An independent contractor is a self-employed individual who provides services to an employer working independently under a contractual agreement. If you are thinking of hiring an independent contractor, understand key elements of the contract that should be covered so your company isn’t liable for unanticipated taxes and other legal problems.
The agreement should clearly spell out the services to be performed and over what time period this work will take place. The deliverables and scope of the work to be performed should also be clearly defined so that there is no misunderstanding.
A non-disclosure clause should be included in the agreement to protect the company from the contractor sharing any knowledge not already publicly known.
The agreement should clearly spell out that the contractor is not an employee of the company and that the contractor is not participating in a joint venture agreement with the company nor acting as an agent for the company. It should also include a clause indicating that the contractor waives any right to benefits the company provides to fulltime employees such as health-care benefits and a 401k plan.
Contractor status should cover all of the points the IRS uses to determine if an individual is an independent contractor. IRS determination is based on a list of 20 questions used to assess the individual’s status. For example, an individual would not be considered an independent contractor if the company provides him training to do his job, if the business supervises the individual's work or if there is an ongoing relationship with the individual.
Work for Hire
The agreement should indicate that the tasks and deliverables provided by the consultant are work for hire and that the resulting work is the property of the company and for its exclusive use.
Define if the contractor will be paid a flat amount or an hourly rate. Also specify when payments will be made and if they are tied to the schedule of work to be performed.
Specify under what conditions an independent contractor may be fired -- for example, “this agreement may be terminated at any time at the discretion of the company with 30 days advance notice.”
Customer and Employee Solicitation
Outline that the contractor may not recruit any employees of the company nor attempt to do business with customers of the company for a specified period of time.
Should there be a dispute between the independent contractor and the company, the contract should indicate that the agreement will be submitted for mediation and, if unresolved, that the issues will be taken to binding arbitration. It should also indicate that whoever loses the case will have to pick up all attorneys’ fees.