There are many situations in which a business will want to engage the services of an independent contractor instead of hiring an employee. In these situations, both parties must sign an independent contractor agreement.
Independent contractor agreements can receive increased scrutiny from government agencies, so you must draft them carefully to obtain the full advantages of the agreement.
What is an independent contractor agreement?
An independent contractor agreement is a contract that lays out the terms of the independent contractor’s work. It covers the contractual obligations, scope, and deadlines of the work to be performed. It affirms that the client and contractor are not in an employer-employee relationship.
For example, most skilled tradespeople like plumbers will have you sign an independent contractor agreement when hiring them. Meaning that, while you pay them to fix your broken sink, they are not considered to be your employee.
An independent contractor agreement ensures that there is no confusion between the parties regarding the worker’s classification, payments, and tax obligations. It also helps establish a worker’s contractor status by showing the Internal Revenue Service (IRS) and other government agencies that both parties intended to create an independent contractor relationship. This is important because an independent contractor has different legal rights and obligations than an employee.
When do I need an independent contractor agreement?
You need an independent contractor agreement when you want to hire a contractor to perform work for your business. Many important services can be obtained by hiring a contractor instead of an employee.
Some of these services include:
- App development
- Software engineering
- Content writing
- Graphic design.
Parts of an independent contractor agreement
An independent contractor agreement should cover the following key terms:
The agreement should have an introductory paragraph outlining who is the client and who is the service provider. It should contain the legal names of both parties, the date, and the physical addresses of each party.
Scope of work
This section should provide a detailed description of the service being procured. It should also list the duration of the relationship and the timeline of any deliverables.
The purpose of this clause is to detail your expectations regarding the speed and quality of work. By including more details, the potential for costly misunderstandings will be kept to a minimum.
The agreement needs to discuss whether the contractor is paid an hourly rate or a flat fee. It should also include information on payment frequency, payment logistics, and invoicing.
The termination of most independent contractor agreements will be connected to the completion of deliverables. Nevertheless, unforeseen circumstances can lead to a desire to end a project or contractual relationship early.
A termination clause should describe the conditions for termination, along with how notice of termination must be given.
A confidentiality clause states the terms under which the contractor will keep the client’s business information confidential. Confidential information could include trade secrets, business strategies, and trademarks. This section is vital to protecting your private business information.
Intellectual property and ownership
An independent contractor agreement should describe the ownership rights of intellectual property created during the relationship. If you want to own the work created by the contractor, this section must outline that expectation. Otherwise, a complicated legal battle could arise, especially if the dispute involves a foreign country.
This clause outlines which jurisdiction’s laws will apply to the agreement in the case of legal action. In many instances, the parties may require a disputed issue to go through arbitration before legal action can proceed.
Limitations of an independent contractor agreement
Does not automatically establish an independent contractor relationship
As mentioned earlier, an independent contractor agreement helps establish the intent of both parties to create a client/contractor relationship. However, it is important to keep in mind that an agreement is useless if you treat the contractor as an employee. You face the risk of state and federal agencies auditing your business if they believe you have engaged in independent contractor misclassification.
May be unable to fire an independent contractor
Unlike most employees, the client has restricted rights to fire a contractor. Your ability to terminate an independent contractor depends on the terms of your agreement.
How to create an independent contractor agreement
Businesses face two major challenges when it comes to the management of independent contractor agreements.
Organization. As independent contractors become more popular, companies are hiring them more frequently to perform a wide range of services. For example, a business could be contracted with several freelance writers and graphic designers at the same time. This can make it difficult to manage all the obligations and timelines associated with these agreements.
Maintenance. There can be consequences like audits and costly penalties for misclassifying independent contractors. You must carefully document your work arrangement with a contractor, including keeping track of payments and reporting total payments to the IRS.
These challenges, among others, make independent contractor agreements time-consuming and hard to keep track of.
Automate workflows for independent contractor agreements
Independent contractor agreements can be difficult to make. They also require a solid understanding of both labor law and tax regulations.
If your business deals with independent contractors regularly, there is probably already a process in place for generating independent contractor agreements. What if you could automate it?
Fortunately, this is now possible with contract management software.
How contract management software can help simplify the process
Traditional contract management. How does your company store and manage its independent contractor agreements? Some businesses have no specialized system to manage them, or they rely on inefficient tools like spreadsheets. Either way, this presents a few main problems.
Separate systems. Some contracts may be stored in a file cabinet, while others might be stored on computers. Contracts that are stored in separate systems don’t talk to each other.
Isolated processes. You must negotiate each agreement separately. You are unable to use relevant information from other contracts without conducting a lengthy search.
Lack of transparency. After a contract is signed, it is usually stored away and ignored. When you do refer to them, they are often filled with convoluted legal jargon that prevents you from quickly finding what you need.
Ironclad contract lifecycle management. Digital contract management systems are specifically designed to address the shortcomings of traditional contract management. They seamlessly compile information and make it easily accessible for anyone in your company. The following are just a few examples of the benefits.
All-in-one solution. Every contract is stored in one place. You can easily compare and sort them using your computer or mobile device.
One source of truth. With everything in a central location, you will no longer have to worry about conflicting information. It’s easy to find the current contract and any updated terms.
Full transparency. When negotiating with a contractor, you will be able to see prior pay rates and the rates of other contractors you have hired for similar work. Past and present contract information can be found easily.
Ironclad product features that help
Ironclad designed its contract management software to meet the needs of your business. More than just a repository, it also helps you create and negotiate independent contractor agreements.
Ironclad’s Workflow Designer is a powerful tool that allows users to seamlessly navigate the entire contracting process. From creating contract workflows to ensuring compliance, companies can quickly generate the contracts they need without long implementation times or any technical expertise.
Why use digital contract management for an independent contractor agreement
Many businesses are increasingly dependent on freelancers and use independent contractor agreements. Depending on the industry and the size of the company, there could be hundreds of independent contractor agreements you need to manage.
Independent contractor agreements can either simplify your business operations or lead to additional complications. To successfully manage them, there needs to be an ongoing collaboration between your Human Resources and Legal departments.
These departments need a tool to help them collaborate. A digital contract management tool will help them:
- Create independent contractor agreements faster
- Store the agreements in a central location for better organization
- Stay in compliance by managing relevant documents and records more effectively.
Ironclad has your independent contractor agreement solutions
Independent contractor agreements don’t need to be complicated. Ironclad has all of the tools to help you keep track of your agreements. You’ll have everything you need to create new contracts, revise old ones, and find the documents you’re looking for.
Learn how Ironclad’s contract management system can help you automate your independent contractor agreements by signing up for a demo today.
- What is an independent contractor agreement?
- When do I need an independent contractor agreement?
- Parts of an independent contractor agreement
- Limitations of an independent contractor agreement
- How to create an independent contractor agreement
- Automate workflows for independent contractor agreements
- How contract management software can help simplify the process
- Ironclad product features that help
- Why use digital contract management for an independent contractor agreement
- Ironclad has your independent contractor agreement solutions
Want more content like this? Sign up for our monthly newsletter.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.