Freelancing

An employer’s guide to independent contractor agreements

By
Derek Abram
|
CEO of Prio
|
5 min read

The global Covid pandemic has changed the way businesses work all over the world. 

The remote working trend has taken off and doesn't seem to be stopping anytime soon. But this has also caused a mind shift from the organization's perspective. Businesses are now opening up to the idea of replacing full-time employees with freelancers. In fact, employees themselves seem to be gravitating more towards working as 1099 contractors.

When doing so, it is vital to remember the distinction between employees and freelancers. What I mean is, you need to have an iron-clad agreement between the contractors and the business.

Agreements that protect the interests of both the employer and the freelancer.

This article is an employer’s guide to independent contractor agreements. I am going to help you understand:

  • what these documents are
  • how you should draft one
  • and what to keep in mind before hiring a freelance gig worker.

Ready?

Let's get started.

What is an independent contractor agreement?

An independent contractor agreement is a document that defines the terms of the contractor's work.

An independent contractor is a self-employed individual, external to the business, contracted by the organization to perform certain tasks.

Independent contractors do not receive the benefits that regular W-2 workers enjoy. W-2 tax forms, insurance, social security, wellness programs and paid vacations are not part of the average freelancer's contract. Neither do they receive company resources such as hardware from the organization.

However, they do benefit in other ways.

  • Freelancers can decide the number of hours a week that they will devote to work.
  • They can choose to work with multiple businesses at the same time and decide what projects they want to work on.
  • They are not bound by the rules and regulations of the organization beyond the scope of the project.

An independent contractor agreement, or a freelancer agreement, is important to define the terms and conditions of the task that a contractor has been hired to do. This agreement defines, among other things, the scope of the job the contractor is being hired to perform, the duration of the project as well as the project payment details.

Why independent contractor agreements are important

Independent contractor agreements, or freelance agreements, are important to legally protect both businesses and contractors in multiple ways. Let’s take a closer look at what makes these agreements so important.

Defining differences

The legal rules and regulations that apply to a company’s full time employee are very different from the rules and regulations that apply when a business hires a freelancer. An employee agreement that defines the nature of the relationship between both parties, such an independent contractor agreement, is a handy document should legal disputes arise at a later date. 

Defining roles

A written and signed agreement between a business and a contractor clearly defines the scope of work and the duration for which the agreement is valid. It also defines the boundaries for that engagement, and what the contractor cannot do outside of those boundaries.

This protects the interests of both parties in case of future contractual disputes.

Providing security

During the course of a project, an independent contractor has access to a lot of important business information, including but not limited to financial data, intellectual property, business processes, future plans and more. 

A legally binding contract not only makes sure that a contractor cannot divulge these intimate details to another business, it also makes sure the ideas and processes belonging to a business cannot be replicated by the contractor for another customer.

Providing a chance for reconciliation

A lot of independent contractor contracts come with what is called an “arbitration clause.” This is another part of the contract that is beneficial both to the business as well as the contractor. 

It isn’t uncommon for disagreements to crop up during the course of a project. Should either party decide to withdraw from a project and sue the other in a  court of law, the process could cause considerable financial damage in terms of reparation as well as legal fees. 

An arbitration clause protects both parties from being forced down the legal course by ensuring that they first sit with an experienced arbitrator and try to reach a settlement outside of the court. 

Framing an independent contractor agreement

Here are some /of the most essential inclusions every independent contractor agreement ought to have.

What is the role?

The first thing that every employment agreement must do is define the role between the individual and the business. In this case, the business will want the agreement to make it implicitly clear that the person is being hired as an independent contractor and not as a full-time employee.

This will make sure that there are no chances of the contractor being misclassified for taxation, and that they are not owed the employee benefits offered by the company, such as paid holidays and insurance coverage.

The legal jurisdiction of the agreement

It is important to define the laws and jurisdiction under which the agreement is being made and enforced. This is especially relevant if the business has multiple outlets in different locations, or if the contractor being hired works out of a different city or even a different country. 

Description and scope of work

There are multiple reasons why it is important to describe what is expected and clearly define the scope of the project.

For one, it helps the contractor understand exactly what is expected of them in return of payment, what their role in the project is and how long they can expect the project to go on for.

It also clearly defines what the business is allowed to expect of the contractor, making sure the contractor cannot be expected to do more than exactly what the contract states. 

This is also the part of the contract that should include a contingency plan in case the project deviates from the agreed upon path.

The project timeline

When working with independent contractors, it is best to define the timeline of the project and have a definite date by when you want the project to be completed. This will help the contractor plan the best way to plan for the project, especially since they decide their own working hours.

In the case of a project that has multiple stages and is likely to go on for a long period of time, this is where the business may need to set up multiple milestones that align with the timeline, making it easy for the contractor to know what part of the project needs to be completed by a certain date. 

Payment schedules

Every independent contractor agreement ought to clearly state the project payment schedule. Depending on the nature and duration of the project, the contractor may need to be paid multiple times instead of only once after the completion of the project.

A lot of unnecessary delays and miscommunications can be avoided if the business and the contractor come to an agreement about the dates and/or project milestones that will influence when the contractor can expect a payment. 

The agreement should also include when the contractor will be paid (flat fee or time based), the medium of payment (cash, cheque, etc.) and how much the contractor will be paid. 

This section of the agreement should also advise the contractor about bills and invoices the contractor needs to generate prior to receiving payments as well as any tax deductions that may be applicable. 

Termination and liquidation clauses

While terminating an agreement with an independent contractor can be detrimental to the project, to the business and to the contractor, it is necessary to include a termination clause. 

There could be multiple reasons why the agreement could be prematurely terminated, including the business not sticking to payment schedules, or the contractor straying from the scope of the project. 

The termination clause should feature the following details.

  1. The grounds for the agreement being terminated.
  2. If either party has the right to terminate the agreement.
  3. A pre-termination notice period, if any.
  4. Repercussions or consequences of not adhering to the notice period.
  5. The medium through which the notice ought to be communicated.
  6. Reimbursement terms and percentages, if any.

A liquidation clause, on the other hand, guarantees some amount of compensation should either party breach the agreement. Before this clause is added to the agreement, the business and the contractor both need to be in agreement about what qualifies as a breach in the agreement, and what the compensation to be paid by the breaching party ought to be. 

Necessary restrictions

While not all freelancer agreements feature this section, a lot of businesses prefer adding this to protect themselves. Restrictive clauses that may be applied include the following.

  1. Non compete clause: This clause prevents the contractor from doing business with the competitors of the business for a specific period of time.
  2. Non solicitation clause: This prevents the contractor from doing business with customers of the business for a specific period of time.
  3. Confidentiality and nondisclosure clauses: These clauses prevent the contractor from sharing proprietary and confidential information with competitors of the business. 
  4. IP clause: This clause is very important to businesses that are creative in nature. It protects the creations of the business, which may include logos, symbols, music, videos, designs, etc. from being misused by the contractor to generate income by any means other than what is included in the agreement.

Other inclusions

Here are a few other inclusions that may be necessary for an independent contractor agreement to feature, based on the nature of the project.

  1. The agreement should mention that the contractor is not eligible for employee benefits such as insurance, social security, tax forms, etc. On the other hand, the contractor should provide proof of insurance and necessary licenses.
  2. The agreement should clearly mention if the contractor will be allowed to hire subcontractors independently or not.
  3. If the contractor will be allowed a work space within the business premises, or access to any business machinery and tools, the agreement should mention the terms and conditions of this access. The agreement should also mention what restrictions apply to the contractor while on the business premises. 

The correct format

You don’t really need to hire a lawyer to frame an independent contractor agreement for you. There are plenty of agreement templates available online that you could use to help make the task easier for you, just as long as you remember to include all the necessary elements. 

Keep in mind, though, that independent contractor laws may differ according to the state your business is located in, so it helps to know these differences while framing the agreement. 

Conclusion

The contents of an agreement between a business and an independent contractor is bound to vary, depending upon factors such as the nature of the business, the nature of the project and budgets. Irrespective of whether a business chooses to use an online template to make the agreement, hires a lawyer or just does it themselves, this guide should help ensure all the salient points are included in it. 

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