Independent contractor agreements: What in-house counsel need to know

You’re working in a small legal department when the request comes in: the company is going to engage its first independent contractor and needs a contract. Pronto! Unfortunately, you’ve never drafted one before — and you know hiring independent contractors comes with legal risks, but you’re not sure what those are. You could scour the internet for a form, but those are notoriously unreliable. Or you could hire outside counsel, but you don’t have the budget.

On the other hand, you could use the Practical Law Independent Contractor Tool Kit and get everything you need to do the job in minutes — including model contracts to get you started, practice notes to clue you in on the legal issues, and checklists to ensure you don’t miss a trick. And, all without spending a dime on outside counsel or taking risks by using outdated or incorrect forms you found on the internet. (See Practical Law: Independent Contractor Tool Kit)

Independent contractors are not employees

Independent contractors are individuals or businesses who hire themselves out for project-specific work. They bring their skills and equipment to the company, but they are not employees. They may work for several different companies at one time, like a driver who contracts with both Lyft and Uber. Employers use independent contractors because they can avoid the expenses associated with hiring employees while still filling gaps in the employee roster.

However, employers can over rely upon independent contractors and, over time, begin to treat them as employees. This is how most legal problems arise. A properly drafted contract can minimize problems. (See Practical Law: Using Independent Contractors and Outside Firms: Avoiding Employee Misclassification)

Why is having a contract important when engaging an independent contractor?

Your contract with an independent contractor is your first line of defense to legal problems. It sets out the terms of the relationship, helps establish a smooth working arrangement, and ensures both sides follow the proper protocols to assure that the “company-contractor” relationship doesn’t become an “employer-employee” relationship. (See Practical Law: Evaluating and Engaging Independent Contractors Checklist)

It’s a map leading to the right behavior by both sides. If there’s a dispute with the contractor or a regulator, the contract will contain all the necessary indicia of an independent contractor relationship. So long as the parties abide by the terms, it will be difficult for anyone to successfully argue that the contractor is really an employee. Additionally, any business relationship should be governed by a written contract — a document that sets out the rights and responsibilities of the parties, payment terms, dispute resolution, and so on. Once you draft a contract you have a template that is tailored to your company’s business needs and can be reused in the future. (See Practical Law: General Contract Clauses Toolkit)

What do I need to include in an independent contractor agreement?

Here are the key clauses to include in your independent contractor agreement:

• Scope of work – Describes the assignment/project the contractor will be working on. It includes the project time frame, milestones (if any), freedom to work hours the contractor thinks best to complete the project on time, any necessary licenses or qualifications, and other basic information about the project or tasks. Depending on the project, this may be contained in the body of the contract or in a statement of work attached to the contract.
• Independent contractor status – A section that clearly states the relationship of the parties — that of independent contractor and not an employee. It will state that neither party is an agent, broker, or employee of the other and has no ability or power to bind the other. The clause will note that the contractor is not entitled to any employee benefits. It will set out that the contractor will provide their own equipment and materials to complete the project, unless special equipment provided by the company is needed to do the work. Lastly, it should state that the contractor is free to work for other companies and that the company is free to hire other contractors to perform the same or similar work.
• Confidentiality – Given the nature of the relationship, it is very likely that the parties will exchange confidential information and you must protect that information from unauthorized use or disclosure. Ensure that the obligation to maintain confidentiality does not extinguish when the contract terminates and provide for the return or destruction of any confidential information once the contract ends. Additionally, this clause will govern the access the contractor may have to company systems and limit what the contractor may do with that access.
• Payment – In addition to the basic terms of rate or amount, along with the timing of payments, this section will state that each party is responsible for their own taxes — and that the company will issue the contractor a 1099 form — and that the contractor will pay their own expenses, except for any duly noted exceptions.
• Termination – Ensure that your agreement states that it is terminable at will by either party on timely notice, in addition to termination for breach. The ability of either party to simply terminate and walk away is a critical component of establishing an independent contractor relationship.
• Restrictive covenants – Ironically, you’ll likely need some type of limited non-compete agreement with your independent contractor, such as while performing services for your company they will not work for a competitor. The restriction may even go for a brief period after your arrangement ends. Depending on the sensitivity of the information and the project, a reasonable restriction is a permitted exception to the general rule of the contractor being free to work with other companies. Likewise, you’ll want language around the non-solicitation of employees and customers as well.
• Work-for-hire – This is a critical clause in contractor agreements. Without such a clause, the contractor will own any work product they produce, including intellectual property rights. Make sure it is clear that the contractor is producing materials on a work-for-hire basis and that the company, not the contractor, owns the work product. (See Practical Law: IP Rights Clauses for Independent Contractor/Consultant Agreements)

There are other clauses, of course, such as dispute resolution, warranties, etc., but, if you get the list above right, you’ll be in good shape if there is ever a problem with — or investigation into — the independent contractor relationship. (See Practical Law: Drafting or Reviewing a Commercial Contract)

With the contract templates in Practical Law, you’ll be sure to cover all your bases regardless. (See Practical Law: Independent Contractor/Consultant Agreement (Pro Client)

Lastly, while a good contract is important, it’s not much value if the business tosses it into a drawer and doesn’t follow the provisions. Make sure that you, in conjunction with the HR team, train the business on the proper way to manage independent contractors, including a process to review independent contractor arrangements at least yearly to ensure the contractor is not becoming an “employee.” (See Practical Law: Classification of Independent Contractors (PowerPoint training presentation) and Questionnaire to Evaluate Independent Contractor Status Under the FLSA)

It can be tough to be a legal department of one or part of a small legal team. Time and budgets are often limited, while the range of issues you can face from one day to the next knows no boundary. With Practical Law, you are only minutes away from finding up-to-date and useful answers, templates, forms, practice notes, sample policies, training presentations, and checklists covering independent contractor issues — along with a vast array of other legal issues. It has never been easier to get the right advice at the right time.