Independent contractor agreements play a critical role in protecting your company from risk and ensuring you get the best possible value from your service providers. Generic boilerplate contracts are risky because they fail to account for the differences in law across multiple jurisdictions. By implementing a CLM system that simplifies the creation of custom independent contractor agreements, your organization can remain efficient and agile, while also reducing costs.
What is an Independent Contractor?
An independent contractor is anyone who provides services to your organization in exchange for payment and who does not otherwise qualify as an employee. The contractor may be an individual (sole proprietor) or may work under the auspices of an organization that is formally organized as a partnership, a corporation, or a limited liability company (LLC). Many solo freelancers operate under a formal legal entity such as an LLC.
Generally speaking, independent contractors are engaged in a business that serves multiple customers – or, at the very least, has the potential to do so. They often perform work on an “as-needed" basis, and they normally do not receive employee benefits directly from your company, such as health insurance, paid leave, unemployment insurance, or retirement contributions. For these reasons, independent contractors offer a very cost-effective way for companies to get important work done, without incurring high overhead expenses, and without locking themselves into long-term employee relationships.
By engaging a contractor to help out when things get especially busy, organizations can remain agile and flexible, scaling up quickly and easily when there’s a lot of work to do and scaling back when the workload gets lighter.
The Difference between an Independent Contractor and an Employee
There are important legal considerations that businesses must take into account before engaging the services of an independent contractor. If a contractor fails to meet certain criteria, they may fall under the definition of an employee as stipulated in state and/or federal regulations. If that happens, your company may be liable for payroll taxes, benefits, workers' compensation premiums, and unemployment costs. That creates a potential risk, and having a good independent contractor agreement in place can protect you.
Fortunately, the distinction between an independent contractor and an employee is generally clear. Nevertheless, there are some gray areas, and the definitions continue to evolve over time. The Internal Revenue Service and the US Department of Labor have provided guidance to help businesses better understand where to draw the line. Here are some of the criteria they provide:
- Does the independent contractor generally function like a business? Do they provide similar services for other clients? Do they invest in their own equipment, training, and other resources? Do they advertise their services or routinely seek work with other clients? These characteristics generally suggest that an independent contractor relationship is in effect rather than an employer-employee relationship.
- How much control does the principal business have over the independent contractor? Do they control the means by which the work gets done or the hours and location of work? Do they constrain the contractor’s availability to work for other clients? If the answer to these questions is “yes”, that points toward an employer-employee relationship. If, on the other hand, the contractor is allowed considerable latitude to apply their own judgment and initiative, they are more likely to be classified as independent.
- Is the relationship “permanent” or ongoing? Employees generally perform their jobs with the expectation that their relationship with the business is an ongoing one. While it’s true that some contractors may perform work over the long term without a defined end date, – there is less of an expectation of permanency in a contractor relationship. Although many companies stipulate that their employees are hired on an “at will” basis (if permitted by state law), contractors more clearly fit that description; companies can simply cease doing business with them to the extent that contract terms allow for it.
- Is the relationship clearly defined up front as a contractor or employee relationship? In the case of independent contractors, a written agreement should clearly stipulate the nature of the relationship. In many companies, contractors fall outside the purview of the HR department. Payments are processed through accounts payable rather than through payroll, and contractors are responsible for invoicing the business unit for which they are performing services.
What is an Independent Contractor Agreement?
An independent contractor agreement sets forth the specific terms and conditions of the business relationship under which services are to be performed. This protects both the client business and the independent contractor. The right agreement ensures that each party understands what to expect with respect to the scope of work, timing, and payment.
A key element of any such contract is a clear stipulation that work being performed is provided on a contract basis. In other words, the agreement should make it clear that there is no employer-employee relationship involved.
Independent contractors are typically considered to be self-employed. As such, they may negotiate the terms of an agreement to suit their needs. As long as both parties agree to the terms, an independent contractor agreement is valid and enforceable.
How to create a Customized Independent Contractor Agreement
There are some fundamental ingredients that belong in virtually every independent contractor agreement, such as the scope and timeline for services to be performed, the amount and terms of payment, and a stipulation that work is to be performed on a contract basis.
It’s common to include a “work for hire” clause to protect the company’s intellectual property rights, as well as a confidentiality agreement to protect trade secrets. Provisions that outline governing law and the default method for dispute resolution are also important.
Depending on your company and the nature of the work to be performed, there are numerous other provisions that companies should consider, including a customized independent contractor agreement.
It can often be tempting to use a free independent contractor agreement from an online source. Unfortunately, that can expose your company to risk because it fails to account for important factors involving state and local law. As a result, such contracts may not be enforceable in all jurisdictions.
The vast majority of businesses need better protection than such boilerplate agreements can provide. The more complex an organization is and the higher its need for confidentiality, the more important it is to craft a customized independent contractor agreement.
There are several potential approaches to this task. As we have already noted, using boilerplate agreements can be extremely risky. On the other end of the spectrum, many businesses choose to treat every contractor agreement as a one-off project. Unfortunately, that leads to high legal fees and multiple review cycles among stakeholders, wasting both time and money.
Creating a customized agreement doesn’t necessarily have to be expensive or time-consuming, though. The right contract lifecycle management (CLM) software can simplify and streamline the process by providing an initial template along with a library of contractual clauses to augment that, empowering your team to develop customized contract agreements that are valid in all 50 states as well as in various jurisdictions around the world.
In this respect, CLM software offers the best of both worlds. Businesses get a fully customizable contract that is perfectly suited to each business relationship without reinventing the wheel each time. That lowers risk, reduces costs, and speeds execution.
Benefits of a Custom Independent Contractor Agreement
A customized independent contractor agreement simply does a better job of protecting your organization than a generic boilerplate. After all, that’s what contracts are designed to achieve in the first place. They protect you when things go wrong, and they set clear parameters for performance. By laying out expectations clearly, with legally enforceable contract provisions, your company is in a better position to get what you need from your independent contractors.
Here are some of the benefits that a customized independent contractor agreement provides:
- Speed up the contracting process by limiting contract provisions to those that actually matter and omitting those that don’t apply to a given situation.
- Protect your organization from the risk that independent contractors could be reclassified as employees under state or federal law, thereby incurring costs after the fact.
- Ensure that your contracts are legally valid and enforceable in the jurisdictions where you’re doing business.
- Maintain full compliance with “must-have” contract provisions across your entire organization.
- Protect your intellectual property rights in the work products created by independent contractors.
- Increase efficiency and accuracy in onboarding new contractors by getting both customization and rapid execution.
Virtually every business organization in the world engages in contractual agreements as a matter of course. To get the greatest possible value out of business relationships, and to protect your company from risk, close attention to contract management is critically important. From the initial proposal to the culmination of a business relationship, contracts provide the guardrails that ultimately guide the behavior of both parties.
Icertis Contract Intelligence helps companies manage contracts and agreements of all kinds, enhancing business value, monitoring compliance, and increasing efficiency. To learn more about our contract intelligence solutions, contact Icertis today for a free no-obligation demo or consultation.