Legal Structuring. It is All in the Foundations
Recently I have been asked by clients who have faced problems with people they thought were independent contractors. People whom they thought were not their responsibility. While the questions have come from the guttering and landscaping industries, the issues apply to all those in business.
So what is the issue. Let’s look at the issues with contractors being prosecuted for performing building work without meeting their legal requirements.
Example 1 – Head Contract Scenario
A Landscaper contracts to design a pool area and install a pool. The total costs of the project are $50,000.
The Landscaper has a contract with the client for the entire project for $50,000.00.
The Landscaper will need to be licensed and obtain insurance from the Home Building Compensation Fund.
The Landscaper thought that by subcontracting out parts of works, all for amounts under $20,000, so that no one person received more than $20,000 he would not need to be licensed. The relevance of this is, that as from 15th January 2015, the threshold for requiring a licence for building and general trade work has been increased from $1000 to $5000 (including labour and materials).
The payment for the work of the Landscaper was $4999.00. As such he thought no license was required to do the work. The Landscaper undertook the work. The landscaper thought wrong!
Wrong, because the contract for the entire work was for $50,000. It was the Landscaper who at law was being paid $50,000 by the client. The legal structure of the arrangement is as in figure 1.
The landscaper had the contract for the entire job. As the entire contracted works exceeded $5000 a licensed tradesperson had to be the head contractor.
Example 2 - Separate contracts for individual parts of the Work
If the Landscaper had of arranged with the client for there to be a separate contract with each of the various tradespeople, then under this structure the situation for some of the tradespeople to not fall foul of the licensing requirements could have been overcome. For this to be effective, it is necessary for the client to have separate contracts with each tradesperson. None of the tradespersons involved would have a supervisory role over any of the others.
The difference at law is that in the first example, the Landscaper took on the role as head contractor. At law the client could hold the landscaper liable and responsible for all of the other tradespersons work, and the quality of their work. Under Example 2, each tradesperson is responsible directly to the client. None has any contractual responsibility to the others.
A similar situation arose with the manufacturer of guttering. The manufacturer makes and sells guttering. The manufacturer at the time of sale, to help the home owner recommends licensed plumbers to do the work for them. On a job a the plumber fell and was severely injured. The manufacturer may now face charges from Workcover. Workcover have commenced an investigation on the relationship between the manufacturer and the injured tradesperon, to see whether the person was a deemed employee or subcontractor of the manufacturer.
If the person is a deemed employee or subcontractor of the manufacturer then the manufacturer should have him covered under his workers compensation insurance. But if the person is an independent, separate and distinct contracting entity to the client and not the manufacturer, the manufacturer has no responsibility over him. The only relationship between the manufacturer and tradesperson being that the manufacturer knows that the person does a professional job and refers clients to him. However, the manufacturer, did not have any documentation to reflect this arms length situation. The manufacturer 18 months ago obtained advice on what structure was needed to avoid such allegations arising. The manufacturer thought the cost of the structuring too much. He did not proceed. Now the manufacturer is facing those costs, plus defence and assistance costs.
Getting your structuring right does come at a cost. The value to you is that the cost is less than the costs of not having the right structure to avoid claims of bad workmanship, negligence, work health and safety and or product liability.
by Steven Brown