Independent Contractor Agreement Basics

For some businesses, having regular employees ready for their operations is a norm. For others, employing an independent contractor is sometimes a better option.

ENTREPRENEURSHIP

Dezmon

11/27/20255 min read

For some businesses, having regular employees ready for their operations is a norm. For others, employing an independent contractor is sometimes a better option. The reason why a company relies on self-employed people or entities can vary. Sometimes, a company may want to hire short-term contractors for a small project and doesn’t want to complicate things with employee benefits. Instead, contractors are given free control over their tasks as long as they meet the goal and requirements within the timeframe.

Having the independent contractor agreement is a foundation for collaboration between an entrepreneur and contractor. Not only does it provide the establishment of responsibilities and expectations, but also legal protection for them. Independent contractor agreements, like ordinary contracts, require a thorough review and understanding of the legal topics.

Because both parties will become legally bound once the agreement is signed, employers and contractors should fully acknowledge the legal implications of the agreement. For this reason, this article will introduce the basic must-have elements in the independent contractor agreement.

Status And Relationship Between Counterparties

It should be mentioned clearly that an individual or entity is not an employee of the business. Therefore, having the same benefits with employees is not eligible. It should also specify that the contractor is held accountable for tax payments. In this way, a company is not going to withhold any taxes on their behalf. Sometimes, entrepreneurs may expect their contractors to provide the tools and equipment for tasks completion. In this case, such requirements should be clearly mentioned in this section to prevent any misunderstanding.

Scope of Work And Timeline

This topic is perhaps the most important part in the agreement. It outlines what entrepreneurs expect to receive from the contractor. For the contractor, it prevents them from being assigned new tasks outside of the scope of work. In this sense, the details of the scope need to be as clear and concise as possible with all the relevant information covered such as the required tasks, deliverable conditions, etc. Additionally, giving a contractor a specific timeline is a good way for both parties to track the progress. For example:

‘The contractor will deliver a 5-minute video presentation about the profile of ABC company, what it does, examples of its products and services, its commercial partners, how its products and services improve the customers’ life via A, B, and C formats in a portable storage on the 31st of August 2022 before 12.00 pm.’

If the project is more complicated, it can be broken down into several deliverables with different due dates instead. Entrepreneurs should also mention that any unclear statement is not part of the agreement. A nonspecific statement can leave room for a vague interpretation that could result in additional time spent on unnecessary work. In some cases, entrepreneurs can mention a backup plan if an intended move doesn’t happen.

Terms of Payment

This section involves the clauses about compensations and wages, as well as other monetary elements such as cancellation fees, deposits, discounts, etc. One of the common terms is the net 30. This means an individual will get paid 30 days after receiving an invoice. Sometimes a discount is given to incentivize on-time payment. For example, a 10/15 net 45 means the customer will gain a 10-percent discount if the transaction is made within 15 day otherwise the payment is due on day 45.

Another common element is the Cancellation Fee. It is a partial reimbursement used in the case where a contract agreement is terminated before accomplishment. Generally, this fee is calculated as a percentage between 20 to 25% of the finalized price. Deposit payment is also important, especially for high-value pieces of work and services. It can range from 20 to 50% of the total payment with the remainder due upon delivery.

Intellectual Property And Ownership

This section is important especially for projects involving research and development, creative materials or innovative products. Usually, when a payment is made, the piece of work or finished product will belong to the employer. Independent contractors, however, may want to own or license their works. This is why clauses about intellectual property should be included that allows both parties to compromise. An artist, for example, may ask for the right to use the work in a particular manner that does not violate the terms of contract.

Confidentiality and Trade Secrets

In many ways, contractors will gain access to a business’s confidential information, as well as its trade secrets. Therefore, entrepreneurs need to ensure that their businesses are protected. This can be done by explicitly specifying that confidential information and trade secrets must not be stored, shared, or used for personal benefits for a specific or indefinite period of time. This way, entrepreneurs can be ensured that their businesses’ information is safeguarded by law.

Termination

Sometimes, there can be a case where it is inevitable to terminate the agreement before completion. For that reason, defining the terms and conditions for contract termination beforehand will help provide an acceptable solution for both parties. A termination clause (or severance clause) shows the foundations of contract cancellation. It represents the right to terminate the contract, the time a termination notice should be provided in advance, and the consequences of not meeting the requirement, etc.

This agreement allows both the contractor and the employer to terminate an agreement without paying any penalty. It can also provide the procedures and remedies of termination. In some cases, this might include the compensation of damages to the victim counterparty.

Obligations

Any requirements that the contractor needs to comply with should be mentioned in this section. This might involve the need for a special license, the eligibility to employ other parties, etc. The obligation can ensure entrepreneurs the quality of the work. It can also be used as evidence when it comes to legal matters.

Disputes

It is the statement specifying which law will be enforced to address disputes between the two parties. Normally, the laws that the state or the country in which the company is located will be used. This is especially important for entrepreneurs that hire independent contractors in another country. In this case, it is strongly suggested that they decide the applicable law upfront.

The Bottom Line

While many suggest that the independent contractor agreement should be created and examined by an attorney, entrepreneurs still need to have the basic knowledge in order to understand and utilize it properly. Entrepreneurs are the ones who know best about the task and deliverable that they want to get done. Therefore, the elements of the agreement should be outlined by them before being finalized at the end by an attorney.

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