Independent Contractor Agreement: The Top 10 Must-Have Clauses

The growth of the gig economy and increase in remote working means has meant that more companies are choosing to hire independent contractors. After all, hiring independent contractors enables you to save on costs typically allocated to employee benefits, while still maximising output. To ensure that both parties are legally protected, you should create an independent contractor agreement, an agreement made between the independent contractor and business which addresses the terms of their business relationship. Within the agreement, you should also include key terms and clauses, such as the scope of work, conditions of termination and liquidation clauses – just to name a couple.

If you are unsure about what clauses or provisions you need to put into an independent contractor agreement, don’t worry. We will be going through the top 10 must-have provisions in every independent contractor agreement below.

What is an independent contractor?

An independent contractor is an individual who is self-employed and is contracted to provide work/services to a business. Since independent contractors work for themselves, they are not employees and do not receive employee benefits such as healthcare, retirement benefits and insurance, etc.

They are, simply put, separate business entities. As such, an independent contractor agreement and an employment agreement are very different.    

How do I distinguish an independent contractor from an employee?

As a rule of thumb (and according to the IRS), an individual will be considered an independent contractor if the payer has the right to control only the result of the work/labour, but not the specific details of how it will be carried out.

Being an independent contractor gives you room for more freedom and direct control over your work. You can set your hours and carry out tasks in whichever way you find fit, so long as you meet the specific goals or deliverables set by the paying business.

If you want to understand more about the differences between an employee and an independent contractor, you can read our dedicated post here. 

What is an independent contractor agreement?

An independent contractor agreement is a document that outlines the details of the business relationship between the independent contractor and the business. The document is legally binding, enabling the parties to reach a solid agreement on all facets of their relationship – such as the obligations, responsibilities, and expectations of the contractor.

As the agreement is legally binding, it provides a layer of protection to both parties, ultimately helping to prevent disputes down the line.

Why do I need an independent contractor agreement?

Hiring an independent contractor is not as easy as simply deciding that you want to hire one. You must acknowledge the legal implications that are involved in this decision, due to the fundamental fact that an independent contractor is not an employee.

Creating a contractor agreement ensures that there is a solid foundation and basis for collaboration between the business and the independent contractor. The agreement is necessary for protecting both parties in the agreement. Additionally, it is needed so that the independent contractor is not misclassified for tax purposes.

Why is writing an agreement important?

The keyword here is written – your agreement mustn't be simply made over text or voice message. A written contractual agreement is particularly important as it allows for:

• Protection under the law
• A secure and stable business relationship
• The agreement to be enforced and backed by law
• The establishment of duties, responsibilities, and expectations
• Misunderstandings and legal disputes to be avoided

For your agreement to be as effective as possible, you should aim to cover all potential bases, such that you are protected under all the different circumstances that might arise. You must also lay down clear expectations, so both parties are on the same page and understand what is required of them.

Do I need a lawyer to help me draft an agreement?

No, not necessarily – although this differs for everyone and is contingent on the scale of your agreement or project at hand.  

If you are hiring an independent contractor for a relatively minor or small project, using a template, and customising it will usually be sufficient. So long as you include all the necessary key terms, it should suffice and be legally enforceable.

If you are hiring an independent project for a larger task or longer period, you might feel more at ease by hiring a lawyer that can ensure that sensitive or nuanced details align with what you have in mind.  

So, what do I need to include in the independent contractor agreement?

As we have emphasised, the most important thing is to be clear and cover all bases. This will ensure that you are legally protected and that the distinction between the independent contractor and your other employee remains strict and clear.

Below are the top 10 things every hiring business must include in every independent contractor agreement.

1. Independent contractor status and business relationship

First and foremost, it should be made explicit that the independent contractor is not an employee of the business. Making the independent contractor status clear is important as it ensures they are not misclassified for tax purposes, as well as clarifying the fact that they are not eligible for the usual employee benefits.

If you are expecting the independent contractor to provide his tools, furnish his equipment or rent his workspace for work, you might also want to include some details regarding that to ensure there are no vague or unclear expectations.  

2. Choice of Law/jurisdiction

This section should specify the law and jurisdiction that the agreement will be made and enforced. It should state the law that will be applied to determine the validity and enforceability of the agreement, regardless of where the independent contractor might be located.

This section is especially important if you are engaging independent contractors that are physically located in another country or system. Additionally, if your business has multiple locations/offices, you must ensure that the applicable law is decided upfront.

3. Scope and description of work

After laying out the relationship, you need to define the precise scope of work and what the project entails. This is needed to prevent scope creep, which happens when the paying business adds new tasks or deliverables outside of the contractor’s scope of work.

This section should include details of the deliverables, tasks, and everything else you expect in return for payment. If it is a larger-scale project, it might be helpful to break down the project into small segments or milestones, as well as include a schedule.

If there is no set deliverable, you can choose to specify the overall objective of the project. You might also want to include a backup plan to prevent scope creep – e.g.: what to do when a certain task does not go to plan.

4. Project timeline and deadline

You must specify the duration of the business relationship and the deadline for specific deliverables, tasks, and the project. Be specific – it is best to write down the exact date you expect things to be completed, so the contractor has something to work with.

If you have chosen to break down the work into smaller milestones (as discussed earlier), you might want to clarify how much/what output is expected at each milestone deadline.  

5. Conditions of termination

Whilst termination of the agreement before the end date is not something you want to anticipate, sometimes it is inevitable, for example, where there is non-payment by one party. To prepare for these circumstances, you should define the terms and conditions which both parties have agreed on and find acceptable. Your termination provision should cover the following points:

• What are the grounds for termination - You’ll want to consider questions like what reason(s) or circumstances will termination be eligible?
• Which party has the right to terminate the contract?
• How much notice should be provided before termination - Note that if you want more protection, you can choose to impose a strict and tight notice period. 
• If there is a notice period required for termination, what are the consequences of not meeting that requirement?
• The format of notice provision - How, or through what medium do you expect the notice to be given?
• How payment will work in the event of termination - Will the independent contractor be paid pro-rata (payment in proportion to completed work), or will he not be paid at all?

If you want to know more about the specifics of termination, you can see our blog post here. 

6. Liquidation Clause

Following the termination clause, you should also include a liquidation clause, as this will protect you in the circumstance that one party breaches the contract. A liquidation clause is a provision that requires the party in breach to pay a certain predetermined amount as a means of compensation.

To determine the number of liquidated damages appropriate, parties will have to negotiate (at the time of signing the contract) and come to an agreed estimate of the number of damages that a breach would lead to. This is the amount that the breaching party will ultimately pay.

7. Restrictive covenants

Although not mandatory, depending on the nature of the project/work, you may want to include restrictive covenants within the agreement to protect yourself in the event of a conflict of interest. These covenants include non-compete clauses, non-solicitation clauses, and non-disclosure/confidentiality clauses.

Non-compete clauses are clauses that prohibit an individual from working with competitor firms either whilst they are working for you, or for a certain period after they stop working for you.

Non-solicitation clauses are clauses that prohibit the independent contractor from doing business with your customers for a specified duration.

Non-disclosure/confidentiality agreements restrict the independent contractor from extracting confidential information from the business and sharing it with other competitors or people who might benefit.

Note that which restrictive covenant you choose to include depends on factors such as the industry you are in, the project at hand, and of course, what the independent contractor is willing to agree to (given that this restricts the scope of the contractor’s work). If you want to learn more about restrictive covenants and what distinguishes them, you can check out our blogpost and free templates here. 

8. Terms of Payment

This is a crucial part of the agreement that must be set in stone before the independent contractor carries out his obligations.

Regardless of what the terms are, whichever terms the parties reach a compromise on should be written down clearly. You should at least include the following:

• The specific amount to be paid to the contractor
• How, or through which medium the contractor will be paid
• Timeline of payment - e.g.: will the independent contractor be paid after each small milestone? Or will he be compensated upfront, before any completion of work?
• Will it be a flat fee or a time-based payment?
• Whether an invoice will be provided before payment

9. Rights and responsibilities

As we noted earlier, the distinction between employee and independent contractor is a crucial one as independent contractors miss out on receiving employment benefits. Independent contractors are fully responsible for covering their tax, insurance, and social security costs, unlike employees.

You should write this down to ensure that you are free of any responsibility or burden and that the contractor is aware of this too.

10. Intellectual Property Clause

Intellectual property (IP) refers to intangible property rights you have over the creative product or work you have created. The category of IP includes symbols, designs, names, etc.

An IP provision, therefore, typically specifies that any product or output which falls within the scope of the project is property belonging exclusively to the business. The result of this is that all rights are reserved and allocated to the business rather than the independent contractor.

Protecting your IP means that you can enjoy the financial benefits that your creation brings and enjoy a competitive edge over other competitors.

If you want to learn more about IP, the different types of IP rights you should be aware of and how to protect yourself, see our blog post here. 

Conclusion

Whether you choose to use a template, seek help from a lawyer or draft an agreement from scratch, the most crucial thing is ensuring that all the key clauses are incorporated and that both parties are on the same page. Which clauses you choose to include depend on the nature of your business relationship and the project at hand.

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.