If your business plans to work with independent contractors, you'll need to understand how to draft a contractor agreement. The agreement is legally binding and sets out the expectations of all parties, making it a crucial document – especially if something goes wrong.
But what exactly should an independent contractor agreement contain? How does it protect your business? And if you're working with an overseas contractor, how does that affect the agreement?
In this article, we'll explain how to make an agreement and discuss what to include and what to avoid.
So let's get started.
As mentioned earlier, an independent contractor agreement is a legally binding contract between an individual contractor and a company, i.e., your business. It outlines the key elements of cooperation, such as:
The scope and nature of the contractor's role.
Payment rates and schedules.
Intellectual Property (IP) Ownership, if relevant
Confidentiality Requirements. This is an important document for the following reasons:
When it comes to independent contractors, different regions may have different laws and regulations, especially in areas such as taxation. For example, if you work with a U.S. contractor, you must fill out a 1099** and file it with the Internal Revenue Service (IRS) even if they are not in the U.S.
By entering into a formal agreement that both parties agree to, both parties are clear about their respective responsibilities and obligations.
If your relationship with a contractor begins to resemble an employee-employer relationship, there may be a risk of misclassification. This can have serious consequences for your business, including penalties, fines, and reputational damage.
Formal agreements help avoid this. While the specific definition of misclassification varies from country to country, you can protect you and your contractors by outlining key areas of the working relationship, such as:
Organization of work. Employees typically have a fixed schedule (i.e., Monday through Friday, 9 a.m. to 5 p.m.), while contractors set their own working hours.
Equipment and resources. Employers typically provide employees with equipment to get the job done, while contractors are responsible for procuring their own equipment.
Pay. Most employees receive regular paychecks and withhold taxes and social contributions. The contractor is responsible for filing taxes.
The length of the relationship. Employment contracts are usually ongoing (unless explicitly stated), while contractor agreements expire after work is completed. If your contractor has an indefinite contract, this may be considered a misclassification.
Advantage. Employees are entitled to statutory benefits, while independent contractors (in most cases) are not.
Make sure your agreement is clear about these expectations. For example, if you hire an independent contractor to create a logo for your business, the agreement may stipulate:
The work should be completed by a specific date.
Contractors are responsible for providing their own software and tools.
The agreement will be completed after the final logo is delivered and payment is received.
Contractors will receive a one-time fee for work (as agreed) and will receive no other benefits or compensation.
To learn more about employee misclassification and how to avoid it, check out our in-depth expert guide.
In most cases, there is no one-size-fits-all template for independent contractors. A standard contractor agreement depends on the nature of the business, the role played by the contractor, and any applicable local laws.
However, the following should always be covered in any contractor agreement:
Any independent contractor agreement should clearly state the start date of the contract, the date of the agreement, and the identities of the parties involved, including any relevant business details.
This section should clarify that the legal relationship between the parties is a client-contractor relationship and not an employer-employee relationship.
It should also clarify what constitutes the termination of the agreement. Typically, an agreement is considered complete once the contractor has delivered the agreed service or task, but it can also be a specific date, or conditional on a specific event. Either way, make sure it's clearly stated in the contract.
In this section, you'll need to list the specific expectations you can expect from your contractor. The more details you can provide, the better (although you don't have to go into detail about every aspect of the job). For example, if you're hiring a content writer for your company's blog, it might be too vague to say so:
The contractor will write informative and interesting articles for the client's company blog. ”
Instead, you may want to draft something like this:
The contractor will provide three 2,000-word blog posts based on the client's company style guide (attached separately). Themes will be provided in advance by the customer. ”
This section will be different from the other sections in that it should be as specific as possible for each contractor and their respective subject matter expertise. In some cases, you may not want to leave too much room for interpretation for the contractor. However, if you understand and trust contractors, you may be willing to offer more creative freedom.
Also consider any variables that are unique to your business or the task itself. For example:
Does the scope of work include anything other than material deliverables (i.e., services provided)?
Does the contractor need to obtain a special permit or permit to carry out the work?
Should deliverables be provided in a specific way or format?
Note that this section usually occupies the majority of the protocol.
Your agreement should clearly state the terms and conditions of payment, including the following:
Agreed remuneration structure. This usually depends on the nature of the job; In some cases, it may be more appropriate to pay a one-time fixed fee, while in others, the contractor may want to pay by the hour or by the day.
Payment frequency. In some cases, the contractor may require instalments (e.g. 25% upfront and the balance upon completion). If a contractor provides recurring services, they may want to pay monthly or weekly.
Payment methods. This can be done through bank transfers, digital providers, or other methods. Note that if your contractor is abroad, you will need to consider currency and foreign exchange rates (alternatively, you can use a contractor management platform to eliminate this burden).
Invoicing procedure. In most cases, independent contractors will provide you with an invoice for their work before you pay. In the agreement, you should outline this process, including when, if relevant, the invoice should be submitted (e.g., the 25th of each month).
If needed, your agreement should specify how your contractor will be reimbursed for any expenses incurred, such as travel expenses. If the contractor manages the budget on your behalf (i.e., they are running a PPC ad campaign for your business), you should also determine if the contractor needs pre-approval before spending.
Independent contractors are not employees, so there's nothing stopping them from working with competitors. As a result, you may need to insert a confidentiality clause (or similar) to protect your trade secrets and intellectual property.
For example, you may want to insert an exclusivity clause that restricts the contractor's ability to work with other parties for the duration of the contract. However, the contractor is not obligated to sign this agreement and can choose to decline.
Alternatively, you can insert other confidentiality clauses, such as:
Restrictions or restrictions on the Contractor's ability to use any Confidential Information or Intellectual Property developed during the Contract Period in other projects or for other clients.
Conditions for the protection of a company's trademarks, trade secrets, or business processes.
Note that exclusivity clauses should be used with caution, as in many countries they may be considered restrictive covenants that may be unenforceable if they are deemed to be in violation of antitrust laws.
Intellectual property is an important area to cover, especially if you're working with overseas contractors. This is because the IP laws in the country where the contractor is located can be different and expose you to potential problems.
The ownership clause will outline the rights and responsibilities of both parties with respect to any intellectual property created during the project, including any patents, trademarks, copyrights, and trade secrets.
It should define the following:
Who owns the rights to any intellectual property created by independent contractors during the project.
Whether independent contractors are entitled to use the intellectual property after the agreement ends, and if so, in what capacity.
What obligations, if any, independent contractors may have to take on to protect and register the intellectual property created by the employer during the contract.
The obligations that an independent contractor may have with respect to the existing intellectual property that an independent contractor may bring into the project.
Intellectual property law can be complex, so it's best to have your legal team review this part of the contract.
This part of the agreement should clearly state that contractors are responsible for filing and paying their own taxes and state contributions, as well as obtaining their own insurance and equipment. This is important to avoid the risk of misclassification and to comply with tax and labor laws.
If a contractor's services involve a certain level of risk, requiring proof of liability insurance can help protect your company from potential lawsuits.
The agreement should also clearly spell out any liability that your business does not incur, such as any damage or loss caused by the independent contractor's actions or omissions. This may include liability such as property damage, personal injury, or third-party claims.
Ideally, your contractor will provide the agreed service within the specified time, and everyone will be happy. However, this does not always happen.
Therefore, it is best to include a termination clause that defines the conditions and procedures for early termination of the contract. Note that this can be a two-way street, and the contractor may also want to include a termination clause.
The termination clause shall include the following:
A detailed description of the conditions under which either party may terminate the agreement (e.g., breach of contract or non-performance).
Any notice requirements that must be met prior to termination.
Obligations of both parties upon termination, such as the return of resources, destruction of confidential information, or the submission of a final report.
Provisions for resolving disputes or resolving any outstanding issues that may arise at the time of termination.
If your contractor is in the same country as you, you can use standardized protocols (although in some countries, such as the United States, laws and regulations may still vary from state to state or province).
However, if your contractors are based abroad, the situation is more complicated – especially if they are spread across different countries. There are different tax and labor regulations to consider, currency and conversion fees to consider, and even potential language barriers.