If your business is thinking about engaging an independent contractor, it is important to ensure that you have an agreement outlining the terms of the contractor relationship. Just like any business relationship, each party should know their obligations and responsibilities in order to avoid conflict down the line. Keep in mind certain key terms to include in your independent contractor agreement for maximum clarity and protection.
Worker Classification
Before anything else, it’s extremely important that you determine whether the individual you want to hire should be classified as an independent contractor instead of an employee. Misclassification of employees (even if it’s inadvertent) is all too common, especially with today’s changing workplace landscape.
While there are many factors that courts look at when determining whether a worker is an independent contractor or an employee, the general rule is if the individual is (1) free from the hiring entity’s direction or control over the performance of services; (2) engaged in an independent trade, occupation, or profession; and (3) the service is outside the usual course of business of the hiring entity for which the service is performed, then the individual is likely to be an independent contractor. For example, if an accounting firm hired a marketing consultant, it might make sense for that individual to be an independent contractor, since the service the consultant is performing (marketing) is outside the scope of business of an accounting firm.
Terms of an Agreement
The terms to be included in any employment agreement will vary depending on several factors, including the precise nature of the work to be performed and the jurisdictions governing the agreement. That said, the following provisions are generally essential for an enforceable and protective agreement.
- Scope of Services. The nature of the work the contractor is performing should be clearly stated in the agreement. Are they providing a product, materials, or advice? When will the services be completed or delivered, and how is it determined if the work was completed in an acceptable manner? These details should be clearly laid out in the agreement so that the contractor knows what is expected of them.
- Independent Contractor Status. One of the most important terms to include is a statement (or paragraph) outlining that the individual is not an employee of the company and is, instead, an independent contractor. The contractor is not entitled to company benefits, and since a contractor is considered a self-employed individual, they are responsible for any and all taxes (such as income, Social Security, and Medicare) as a result of the contractor status.
- Payment and Expenses. The agreement should list payment terms and how much the contractor will be paid to perform the services. Will they charge an hourly fee or a flat fee? When will invoices be sent to the company, and how long does the company have to pay? Will the contractor require the company to pay for any expenses, such as travel or materials?
- Term and Termination. Unlike an at-will employment agreement, a contractor agreement should state that either party can terminate the agreement at any time, with appropriate advance notice (anywhere from 14 to 60 days, depending on the nature of the services). The term should also be spelled out: is it for an indefinite amount of time (until terminated), a short initial period (maybe one month), and/or does the agreement automatically renew?
- Restrictive Covenants. Depending on the nature of your work, your client/customer base, and the scope of your relationship with the independent contractor, you may want to include a restrictive covenant in the contractor agreement. This can include a non-competition clause, which restricts the contractor from engaging in competitive activity within a certain geographic area, or a non-solicitation clause, which restricts the contractor from soliciting clients or employees. It’s important to note that restrictive covenants must be narrowly and carefully drafted to be enforceable. There are other legal requirements as well; be sure to speak with an attorney to see if including a restrictive covenant is appropriate for you.
- Confidentiality and Work Product. Another extremely important clause to include concerns confidentiality and intellectual property. The contractor must promise to refrain from disclosing any confidential information they obtain while working with you. Failure to do so could have serious repercussions for your business. Finally, your business should own any property (which can include materials, presentations, formulas, and writings) the contractor produces during the agreement. This is the whole point of hiring a contractor, so make sure the terms are clear in the agreement!
Including the above provisions in an independent contractor agreement can go a long way in preventing misunderstandings and avoiding potential legal disputes. It is best to speak with an employment attorney to tailor these provisions to your particular situation and to advise on which additional clauses are needed.