Independent Contractor Agreement

Set your business up for success by deciding if a contractor is the right fit and defining expectations from the start. Let an attorney take the lead to help you make an informed decision and customize your agreement.

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Our law firm LZ Legal Services co-counsels with experienced local attorneys to guide you step-by-step through the process and help prepare your state-specific agreement.

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An independent contractor agreement is a legal document that defines the working relationship between a company and an independent contractor. This agreement outlines the terms and conditions of the contractor's work, detailing the responsibilities, expectations, and compensation.

Unlike traditional employees, who are hired to fulfill a broader role with evolving responsibilities, independent contractors are often hired temporarily to fulfill a specific need or tackle a certain project. Because of the nature of these relationships, it’s important to outline exactly what the employer and contractor expect from one another throughout the course of the agreement.

An independent contractor agreement is a written contract that outlines details about:

Names
Include the names of the employer and the independent contractor involved in the working relationship.

Job details
Explain any details about the project scope, how the independent contractor will provide services, and and any other tasks the parties agree will be performed.

Timing
Provide a detailed description of how long the independent contractor agreement will be in place and how long the work is expected to take.

Compensation
Agree on payment information, including rates, payment schedule, payment method, vacation pay, whether the independent contractor will be on the company's payroll, and what tax obligations the involved parties will each have.

Termination clause
Communicate whether earlier termination of this agreement is acceptable and anything else about how the employer-employee relationship will end—for example, if written notice is required.

Intellectual property created
Specify who owns rights to any intellectual property created by the independent contractor, such as visual design, music, writing, and video.

Confidentiality agreement
Align on how confidential information such as trade secrets, and other proprietary info like business operations, will be handled by the independent contractor.

Signing requirements
Outline who needs to sign the independent contractor agreement, including the business owner, independent contractor, and anyone like a notary.

Independent contractor vs. employee: key differences

While independent contractors and employees might have similar day-to-day responsibilities, there are some key differences.

Payment
They're typically paid per project or hourly and submit an invoice to receive compensation. Contractors are responsible for paying their own taxes.

Benefits
Independent contractors don't usually get employee benefits unless otherwise specified in the contractor agreement.

Onboarding
Independent contractors do not get extensive training and are often expected to work independently and manage their own time from the start.

Payment
Employees are either given a salary or are paid hourly but are not expected to invoice for payments. The employer is responsible for payroll tax obligations.

Benefits
Employees are more commonly given a benefits package that can include things like paid time off and health insurance.

Onboarding
They are usually given more extensive onboarding and training including learning about tools, culture, and company policies.

When to hire a contractor instead of another employee

Depending on their industry and the nature of their work, some businesses may need an independent contractor to supplement workflow from time to time. Some of the reasons a business may hire such a contractor over a full-time employee include:

Specialized expertise for short-term projects
When businesses have short-term projects but lack the in-house expertise to execute (such as updating a website or implementing a new tool), they often turn to contractors with applicable skills to help fill the gap.

Avoiding long-term commitments
Some businesses—especially smaller ones—may lack the resources to onboard or maintain the benefits and upkeep associated with many full-time employees. In this case, contractors can fulfill an ongoing role while remaining independent.

Testing new talent before hiring full-time
Similar to a trial or probationary period, hiring an independent contractor can give you insights into their abilities and personality, potentially allowing you to make a more confident decision about whether to extend a full-time job offer.

Temporary replacements for absent employees
If a company has employees on maternity leave, sabbatical, or other types of extended absences, hiring independent contractors allows them to keep the position open while maintaining workflow. When the absent employee returns, they can jump right back in where they left off.

What happens if my business misclassifies an employee?

For businesses who frequently use independent contractors, consultants, or other types of freelancers, it's important to consider the threat of employee misclassification when creating your contracts. If a business does misclassify an employee as a freelancer, they can open themselves up to consequences such as:

Retroactive tax liabilities
When employee misclassification is proven, the Internal Revenue Service will reach out to the business in question to recover unpaid employer taxes, which independent contractors otherwise pay themselves.

Penalties and fines
In addition to the taxes associated with employee misclassification, the IRS and other government agencies may impose penalties, fines, and interest if found guilty of the infraction.

Lawsuits
Depending on the circumstances of the case, a misclassified worker may be able to file a lawsuit for damages against their employer. These cases are tried according to applicable law, or the body of laws outlined within the contract to govern its enforcement.

Owed benefits
When the government determines that a business has misclassified an employee, they may award that employee benefits retroactively, including health insurance, retirement benefits, overtime pay, and more.

State-level consequences
On top of any fines or judgments at the federal level, some states maintain their own laws regarding employee misclassification. When possible, it's best to check the governing law in your state to prevent legal challenges.

Compliance costs
Often, businesses that misclassify one employee may misclassify others. This can, in turn, necessitate expensive company-wide reforms to ensure the business is compliant with employment regulations.

Why every business should have a customized independent contractor agreement

While it may be tempting to opt for a basic contractor agreement, it's often best for companies and contractors alike to invest in an agreement that addresses their specific needs. Ideally, such agreements should be drafted by a lawyer following a consultation and full review of all relevant documents. Once created, this type of customized contractor agreement can be adjusted slightly to fit new jobs or contractors as they arise.

Still, it's important for businesses and freelancers alike to revisit their contractor agreements periodically to ensure they comply with any changes in state or federal laws.

In general, your independent contractor agreement can be written to include benefits such as:

Setting expectations
By definition, an independent contractor agreement specifies what the business and independent contractor should expect from one another during the relationship. This can include a description of job duties, information about payment, and termination clauses in case the relationship doesn't work out.

Legal protections
Independent contractor agreements outline the relationships between businesses and contractors in clear, legally binding language. In doing so, they can help prevent future litigation or other legal troubles from either party.

Intellectual property
Most contractor agreements include items such as non-disclosure agreements or confidentiality clauses. These can help protect your company's trade secrets, customer relationships, and internal communications.

Liability insurance
A well-written independent contractor agreement can concretely designate the business and contractor as separate legal entities, meaning that each is responsible for their own actions. This separation can prevent legal issues from