An independent contractor agreement, in writing, is a crucial element of good contractor management. Here we explain the key things you need to think about when putting an independent contractor agreement in place.
1. An independent contractor agreement or contract is essential before work commences between a client business and a contractor.
2. An independent contractor agreement is necessary to clarify the obligations of the contractor and client, to reduce the risk of misclassifying employees, and as a ‘backstop’ in case of tax authority audits or inquiries.
3. There are a range of essential terms in an independent contractor agreement, including terms setting out exactly what work needs to be performed, what amount is to be paid, and how payment will occur.
4. As well as a written independent contractor agreement, businesses need to consider other steps that they should take to ensure their hiring of an independent contractor is in full legal compliance.
What Is the Purpose of an Independent Contractor Agreement?
The purpose of an independent contractor agreement is to clearly set out what work is to be performed, payment terms, and terms essential for the operation of the relationship (such as terms relating to liability and termination).
By establishing these matters in a written agreement or contract (these terms are used interchangeably), the chance of dispute or confusion about the relationship is reduced. Furthermore, it provides a written record of what is agreed for legal, compliance and tax purposes.
Do Independent Contractors Need an Agreement or Contract?
In short, yes. It is not always a strict requirement of hiring an independent contractor that a written agreement be in place. However, there are several reasons why, from the perspective of a hiring business or the contractor themselves, a written agreement makes good sense. We set out some of the key reasons below:
What Should be Included in an Independent Contractor Agreement?
Independent contractor agreements are governed by contract law. Usually the agreement itself will clarify which country and/or state law applies.
In this way, independent contractor agreements are different from employment agreements (such as fixed-term employment contracts or indefinite contracts), which are largely governed by the labor law of that country.
While the essential terms of an independent contractor agreement will depend on the business and individual concerned, and where they are located (particularly important in the case of remote contractors), some possible terms to consider include:
What Other Steps Should a Business Take to Hire Independent Contractors?
In addition to setting up an independent contractor agreement, it is important that businesses hiring independent contractors take various other steps to ensure that they are in full compliance with their legal, regulatory and tax obligations. Key steps include:
Frequently Asked Questions
Can I Write My Own Independent Contractor Agreement?
Yes, but it is not recommended. Both the contractor and the client should seek legal advice in drafting a contract to ensure that they have appropriately protected their legal position.
Do Independent Contractors Need a Contract or Agreement?
In most cases, a legally enforceable agreement will exist wherever the contractor and client have agreed that specific services will be provided for payment. Independent contractor agreements do not usually have to be in writing to be enforceable (though this may depend on the jurisdiction in question).
However, it can be very difficult proving that the agreement is in place, and its terms and conditions, without a written agreement existing. This written document confirms that there was an offer, acceptance and consideration (core legal requirements for any contract).
In addition, having a written agreement can be an important part of proving compliance with tax and employment laws.
Who Are the Parties to an Independent Contractor Agreement?
The parties to an independent contractor agreement are, in almost all cases, the independent contractor and a client company. However, both parties should ensure that they sign the contract under the correct name: For example, independent contractors can choose to operate through a limited liability company, rather than as a sole proprietor. In this case, the independent contractor needs to be careful to sign on behalf of the LLC, rather than their own behalf.
In some cases, parties to an independent contractor agreement may decide to enter into a tri-partite agreement — an agreement between three distinct parties. In that case the contractor, the client and a third party are all parties to the one contract. This might occur, for example, where a contractor management outsourcing (CMO) firm is engaged in order to manage administration of independent contractors.
Are Non-Compete Clauses Allowed?
A ‘non-compete’ clause requires that the contractor not work with a competitor. Whether or not these are allowed for independent contractors depends on the jurisdiction in question.
It is worth keeping in mind that even where non-compete clauses are permitted, the court may not enforce these clauses where it finds them to unreasonable in the circumstances.
How Do I Negotiate an Independent Contractor Agreement?
Independent contractors do not have to accept the terms of the agreement that is provided to them. It is common for independent contractors to negotiate the price, the services to be performed, and other clauses of the contract, such as the applicability of non-compete clauses.
Sometimes independent contractors themselves provide a contract to cover the work in question. Similarly in these cases, the client can negotiate the terms of that agreement so that they are more favourable to their own position.
How Often Is an Independent Contractor Agreement Amended or Renewed?
The agreement may itself state the length/term of the contract. It may also provide for an option to renew the contract.
It may also be necessary to amend the contract where events substantially change the grounds under which the contract was made. For example, one party may wish to amend the contract where it is having difficulty meeting payment terms, or where the legal name of the business has changed.
How Do I Terminate an Independent Contractor Agreement?
The ability to terminate or end the contract should be set out in the independent contractor agreement itself.
It is common for contracts to either come to an end at a specified point in time, or before that time by mutual agreement of the parties.
Is Using an Independent Contractor Agreement Template a Good Idea?
No. Templates do not take into account the specific legal and compliance requirements that are appropriate for your business. This is particularly true when the contract concerns an international contractor and the laws of another jurisdiction.
Who Can Use an Independent Contractor Agreement?
Independent contractor agreements can be used by anyone who provides services for payment outside an employment context. Where an individual is employed, an employment agreement or employment contract, rather than an independent contractor agreement should be used.
While some individuals working as independent contractors will operate under their own legal name (i.e. a ‘sole proprietorship’), others might operate through a limited liability company (LLC), a partnership, a trading trust, or some other legal form.
Contractors may also call themselves ‘freelancers’, ‘consultants’ or ‘vendors’.
How is an Independent Contractor Agreement Different from an Employment Agreement?
An independent contractor agreement is sometimes called ‘a contract for services’, whereas an employment agreement is sometimes called a ‘contract of service’ — this language captures the key principle at the heart of both types of agreement and relationship.
An independent contractor agreement commits both parties only to provide, and pay for, the specific services set out in the contract.
An employment agreement, by contrast, tends not to set out the services to be provided in as specific detail. This is because employment relates to a more enduring relationship, where specific tasks cannot be easily specified in advance. In addition, employment usually means parties have broader duties to each other, such as those duties set out in labor and health and safety laws.
This core difference is reflected in the language of the contract (employment agreements often contain clauses relating to employee benefits and employee safety, for example, which are usually not provided in an independent contractor agreement).
For more on the difference between independent contractors and employees see What’s the Difference Between Independent Contractors and Employees?
Need Help with Independent Contractor Agreements?
New Horizons Global Partners is an international expansion firm which supports businesses engaging contractors and employees, wherever in the world they are based.
New Horizons provides draft independent contractor agreements, tailored to the country and jurisdiction in question, ensuring that your hiring of independent contractors complies with the law, wherever you are hiring.