Independent Contractor Agreement
An Independent Contractor Agreement is also known as a:
- Subcontractor Agreement
- Consulting Agreement
- Freelance Contract
- General Contractor Agreement
- Consulting Services Agreement
What is an independent contractor?
Also known as a consultant or freelancer, an independent contractor is a business or individual that is typically self-employed and provides a product or service for a customer in exchange for monetary compensation.
What is an Independent Contractor Agreement?
An Independent Contractor Agreement is a written contract that spells out the terms of the working arrangement between a contractor and client, including:
- A description of the services provided
- Terms and length of the project or service
- Payment details (including deposits, retainers, and other billing details)
- Confidentiality, non-solicitation, and dispute resolution clauses
Who can use an Independent Contractor Agreement?
Contractors, freelancers, or consultants who wish to have a written agreement with their client can create an Independent Contractor Agreement. Likewise, customers, clients, or businesses who hire contractors and wish to outline the service arrangement through a written contract.
What is the difference between an independent contractor and an employee?
While there are many ways to distinguish an employee from a contractor, here are some of the most common ways an employer (or client) can differentiate between the two types of workers.
- May have more than one customer
- Sends invoices to his or her customers
- Uses their own tools or equipment
- Has a personal investment in contracting business and may incur profit and loss as a result
- Customers have little overview of the work or services being provided
- Has signed an Independent Contractor Agreement
- Works on a fixed-term basis
- May hire employees or subcontractors to help complete services
- Does not receive employment benefits from clients or customers
- Employer controls how the employee’s work is carried out, and when and where the employee works
- Employer controls the employee’s wages
- May receive employment benefits, such as medical, pension, vacation, or sick pay
- Has signed an Employment Contract
- May undergo employment reviews
- Receives in-house training
- Employer creates his or her job description
Why should businesses classify workers properly?
Keeping track of who is an employee and who is a contractor ensures a business is in a position to file taxes properly and comply with employment law.
Employers must pay a portion of payroll taxes on employees, whereas independent contractors conduct their own personal tax filings.
What happens when employees are misclassified as independent contractors?
The U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) conduct regular company audits with the goal of finding employees who have been misclassified as contractors.
The consequences for such misclassifications can range in severity depending on whether or not the misclassification is intentional, unintentional, or fraudulent.
The ramifications for classifying employees as independent contractors can include:
- A $50 fine for each unfiled W-2 form
- Monetary penalties from failing to withhold income taxes (potentially 1.5% of paid wages, 40% of FICA taxes not taken from employee wages, and potentially interest for late filing)
- A failure-to-pay tax penalty, which can total anywhere between 0.5% and 25% of the employer’s taxes depending on how long the employer has misclassified the employee and failed to pay the appropriate taxes
The IRS might also impose additional fines and penalties if they suspect fraud or intentional employee misclassification.
How do I protect the company’s confidential information when working with a contractor?
Confidentiality is a concern for customers who may be entrusting private or sensitive information to an independent contractor who has been hired to carry out a service for the company.
In a contractor agreement, you can include terms to prevent a freelancer from divulging information about your business. There are also terms about non-solicitation and non-competition in the event there are conflicts of interest in the industry or a risk of competition. It should be noted that if the contractor fails to comply with these terms, it would put them in breach of the contract.
Who owns the intellectual property created by an independent contractor?
Under U.S. copyright law the initial owner of the copyright in a “work for hire” is the person commissioning the work and not the person who actually created the work.
Section 101 of the Copyright Act defines a “work for hire” to include work by employees in the course of employment, including creative work developed by an independent contractor in certain circumstances like a translation, a contribution to a collective work, and more.
Alternatively, this contractor agreement can be tailored so the contractor retains complete ownership of the intellectual property but gives the company license to use the material.