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.
Key Takeaways
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. Considering how developed today’s best AI writing apps are, crafting such an agreement with their help shouldn’t be too hard. 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:
- Clarify obligations of contractor and client
- A written independent contractor agreement clarifies the services to be performed, the amount to be paid, and the method of payment, in one central document.
- This reduces the chance of confusion and disagreement about terms of the contract at a later date.
- Reduce risk of employee misclassification
- Employee misclassification (also known as ‘disguised employment‘) occurs wherever the hiring business views the hired individual as an independent contractor, but under the applicable law they are considered an employee.
- This can have a range of negative consequences for the hiring business, including legal action from the misclassified employee, tax authorities and labor regulators.
- While an independent contractor agreement does not provide 100 percent protection against this risk, it can reduce the risk significantly. This can be achieved by clearly setting out the duties and expectations of the contractor so as to avoid the essential elements of employment (more on this below).
- Tax department audit or inquiries
- Even where tax authorities may not explicitly require written contracts or agreements, they are important to have on hand.
- Tax authorities often ask for written agreements in order to help establish that a true independent contracting arrangement is in place (rather than employment), and to ensure that taxes are being paid correctly. Failing to provide those documents (whether via an audit or a less formal inquiry), can make it more difficult for the business to establish that it has acted within the law.
To find out more about hiring independent contractors, see our checklist at How to Hire an Independent Contractor.
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:
- Identifying particulars
- The written contract should set out the full legal name of both parties, as well as their address.
- This is important for legal reasons (e.g., if a business has a different trading name from its legal name, it is crucial that both parties know the legal person that they are dealing with). It also makes it easier to process invoices (using the same particulars), and ‘serve notice’ if legal proceedings ever eventuate.
- Description of services to be provided
- The services to be provided by the individual need to be spelled out in detail to see off any possible disagreements.
- Independent contractor agreements often specify the work to be performed in more detail than a written employment agreement (more on this below).
- Term/duration of the agreement
- The agreement should specify the beginning and end of the agreement, subject to any termination or cancellation clauses contained in the agreement.
- Payment
- The agreement should set out the amount to be paid, the applicable currency, on what schedule payments are to be made, the method of payment and how invoicing will work.
- Read more about paying independent contractors at How to Pay Independent Contractors.
- Termination
- Can either party terminate the agreement, and what are the consequences of doing so? Will payment be required in the case of part performance of the contract? The answers to these questions should be given in the written agreement.
- How taxes are to be dealt with
- Independent contractors are responsible for paying their own income taxes. In addition, independent contractors may be required to pay sales tax, goods and services tax (GST), valued-added tax (VAT) and self-employment taxes, depending on the country and jurisdiction.
- Read more about taxes for independent contractors in our comprehensive guide.
- Expense reimbursement and equipment
- Will the independent contractor be reimbursed for any expenses incurred in performance of the contract or agreement? If so, what will the process for reimbursement be?
- If any equipment is to be provided, what are the conditions of its return?
- Confidentiality and data protection
- What obligations does the independent contractor have to keep information confidential and protected? It is particularly important to clarify this in countries where the General Data Protection Regulation (GDPR) applies.
- Contractor status
- The contract should make it clear that the individual is an independent contractor, and is not an employee, and is not entitled to any of the benefits that are associated with employment.
- Substitution/sub-contracting
- Is the independent contractor permitted to sub-contract/outsource work agreed to under the agreement? If so, are there any conditions that apply? And will the independent contractor remain ultimately liable for the work?
- Exclusivity/anti-competition/’non-compete’ clauses
- Is the independent contractor entitled to work for other clients, even where they are direct competitors with your business?
- It is worth bearing in mind that, depending on the jurisdiction, many courts will read overly restrictive clauses as an illegitimate “restraint of trade“.
- Indemnity
- The agreement should contain a clause specifying the extent to which each party indemnifies the other for any losses associated with the performance of the agreement.
- Amendments and addendums
- How will the agreement be amended?
- Is the document in question the whole of the agreement, or are other terms located elsewhere? It is relatively common for agreements to incorporate terms and conditions which are not explicitly contained in the document in question.
- Governing law and dispute resolution
- Which country or state’s laws govern the contract and any disputes relating to it?
- Will disputes be subject to commercial arbitration?
- Severability
- This clause provides that if one clause of the agreement is held to be invalid or unenforceable, it does not follow that other clauses in the agreement are invalid or unenforceable.
- Ownership
- Who has ownership of the work, both the deliverables and associated work product? In the event of non-payment does ownership remain with the independent contractor?
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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:
- Send necessary tax forms
- In the United States, businesses need to ensure that independent contractors located within the US send a Form W-9 containing key information about themselves. This is necessary to complete a Form 1099-NEC at the end of the year for all contractors paid more than US $600 over the period (for this reason, independent contractors in the US are often known as ‘1099 employees‘).
- If the contractor is based outside the US, a Form W-8 BEN is required from the contractor. Read more about contractor tax obligations here.
- Send non-disclosure agreements (NDAs)
- Some businesses like to use non-disclosure agreements (NDAs) which are separate from the main independent contractor agreement. There can be good reasons to keep the two agreements separate. For example, a business may want to disclose commercially sensitive information to the potential contractor while negotiating the main contract and before it is signed.
- The NDA commits the independent contractor/potential contractor to not disclosing specified information.
- Keep records
- Ensure that accurate records are kept of the contracts, any related documentation, invoicing, payment and other aspects of the ongoing client-contractor relationship.
- This is essential for legal purposes, and for evidence of the arrangement in case of a tax audit.
Frequently asked questions
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.
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.
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.
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.
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.
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.
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.
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.
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’.
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?
Horizons is an international expansion firm which supports businesses engaging contractors and employees, wherever in the world they are based.
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.
