How to Write an Independent Contractor Agreement

Before a business hires an independent contractor, it is important first to weigh the pros and cons of hiring a contractor versus an employee. Once that has been done, it is equally important to understand how to write an independent contractor agreement in order to help protect the company from having the contractor reclassified as an employee by the IRS, or other government agencies. According to the GAO, there are 10 million workers who are currently misclassified as independent contractors. The IRS estimates that 15% of the working population is misclassified. Having an independent contractor reclassified as an employee can have far reaching effects; creating issues involving tax liabilities, insurance, unemployment, wrongful termination, minimum wages, overtime, FMLA, discrimination claims, plus more. In fact, there is legislation pending before Congress entitled "The Employer Misclassification Act" that will, if enacted, bring about more penalties for companies who misclassify their workers. Therefore, it is important to ensure that you have the necessary provisions in your agreement, so that there is no doubt what the relationship is between the company and the independent contractor. In addition, the terms of the agreement must be literally followed.

Things You'll Need

• A plan and description of the work that needs to be done.

Instructions

1. 

   As mentioned above, it is first important to consider what you need done and if you are better served by using an independent contractor. Most of the time, the best projects for independent contractors involve closed end projects and projects done by professional or skill laborers. Prior to drafting the agreement consider the costs, risks involved in the work, the tasks needed to be completed, what it is worth to the company, deadline expectations, and results expected.

2. It is important that the independent contractor agreement recognizes that the contractor earns his or her own profits or losses, when possible will furnish their own tools, that they decide how they will do the work, they can hire who they need to assist them in completing the work, they will not receive any employee benefits, and that their business and travel expenses are their own.

3. 

   The basic agreement at minimum should contain:
   * A heading that it is an "Independent Contractor Agreement."
   * A first paragraph that says it is the intention of the parties to enter into an independent contractor agreement and that there is not intent by either party to enter into an employer employee relationship.
   * An effective date and termination date. It is probably better to have a term agreement that can be renewed, rather than an open ended agreement.
   * What the task or job is that needs to be done and how the contractor will be paid. The IRS used to focus a lot on how the contractor was paid and often found that an independent contractor that was paid hourly, was really an employee, but they no longer have that strict interpretation. Having said that, it would make the relationship more clear if the independent contractor either bills for their hours or there is a flat rate that is paid out in intervals. In no case should they be paid under regular payroll like employees.
   * A hold harmless clause and a clause that states that the independent contractor, unless otherwise recognized, is not an agent of the company.
   * A statement that the company recognizes that the independent contractor can enter into any other similar agreements with other customers but that in doing so it will not conflict with their duties or the interests of the company.
   * A statement that the independent contractor will not divulge confidential or proprietary information learned in the course executing their contract.
   * A provision covering the circumstances under which early termination can occur and the monetary consequences for that termination. In order to keep the agreement at arms length and mutually agreed upon, there should be consequences for both parties.

4. The more detail about the task or job that needs to be done the better, in terms of putting everyone on notice as to what is expected. It is important though that, as much as possible, that the how is left up to the independent contractor. The more the company gets involved in controlling the way things are done, the more exposure the company has to reclassification as an employee.

Tips & Warnings

• There are many online sources where you can get an Independent Contractor Template. In addition, your local public library may also have them.

• If you have any doubt at all about how to write this type of agreement see an attorney. THIS IS NOT LEGAL ADVICE.

• Think twice before converting a current employee to an independent contractor. Just because you reclassify them, doesn't mean that is the way it will be interpreted under employment law and by the IRS. Again, consult an employment law attorney or experienced human resources professional.