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Many employers use independent contractors to save costs and help fill the staffing gap. An independent contractor eliminates the need to determine exempt vs. nonexempt status.
Many of these freelance workers are hired to fill a need or to complete a project or job.
Because these workers are not technically employees who receive the same benefits, there needs to be a written agreement between the two parties to ensure an understanding of the requirements and expectations of both parties.
The IRS defines an independent contractor with specific rules that specify whether someone is an employee or an independent contractor. The biggest difference is in how the worker is taxed.
Business owners must protect their interests by having a written agreement with the independent contractor.
Contracts are enforceable when there is a mutual agreement between two parties with clear details of what is agreed upon.
The agreement is typically initiated by one party and accepted and signed by the other.
It is important for the wording in the contract or agreement to be clear, so there is no confusion.
The more detail, the less confusion there will be if one party challenges the agreement.
10 Points to Cover in an Independent Contractor Agreement
1. Services Provided
The agreement should clearly state what services the contractor will provide by listing all services they perform.
Specifically, what services will be provided for the compensation received?
For instance, let’s say that you need a bookkeeper to keep track of credit card statements and pay the bills. The Agreement would list specifically each service the bookkeeper provides: track purchases, submit payments for bills, balance monthly statements, and provide monthly reports.
2. Terms of Agreement
This includes when the agreement is effective, how long the agreement will last, and a date when the agreement ends.
For instance, the Agreement will end on December 31st with an annual renewal option.
Payment for services should be determined by stating the frequency for payment – weekly, bi-weekly, or monthly. This includes the agreed-upon hourly or fixed payment rate to compensate the contractor for their services.
Specifically, what is the agreed compensation for the services, and when is the compensation due for payment?
For instance, the fee for the services is $3000 per month, due on the 5th of each month.
4. Termination of Agreement
A termination clause should be included in the agreement stating the number of days required for giving notice of termination of the agreement.
A section should clarify what each party needs to do to terminate the agreement, the time required to give notice, and how that notice will be delivered to the other party.
For instance, termination of the agreement requires a 30-day notice to terminate the agreement.
5. Relationship Between the Parties
This section stipulates the relationship between the contractor and the organization and clarifies that the contractor is not an employee and is not eligible for benefits, such as health insurance, paid vacation, or any other benefits employees receive.
For instance, it might say the contractor is independent and not eligible for benefits other than agreed-upon payment for services rendered.
6. Work Ownership
Both parties should agree to ownership of any copyright works that are produced by a contractor.
If the contractor works creatively, it should be specified who owns the work’s copyright.
Typically, the person paying for the work owns the copyright, which should be specified in the agreement.
For instance, the Agreement might clarify that ABC Company owns all copyright of the work done by X contractor.
The agreement should include expectations for the contractor to not disclose proprietary or confidential information to any third party during and after the agreement period.
For instance, the Agreement might state something like: The Independent Contractor agrees to maintain the confidentiality of all Confidential Information received from the Client during and after the term of this agreement.
8. Applicable Law
The agreement should identify the state in which laws will govern the agreement. The agreement should be upheld in the court of the state where the contractor resides.
For instance, This Agreement shall be construed in accordance with and governed by the laws of the State of Your State.
9. Worker’s Compensation/Liability Insurance
The contractor should be required to provide worker’s compensation insurance for any workers under the agreement.
The hiring organization should not be held responsible for any claims resulting from injuries to the contractor’s employees.
The contractor should provide all equipment, tools, and supplies needed to perform the work.
The agreement should describe the minimum amount of insurance the contractor will carry to cover any negligent acts on the part of the contractor or the contractor’s employees.
The agreement should be signed by both parties, specifically by the person with the authority to sign on behalf of the organization.
For instance, signatures might include COO, CEO, or company CPA.
Finally, one of the advantages of outsourcing work is reducing cost and risk to the organization.
These factors should always be considered when hiring contract workers, and negotiating the agreement should be part of the process.
As with all legal documents, having an attorney review and modify before finalizing or signing is advisable.
An Example Independent Contractor Agreement is available for you to modify for your organization and review with your attorney.
Thriving Small Business makes no claims as to the legal viability of this document. It is merely for example purposes only.