are you genuinely engaging them for their skillset and they're free to provide the services in the way that they see fit? That's a hallmark of a contractor. The minute we get into situations where we've brought on a contractor and they issue us invoices, but they can't delegate, they have to do the work as we tell them to, they've got set fixed rosters or hours or expectations, they have to give us notice of when they're going on leave, it's not open to them to say no to particular work because that's going to upset the way things are working, as soon as we start having those types of arrangements in place, we really need to be asking the question, have we got this classification right or not? And is this person actually a contractor operating their own legitimate business, or am I really treating them like an employee? Getting that classification wrong can cause heartache and pain down the track, And that is something that a business can avoid by taking the time to clearly understand the classifications at the beginning and to clearly understand how it is that they're bringing on their new team members, employer employee relationship, or independent contractor.

[00:07:39] On a side note, that I just want to flag this here because this is a conversation I'm having almost weekly at the moment. It's the topic around superannuation obligations on contractors. So back in the day, long time ago, it was very much run of the mill. I've got a contractor, they pay their own super and tax and sure it used to be like that, very simply, [00:08:00] a long time ago. But now the law has changed and things are just a little bit different. And there are rules around superannuation to contractors. And so what the law says is, if you've got a genuine contractor, that's great, but sometimes you will need to pay super for your genuine contractor and sometimes you won't.

[00:08:18] So this is another area where business owners find themselves exposed and it does flow on from the mistake number one, the misclassification of employees and contractors. It's a misclassification or a misunderstanding of when superannuation is payable to contractors.

[00:08:33] So once you've gotten over that first hurdle and you understand that somebody is a genuine contractor and you've satisfied all of the criteria, and you are really clear about that, you then need to turn your mind to whether or not superannuation needs to be paid to that contractor. That's a whole other podcast episode.

[00:08:48] I'm not going to go into it here, but generally speaking, if you are paying a contractor on a results or outcome basis, so per project. For example, I'm going to pay you $500 a week to do this and whatever it is that they're doing, it doesn't matter to you if it takes one hour or 10 hours, that's a results basis payment, that's per project. Typically, superannuation obligations don't attach to that. On the flip side though, if you are paying a contractor per hour, an hourly rate per hour, depending on how many hours they work for you, and they issue you an invoice at the end of each week or month, I've worked 10 hours, 10 hours times our agreed hourly rate is this, that scenario generally attracts a superannuation obligation for your contractor. So if that's triggering something in you and you're not sure whether superannuation is payable for your contractors, the way you're engaging them, reach out and have a conversation with your accountant or your bookkeeper right now, or your business lawyer because it's really important that you get this right because the obligations to pay superannuation on these contractors can be backdated. So you can be find yourself in a situation where you've got a claim for unpaid super.

[00:09:55] So I just flagged that as a flow on of the mistakes that business [00:10:00] owners can make when they're engaging contractors. Getting the classification wrong and being an employee. And then secondly, misunderstanding when superannuation is payable for contractors.

[00:10:12] That's mistake number one. Mistake number two is the documentation, using an agreement that doesn't protect you. So once you have been through the process of understanding whether your team member is an employee or a contractor, make sure you have a proper agreement that is actually going to work.

[00:10:32] So that means don't use Chat GPT to draft it. Don't use a template. Templates are drafted for everybody. They work for nobody. They're very generic. I have a lot to say about that. I talk about that on the podcast a lot. I actively stand against templates for legal documents. I firmly believe that D IY is for Bunnings, not for your legals.

[00:10:54] So when we are talking agreements, make sure that you've got a properly tailored employment agreement that accurately sets out the details of the position and the role, and accurately sets out all of the things that it needs to to be a lawful compliant employment agreement, but one that works for your business and works for the employee.

[00:11:15] Equally, an independent contractor agreement. It's gotta address all of the criteria that we've just touched on. It's gotta address all of the things that a contractor agreement needs to cover to make sure that the arrangement you have in place with your contractor is actually reflected in your agreement, and that you act consistent with that agreement.

[00:11:35] It is no good having something in place which is not aligned with how the relationship actually works. That can leave the business exposed later if there's confusion or misaligned expectations. Or worse, you receive correspondence from the Fair Work Ombudsman saying there's been a claim that your contractor was really an employee.

[00:11:53] You need to be able to go back to the documentation to support you, and you need to be able to satisfy a court or a tribunal [00:12:00] that you are acting consistent with what it says in that documentation. I had a situation last week where a beautiful business owner reached out to me and she said to me, can you take a quick look at this contractor agreement I've been using in my business for three years?

[00:12:14] Just let me know if we need to update this or if this is okay. And this conversation came about because we worked together to develop her client service agreement and it was a fabulous experience and she loved the outcome that we achieved there with her client service agreement and the implementation into her processes and systems.

[00:12:34] So I was only too happy to take a look at the contractor agreement she was using. She thought it was okay. She said to me, I think this document's good. I purchased this lawyer drafted template some years ago. Emphasis here on lawyer drafted template. She sent me the document and I had a look at it and I really sat with it and gave a lot of thought to how I was going to approach this with her because hand on heart, this contractor agreement was absolutely the worst contract I had ever seen.

[00:13:10] I do not say that lightly. I have seen a lot, I've seen contracts drafted by AI. I've seen templates. I've seen documents that clients have cobbled together themselves from things that they've gathered on Google. This was the worst contract I'd ever seen because it was leaving the business so exposed, because it was establishing in the body of the document, an employer employee relationship.

[00:13:36] It had obligations back to front. It had the superannuation obligations for this contractor who was paid by the hour completely wrong. It contained unfair contract terms, particularly around termination and the contractor's right to be paid, which means if a contract has unfair contract terms since November 23, when the laws changed, the whole document can be voided if that's the case. So [00:14:00] this document wasn't worth the paper that it was written on, so to speak, and it left the business completely exposed because it confused the relationship entirely. This beautiful business owner had no qualms in taking that advice.

[00:14:12] She loved the direct nature of what I shared with her, and we are now working together to develop a proper tailored contractor agreement that will serve her business going forward, and that will set the business up for success with the contractor so that everybody's really clear on what's happening and all the things.

[00:14:29] I share that example because it goes to the second mistake that I'm talking about in this episode, which is the importance of getting the documentation right. There is no substitute for preparation, but once this is done and done properly, you have absolute confidence and peace of mind that you're not going to find yourself in a situation later where things have fallen through the cracks and you're now exposed. So I can't emphasize strongly enough the importance of the right documentation.

[00:14:58] The third mistake that I see as being a very common mistake is when business owners grow and start hiring the employees and or engaging contractors, but they don't take a moment to pause and revisit their business structure. It doesn't need to be an onerous process, and it's certainly not something that a great deal of time needs to be spent on, but just the oversight or the assumption that the business structure you had at the beginning will always be the right one can be a really costly mistake.

[00:15:29] And most commonly, this arises when business owners start as a sole trader, but they grow and they grow and things change, and they're bringing more and more people into the business. Therefore, they have more and more obligations and liabilities but they haven't given any thought to whether the structure continues to serve their best interests.

[00:15:50] They just assume that the sole trader structure will always be the best way, and it's not always the best way. Sometimes it is, but sometimes it's not. [00:16:00] Changing business structures from a sole trader to another structure, most commonly in my experience with the business owners I work with, it's a company structure, can be incredibly important from a risk mitigation perspective. So business structure is a really important pillar when it comes to managing your risk. Your three pillars for managing risk, by the way, are your business structure, your insurance, and your legal documents. They're the three ways a business manages risk.

[00:16:28] So when we're a sole trader, fine. That's great. Excellent. Insurance and legal documents are really important. Sometimes we need that extra strength and protection and we need to consider the business structure. We need to consider whether from a risk perspective, whether it really is time to change from a sole trader to another structure.

[00:16:49] Most commonly in my experience, the company structure. And when business owners don't turn their mind to it, they can find themselves exposed down the track because their liabilities have increased, their personal exposure has increased, but they've never revisited the structure.

[00:17:05] And when they look back, they realize, huh, I could have avoided much of this risk exposure if I had have changed to a company way back then. So I flag this here as one of the most common mistakes because it really is something that just needs to be revisited every now and then to make sure that the structure you're using still serves you well. This often involves a conversation with your accountant from the tax and numbers side of things, and a conversation with your lawyer from the risk protection side of things. Have that conversation every now and then so that you know as you are growing, changing, pivoting, all the things that the structure you have in place is still the right one.

[00:17:45] So whilst growing your team is incredibly exciting and it can be the natural next step for your business, make sure that you're taking the time to do it properly, so it's not going to come back [00:18:00] and bite you later, so that you are not going to have claims or allegations made whereby you've got back pay to pay for entitlements or super, or you've facing penalties because you've misclassified.

[00:18:13] All of that can be avoided. All of that absolutely can be avoided. The three most common mistakes that I've talked about is the misclassification. So getting the classification wrong between employees and contractors. The second being not having agreements that work and that support you. And the third is not revisiting your business structure.

[00:18:34] Take the time to revisit your classifications. If you're not sure, ask the question. Reach out to your accountant. Reach out to your business lawyer. Ask the question around the classification and check in, make sure you've got it right. Then make sure you've got agreements that work that were tailored properly for your business so you know that they serve your business and your team members, employees, and contractors.

[00:18:58] And third, check in every now and then and make sure that the business structure that you're operating under is still the right one. As I said, it doesn't have to be an onerous, lengthy process. It's just asking the question and giving it thought. Talking to your business lawyer about your risk and talking to your accountant about your numbers.

[00:19:14] I really hope this has helped, and if you haven't grown your team yet, I really hope this helps you do so when you're ready, with absolute confidence and peace of mind, knowing that you aren't leaving your business exposed. Or if you have grown your team and you do have employees and or contractors, now might be a really great time just to go back and revisit the classification for each of those team members. Make sure you've got it right. Make sure your documentation's working and have a chat with your accountant or your lawyer just to make sure that the business structure you have is still serving you.

[00:19:47] I really hope you have found this episode to be helpful. If you have business friends or colleagues that you think would benefit from listening to this short and sharp episode as well, please feel free to share the podcast with them Together, that's how we get the [00:20:00] podcast in the ears of even more business owners.

[00:20:02] As always, thanks for joining me. I'll catch you next time.