The secret to keeping good working relationships with service providers? Agreements.
Once you know whether the person you just hired is an employee or contractor, you can begin to create the documents needed to bring them on board. In this article, we’ll explain the why and how of independent contractor agreements so you can go ahead and draft an entire agreement on your own.
Why an agreement is so important
So you just brought on an independent contractor. When you shook hands on your verbal agreement, you probably assumed the two of you were on the same page. But how can you be on the same page when there was no literal page to begin with?
You may think you can just talk through what’s needed, come to a mutual agreement about the terms, and go from there. It’s quick, easy, and painless—that is–until you get a little further down the road and realize your contractor hasn’t done what you thought they would. And sometimes those misalignments can result in incomplete projects, wasted payments, or just general annoyance. There are lots of legal considerations, including making it clear that this is an independent contractor relationship and not an offer of employment, as well as protecting confidential information like trade secrets, which is why a written agreement is so essential.
Simply put, don’t skimp on a contractor contract, regardless of whether you’re hiring a consultant, a freelancer for specific services, or someone else for company support. If you want to be on the same page as the independent contractor you’re hiring, there’s simply no substitute for having a formal written agreement for your contractor’s work.
Here’s what needs to be in it:
Begin with the details
Start off with the effective date of the agreement and then name the parties entering into it. It will look a little something like this:
This independent contractor agreement is made and entered into as of [DATE OF AGREEMENT] between [YOUR COMPANY NAME], and [THE NAME OF YOUR CONTRACTOR].
Section 1: term and termination
So far so good, right? Next, you want to delineate the term of this agreement, as in how long the agreement is for (it can be until the work is completed), and how the agreement can be terminated, if needed. Call this section 1.0, “Term and Termination.” Subsection 1.1 would cover the “Term” of the contract and subsection 1.2 would cover the termination of this agreement, like a written notice from one party that the other is violating the agreement, along with severability, so if the agreement is terminated certain provisions of this agreement would remain enforceable. Feel free to comb through these SHRM and Rocketlawyer templates and you’ll be able to find the wording that works for you.
Section 2: contractor services
Pro tip: Don’t skim this section. All sections of the agreement are important, but section two is the most critical because it’s where you lay out as clearly as possible the scope of work that your contractor is supposed to accomplish. This is also where you lay out the compensation rate for the work to be performed, how and when the contractor will be paid, how expenses will be handled, and that you will provide access to necessary materials but ultimately the contractor is responsible for providing any needed tools or equipment, deadlines to be met, and so on.
The scope could be included as a clause within the contract, but it can also be contained within the statement of work (SOW), which is an exhibit attached to the contract, serving as an additional legal document connected to and referenced within the initial contract that serves as the master agreement. The SOW contains not only the scope of the project but also milestones, such as the start date and deadlines, along with the rate, and any other details required to specify the requirements of the assignment. Subsequent SOWs can also be added to the master agreement for future projects without having to create a new contract unless other terms or clauses have changes that would apply to all SOWs. If a SOW isn’t used, then the contract should include the completion date with the scope of work or should attach a schedule—referenced within the contract—that includes timelines for deliverables.
Your goal? To eliminate any areas of ambiguity regarding the deliverables. Be as detailed as possible so both parties understand the expectations for the end result of the work, including how you’ll review it and how you’ll handle quality issues.
Also make it explicit that your company is not responsible for liability insurance or worker’s compensation insurance, nor any local, state, or federal income taxes, as well as self-employment taxes due to the the Internal Revenue Service (IRS), which should be the responsibility of your freelancer. For example, this part could say something like this:
Consultant will report to all applicable government agencies as income all compensation received by Consultant pursuant to this Agreement. Consultant will be solely responsible for the payment of all withholding taxes, social security, workers’ compensation, unemployment and disability insurance or similar items required by any government agency. Consultant will not be entitled to any benefits paid or made available by Company to its employees, including, without limitation, any vacation or illness payments, or to participate in any plans, arrangements or distributions made by Company pertaining to any bonus, stock option, profit sharing, insurance or similar benefits. Consultant will indemnify and hold Company harmless from and against all damages, liabilities, losses, penalties, fines, expenses and costs (including reasonable fees and expenses of attorneys and other professionals) arising out of or relating to any obligation imposed by law on Company to pay any withholding taxes, social security, unemployment or disability insurance or similar items in connection with compensation received by Consultant pursuant to this Agreement.
Q: What is payroll?
TaxesSection 3: relationship of the parties
Section three is where you make it as clear as possible that the contractor is in fact an independent contractor and not a full-time or part-time employee. This is where you should make it clear that the company does not control or direct the manner or means by which the contractor is providing services. Be sure to explain that since the contractor is not an employee and has independent contractor status, they have no authority to make any agreements or representations on behalf of the company. Defining the relationship of the parties is important for many reasons, including if you ever end up in court with a contractor trying to claim any employee benefits as if they were an employee.
For example, the section could say something like this:
Consultant is an independent contractor and nothing in this agreement will be construed as establishing an employment or agency relationship between Company and Consultant. Consultant has no authority to bind company by contract or otherwise. Consultant will perform services under the general direction of Company, but Consultant will determine, in Consultant’s sole discretion, the manner and means by which services are accomplished, subject to the requirement that Consultant will at all times comply with applicable law.
Section 4: ownership
This part is also important because it’s where you say that any and all work products your contractor creates for the following services listed in the SOW are owned by your company, and therefore, they give up all rights to it, including any intellectual property rights. This is also where you can grant permission to the contractor to display the work in their portfolio for the purposes of marketing their services to others.
For example, the section could say something like this:
Consultant agrees that all Consultant work product will be the sole and exclusive property of company. Consultant hereby irrevocably transfers and assigns to Company, and agrees to irrevocably transfer and assign to Company, all rights, titles, and interest in and to the Consultant Work Product, including all worldwide patent rights (including patent applications and disclosures), copyright rights, mask work rights, trade secret rights, know-how, and any and all other intellectual property or proprietary rights (collectively, “Intellectual Property Rights”) therein.
Other sections to think about
From here, you might include any number of additional sections with all kinds of little legal stipulations. Items typically included are:
- Representations: This means that both parties are authorized and empowered to enter into the agreement and that doing so doesn’t infringe on anyone’s rights.
- Indemnification: This covers that company will not be held liable for anything bad that happens when the contractor is performing the work, which includes any claims, damages, liabilities, losses, expenses, and costs that arise from the services or the results of the services that the contractor provides.
- For example, the indemnification clause could say something like this:
Consultant will defend, indemnify and hold Company harmless from and against all claims, damages, liabilities, losses, expenses, and costs (including reasonable fees and expenses of attorneys and other professionals) arising out of or resulting from:(i) any action by a third party against Company that is based on a claim that any Services performed under this Agreement, or the results of such Services (including any Consultant Work Product), or Company’s use thereof, infringe, misappropriate or violate such third party’s Intellectual Property Rights; and(ii) any action by a third party against Company that is based on any act or omission of Consultant and that results in: (i) personal injury (or death) or tangible or intangible property damage (including loss of use); or (ii) the violation of any statute, ordinance, or regulation.
- Travel or other expenses: How much is involved? Who pays for travel expenses, if any? Are there any other expenses associated with the project that would be reimbursable? Up to what amount? What’s the reimbursement process like? If there is no travel or other expenses that are covered and outlined with the assignment, then the agreement should make it clear that the expenses are the sole responsibility of the contractor, or that they will only be reimbursed with prior written approval.
- Confidentiality: This is where you spell out that the contractor is not to share anything related to the work they are doing through a non-disclosure clause (you may even want to send them a separate NDA, which stands for non-disclosure agreement ), or any of your company’s proprietary information they may learn with anyone for any reason.
- For example, the confidentiality section could say something like this:
“Confidential Information” means and will include: (i) any information, materials or knowledge regarding Company and its business, financial condition, products, programming techniques, customers, suppliers, technology or research and development that is disclosed to Consultant or to which Consultant has access in connection with performing Services; (ii) the Consultant Work Product; (iii) information entrusted to Company by third parties in confidence; and (iv) the terms and conditions of this Agreement. Confidential Information will not include any information that: (a) is or becomes part of the public domain through no fault of Consultant; (b) was rightfully in Consultant’s possession at the time of disclosure, without restriction as to use or disclosure; or (c) Consultant rightfully receives from a third party who has the right to disclose it and who provides it without restriction as to use or disclosure. To the fullest extent permitted by law, Consultant agrees to hold all Confidential Information in strict confidence, not to use it in any way, commercially or otherwise, except in performing Services, and not to disclose it to others. Consultant further agrees to take all actions reasonably necessary to protect the confidentiality of all Confidential Information. Nothing in this Agreement shall limit or restrict in any way Consultant’s immunity from liability for disclosing Company’s trade secrets as specifically permitted by 18 U.S. Code Section 1833, the pertinent provisions of which are as follows: Immunity From Liability For Confidential Disclosure Of A Trade Secret To The Government Or In A Court Filing. An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made, (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Use of Trade Secret Information in Anti-Retaliation Lawsuit. An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal; and (B) does not disclose the trade secret, except pursuant to court order.
- Non-solicitation: You may want to ensure that the freelancer won’t try to recruit any of your other employees or clients during the term of the agreement and for a length of time afterward, such as a year. In a non-solicitation clause, it’s common for those limits to also include employees who have been at the company during the preceding 12 months, too. It can also cover not soliciting exclusive consultants in addition to staff, as well as not persuading them to leave the company, in addition to not hiring them.
- For example, the non-solicitation clauses could say something like this:During the term of this Agreement and for a period of one (1) year thereafter, Consultant will not directly or indirectly solicit the services of any Company employee or consultant for Consultant’s own benefit or for the benefit of any other person or entity.
- Non-compete: You can ensure that someone doesn’t use your intellectual property (IP), but you can’t restrict someone from seeking gainful employment. While non-competition clauses are often added to contracts, they need to be for reasonable time periods, and even then may not be enforceable, depending on the applicable laws of the states involved. For example, non-competes are prohibited in California, and in April 2023 the Federal Trade Commission (FTC) proposed a rule to ban them, too.
- Assignment: This refers to the contractor not being able to hire a subcontractor to complete the services. For example, this could be phrased something like this: Consultant may not assign or transfer any of Consultant’s rights or delegate any of Consultant’s obligations under this Agreement, in whole or in part, without Company’s express prior written consent. Any attempted assignment, transfer or delegation, without such consent, will be void. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties permitted successors and assigns.
- Miscellaneous provisions: In this area, you can mention if the agreement supersedes any previous agreements, how it can be amended if needed, how it’s construed in accordance with the governing laws of the state involved, what happens if the contractor needs any licenses or permits for the work, who and where notices related to the agreement should be delivered to, and so on.
Now that you’ve got all the crucial ingredients, you can simply wrap it up with places for both parties to sign and date the agreement.
You should now feel like you have a solid grasp of how to spin up an agreement that shines. As with all legal matters, it’s always a good idea to consult with a lawyer for advice to ensure that your contracts serve your business well. The document you create will also enable your contractor to do fabulous work, feel protected, and rest assured knowing that the two of you see eye to eye (and page to page).
