How to Draft a Comprehensive Independent Contractor Agreement: A Lawyer’s Take

An Overview of Independent Contractor Agreements

An independent contractor agreement is a contract between a business and an independent contractor. This agreement defines the nature of the relationship and terms between the two parties. These contracts are the most basic form of any independent contractor engagement. They set out the rights, responsibilities and obligations for a number of items, including the general responsibilities of the contractor, the method of payment, intellectual property, grounds for termination , and items specific to the particular field of work. While it can be argued that verbal agreements do exist and are binding, many states in the U.S. specifically require a written independent contractor agreement for the engagement of any independent contractors. It is also a defining work contract when it comes to determining whether a worker is actually an independent contractor or employee when there is an audit or dispute over their status. It must be carefully crafted to include the appropriate terms and conditions to help ensure the independent contractor can be defined as such.

Essential Elements of an Independent Contractor Agreement

Regardless of the scope of the relationship, independent contractor agreements should generally address the following:
Scope of Work. At a minimum, the independent contractor agreement should identify all the services to be performed by the independent contractor and when those services are to be performed. The agreement should also anticipate when the project "ends" (if that date or milestone can even be forecasted).
Payment Terms. How much is the independent contractor to be paid for its services? By what date(s) must payments be made? Will there be an hourly fee, a flat monthly fee, or a payment based on milestones? Will the independent contractor be reimbursed for any expenses? Is so, what types of expenses will be reimbursed? How will the independent contractor invoice your business for amounts owed? Will your business have the right to audit the independent contractor’s books in order to verify the accuracy of any invoices? These types of questions – and their corresponding answers – are necessary to address in an independent contractor agreement.
Warranties/Indemnification. While an independent contractor is not an employee of your business – and therefore they should not be covered by your business’ insurance policies – it is important to include a provision in the independent contractor agreement that requires the independent contractor to carry a certain amount of liability insurance or other business insurance. If a lawsuit is ever filed on the work performed by the independent contractor, your business should have the convenience of filing a claim with the independent contractor’s liability or other business insurance policies. You may also want to consider requiring the independent contractor to obtain errors and omissions insurance (or some other type of insurance policy in order to protect your business from losses caused by the independent contractor’s negligence). In addition, an independent contractor agreement should include or at least reference, certain indemnity provisions that require the independent contractor to bear responsibility for certain types of losses that your business could suffer as a result of the independent contractor’s work.
Business Ownership Rights. When an independent contractor is hired to work on something that your business has an ownership right in (for example, intellectual property), that independent contractor should be made aware of that fact in advance. In addition to identifying the parties to the agreement, many unintentional problems can be avoided by clearly identifying the product, technology, software, code, artwork, invention, or other item that is at the subject of the agreement. Further, anyone hired by your business to create any type of work product should understand that, unless otherwise agreed upon, they do not own the rights to that work product or any other technology developed while working for your business. In fact, your business should have specific ownership and rights provisions in its independent contractor agreements addressing ownership rights to work product, inventions, discoveries, and improvements (if it does not already have that specifically addressed in other agreements such as a non-disclosure or non-competition agreements).
Termination Rights. It is important to have a termination of agreement provision in your independent contractor agreements in order to allow either party the ability to terminate the independent contractor agreement in the event of a material breach or other misconduct. This contractual provision also provides guidance to your business if it otherwise needs to terminate its relationship with the independent contractor. The independent contractor agreement should also include a provision that identifies the procedures the parties must follow in order to terminate the contract.

Legal Guidelines in Agreeing to Agreements

When drafting free agent or independent contractor agreements, lawyers should familiarize themselves with the difference between "employees" and "independent contractors." Employing the wrong label for a worker on an agreement (e.g., claiming an employee is an independent contractor) can have liability for the employer. For example, using the term "employee" to describe the worker in the independent contractor agreement may create an unintended employee-employer relationship.
When drafting these agreements, lawyers must keep in mind the breadth of state and federal laws that are applicable to employees. If, for example, the worker has a disabled person who is eligible to work under the Americans with Disabilities Act, and the company has notice of the disability, the company cannot end the relationship because it mislabelled the worker. The company has some obligations under the ADA that it would not otherwise have if the worker were truly an independent contractor. And, if the worker makes a claim for discrimination or harassment in the workplace, and an employment claim is filed with the federal Equal Employment Opportunity Commission or a state-equivalent agency, or even in court, the company will be liable for claims if the worker is mislabelled as an independent contractor. The employer would also be responsible for the workers’ compensation claim of the worker—if there was an injury at work despite the independent contractor label. The employer would be subject to potential wage and hour liability under various state and federal wage and hour laws if the workers are misclassified as independent contractors. In some states, independent contractors are provided very few rights. For example, California Independent Contractors get briefer rest breaks than employees, and they receive no meal breaks.
Whether performing work for a service provider or an independent contractor, two important questions you should ask yourself when you are looking at the relationship between the provider and the recipient are: (1) Perceived control (can the service provider tell the independent contractor what to do; when to show up for work; how the independent contractor dress; how the independent contractor communicates with the public, etc.); and (2) Financial investment (who issues a W-2; who pays for the work tools; who pays for the materials used; who funds the business start up costs, etc.).
The IRS provides additional questions employers should review to determine whether any worker can be considered self-employed. Among them are:

• Does the business offer training for the individual?
• Is the work done only at certain locations?
• How does the person do his or her work? Do they get to choose when to finish the work, when to start the work, when to come back to work, and how to complete the work?
• Does the person do work for other companies?
• Does the person support his or her own business?
• Is the person hired to complete a job and is there a set price?
• Is the work the same as the business operation?

Work performed can be distinguished from an independent contractor by using the IRS test. If the work can be differentiated from an independent contractor based on the IRS test, then the work performed does not constitute a "trade or business" for purposes of issuing Forms 1099.

Common Errors and Mistakes

There are a number of common pitfalls and missteps business owners and entrepreneurs make when crafting their contractor agreements. Many are simple mistakes, but can have long-term legal ramifications which are quite severe. Below are some of the most common.

1. Not Having Clear Job Descriptions

If your independent contractor is going to be doing several things for your business, and you don’t make it explicitly clear in the contract or agreement, you run the risk of your contractor performing work that can legally be classified as "employee" work instead of as independent contractor work. For example, a script writer or proofreader might need to speak on the phone with someone at the business in order to clarify your desired changes, but if there’s nothing in the contract or agreement specifying they can do so, there’s a greater chance that they’ll be classified as an employee. This is important because it can cost your business a lot of money.

2. Using Outdated or Obsolete Contracts

Agreements from as recently as 2010 may not accurately reflect the most up-to-date employment law regulations. It’s absolutely imperative you ensure the validity of your agreements with independent contractors so you won’t face IRS regulations or liability for failure to provide workers compensation.

3. Not Seeking Help from a Lawyer

Although it’s possible for business owners to create their own contracts and agreements, this is never recommended by our employment lawyers. An attorney can spot any potential problems with your agreements – such as illegal clauses, potential for misclassification, loopholes or omissions – and help you avoid difficulty in the future.

4. Not Having Non-disclosure or Confidentiality Agreements in Place

If your business has proprietary or fairly detailed processes that must be kept confidential, or if there is sensitive information you wish to keep out of the hands of competitors, not having an agreement that stipulates the independent contractor must keep these things confidential could cost you serious money down the road.

The Lawyer’s Role in Forming Agreements

Once the terms of the parties’ agreement have been discussed and narrowed down, the next step in the process is forming the actual agreement that will govern their relationship. This is always an important step in the process as every potential task or deliverable cannot possibly be outlined beforehand. In addition, there are always unforeseen disputes that can and do arise during the course of any independent contract (or employment) relationship. While the parties can certainly try to address these issues in advance and map out the anticipated roles and responsibilities in detail, the fact remains that there will always be some grey areas that cannot be predicted or completely contemplated.
This is where the role of an attorney is most paramount. An attorney can help make sure that the proper terms are used (creating an independent contractor relationship rather than a joint employer relationship) and that the right things are covered. Attorneys can also foster good communication so that when times to argue do arise, the parties will view each other as true business people (rather than adversaries) and be more likely to view each argument objectively and with the goal of finding a resolution . There are only so many basic terms that you can use when drafting an independent contractor agreement and the law surrounding independent contractors is so complex that most people cannot keep up with the developments, so the result is that the same concepts or contract provisions are reused over and over again. This is not a bad thing if both parties feel that they are properly represented and going into the contract with their eyes wide open.
An experienced employment lawyer can certainly draft and negotiate appropriate contract provisions, but it is also important for them to be able to explain legal concepts and document terms in a way that the lay person will understand. This is not always easy and often it is best to take the time to write an article such as this one to help reach out to people who may need legal services in the first place. Having said that, most individuals will know when they do need an attorney, and if that time comes they should take the opportunity to seek out an experienced attorney to draft, negotiate and/or review their independent contractor agreement.

Modifying an Agreement for Specialized Circumstances

While all independent contractors should be subjected to a minimum amount of obligations and rights, industry-specific characteristics may require particular terms in an independent contractor agreement. For instance, an architect’s duties and responsibilities are distinct from those of a sales consultant. Therefore, the agreement for an architect would include terms dealing with a creative relationship with an emphasis on intellectual property as opposed to a consulting agreement for a sales consultant would address compensation as well as protective measures to ensure that clients remain with the company after the termination of an independent contractor’s working relationship. Below is some specific language for an architect that may be used to outline responsibility for successful work:
"Duties. Consultant agrees to provide services, without limitation the following:

1. Consultant shall prepare conceptual design drawings, architectural drawings and specifications, and shall provide all other architectural services necessary for the complete, proper, efficient, and accurate preparation and submission of documents for required building permit applications to the Town. The documents shall define the scope of the work.
2. All drawings and specifications shall be submitted to Architect for Architect’s review. Architect shall provide, or cause to be provided, all information, comments, opinions, or advice relating to Consultant’s completed drawings and specifications."

An example of an independent contractor agreement specifically addressing confidentiality requirements can be seen in the excerpt below:
"Confidentiality. In order to perform the Services hereunder, Consultant may be exposed to certain confidential and proprietary information of Issuer (the "Confidential Information"), including, without limitation, confidential investment strategies, financial information, information about investments, documentation (including this Agreement), business and marketing plans, records, projections, client records, both existing and prospective, and customer lists. The Consultant agrees (i) that it will keep all of the Confidential Information strictly confidential and will not disclose any Confidential Information to any third parties; and (ii) to use the Confidential Information only in connection with its obligations and duties contemplated by this Contract. The Consultant’s obligations with respect to the Confidential Information shall survive any termination of this Contract."

Revisiting Agreements Regularly

As with many other legal agreements, it is important to periodically review and update your independent contractor agreements to ensure that they remain relevant and legally sound. State and federal laws are constantly evolving and changing. For example, in California, the applicable standard for determining whether a worker is properly classified as an independent contractor continues to be expanded, made this the second year in a row that the California Supreme Court has weighed in on the issue , casting doubt on the previous standard by which California companies had been following. These changing laws may require revisions to your independent contractor agreements. Moreover, the unique needs of your business and workers may have changed since the time the agreements were originally drafted. Finally, periodic reviews and updates will ensure that your agreement continues to meet your needs and any changes in the law.