Many businesses use independent contractors to complete short-term or episodic projects instead of hirinng full or part-time employees. Still, this relationship must be properly defined in an independent contractor agreement or both parties may end up in costly disputes. If you are considering hiring an independent contractor for any work, an employment lawyer from Priori Legal's vetted network can help you draft an independent contractor agreement that is tailored for your company's needs.
Understanding Independent Contractor Agreements
Companies often need work done by a professional that may not require the full-time dedication of an employee. Independent contractors fill this role, yet the contractor client relationship is often fraught with discord, especially when expectations are not set clearly. That’s where independent contractor agreements come in. Independent contractor agreements are legal documents that define the relationship, dictate the terms and expectations of the project, and ensure that the contractor’s status is legally protected as such. These contracts serve as the legal basis of the client-contractor relationship. You can review and download a free form template Independent Contractor Agreement in Priori Legal's Document & Form Learning Center.
Key Terms and Provisions
Although every independent contractor agreement will differ depending on the duration of the project, the scope of the work to be done, and many other factors, all independent contractor agreements must address certain issues through the following key terms and provisions:
- Nature of Contract Services. This should define the general work expected and the expectations of what will be delivered and when.
- Scope of Work. This should clearly define the work product to be completed, timelines and milestone dates, and requirements for each milestone as specifically as possible. In the event of a dispute, the courts will look to this clause to determine whether or not a contractor has delivered up to expectations.
- Revisions and Changes. A project is very rarely delivered perfectly as desired on the first try. This should define how requests for revisions should be made, the extent to which the client can request revisions and the timeline for turning around any changes.
- Payment. The amount and timeline for payment must be defined.
- Expenses. All known expenses related to the project should be defined and allocated. In addition, there should be a process in place to define who is responsible for any additional expenses that may come up unexpectedly.
- Client and Contractor Responsibilities. Many deliverables require input from both the client and the contractor. This should define what each of these are, as well as any penalties for failing to live up to them on either party’s end.
- Non-Disclosure. This ensures that secret company work product remains secret.
- Work-for-Hire/ IP Assignment. Most independent contractors will be creating valuable intellectual property for the company, but as a non-employee, this remains the property of the contractor unless otherwise stipulated. When possible, it is best to transfer ownership of IP rights through work-for-hire doctrine, but work-for-hire has a limited application. In case the work produced is not covered, it is important to have a clause transferring ownership of the work product.
- Dispute Resolution. This establishes how disputes over work and contract terms will be resolved.
- Disclaimers. This sets specific disclaimers that help ensure that the contractor is not classified as an employee, such as lack of employee benefits conferred by the relationship, the scope of control over work production left to contractor and a lack of limits on when employee hours must be completed.
- Term and Termination. This establishes the duration of the contractor agreement and procedures for termination.
- Renewal. This establishes processes to renew the contract as desired by either party.
- Kill Fees. This establishes a fee in the event that the contract is terminated before the full term.
Limitations of Independent Contractor Agreements
No matter how well you draft an independent contractor agreement, it will still be limited. If you are treating the contractor like an employee, such as by requiring work be done in a certain location during certain hours, giving extensive instructions on how work must be done, or defining by whom all work must be completed, an independent contractor agreement alone will not prevent the IRS, a state or the courts from redefining the relationship. That’s why you must be aware of the limitations of an independent contractor agreement before ever signing one. If you are not sure if the work you need can be covered under an independent contractor relationship, it may help to discuss the specific with a corporate lawyer.
What if the IRS determines that an independent contractor agreement makes the contractor an employee?
If the IRS determines that an independent contractor is really an employee due to the terms of the independent contractor agreement or other circumstances, your company faces back taxes and serious fines. This is a legal situation that most likely requires the help of an experienced tax lawyer to resolve in a way that has a minimal negative impact on your business.
Can an independent contractor agreement be exclusive?
It can be, but just keep in mind that exclusivity is a factor common used to determine whether a contractor may really be an employee. Exclusivity provisions are only permitted for valid business reasons, and even then they are best made as minimally limiting as possible.
Do I always need an independent contractor agreement when I hire someone for a new project?
It is recommended. This is the best way to ensure that the independent contractor relationship is well defined, goes smoothly, and avoids disputes. Every new project and every new contractor merits a new independent contractor agreement