BUSINESS LAW ESSENTIALS: THE INDEPENDENT CONTRACTOR AGREEMENT

By James Forrest

At the Forrest Firm, we advise each new business client to have a proper set of contract templates in place for every third party that their business may have a relationship with, including customers, employees and vendors.  Having the right set of contract templates in place to govern different relationships is one of the core components of basic risk management.  The cost of developing such templates can be fairly minimal and can protect companies against liabilities that can be catastrophic to the health of a business.   These templates create a favorable legal landscape for the company as it relates to third parties in the marketplace.

In this space, we’ve reviewed a number of agreements, including, master services agreements (MSAs),statements of work (SOWs)agent/re-seller agreementsnon-disclosure agreements, procurement agreements, and employment agreements.  In today’s post, we’ll address another very common type of contract, one that helps businesses to expand their capacity to sell or deliver work to clients, as well as test the waters with prospective full or part-time workers —the independent contractor agreement.

Many of our clients utilize independent contractors, and it’s our job as corporate legal counsel to have proper contractor agreements in place that outline the nature and scope of each agreement.  Companies should be very clear in both their expectations for each contractor with regard to performance, as well as the areas that are off-limits to non-employees, such as the ability to bind the company to certain contractual promises.

Each contractor agreement should clearly state an exact purpose for the relationship, such as the provision of contract research services on projects for specific clients or business development activities on behalf of a company. When defining the engagement, the company must also clearly define that contractors must perform any work stated in the contract and/or subsequent statements of work (SOWs) to their highest ability and within any applicable laws and industry regulations. Furthermore, companies should take this opportunity to outline expectations for services (i.e., specific warranties related to the services or the deliverables) performed and qualifications to perform them.

Also, companies should clearly outline any expectations related to company equipment and other resources, such as automobiles, computers, cell phones, and much more.  The independent contractor agreement should make clear any allowances for expenses related to these types of equipment and resources that may be reimbursable to the contractor, as well as clear definition on what types of equipment will remain company property throughout the duration of and after the expiration of the relationship.

Another key point that needs to be addressed is taxation of income. Independent contractor agreements should clearly lay out the responsibility of the independent contractor to cover any taxes applicable to his or her contracted employment to the organization, negating any potential tax liability to the employer.

Good independent contractor agreements should also address concepts like confidentiality, non-solicitation and work-for-hire/IP.  With respect to confidentiality, the independent contractor should covenant and agree with the company that certain types of information will not be used outside of the intended purpose or disclosed by the contractor to any third party.   In addition, independent contractors should agree not to solicit certain customer and employees/independent contractors of the company during the agreement and for a certain reasonable period of time thereafter.  This will deter (and hopefully prevent) your independent contractors from gaining favor with your customers and work force and then creating a competing business that leverages those positive relationships.  Lastly, independent contractors should clearly agree that any inventions or intellectual property rights created within the scope of their work for the company is owned by the company.

In summary, independent contractors can be critical to the health of a business, particularly in helping businesses to expand on a temporary basis to fulfill high levels of customer demand.  Companies can also deploy contractors in lieu of hiring them permanently, to see if the business may have a permanent eventual need for the position and also assess if the individual is the right fit for that potential position.  Favorable contract templates should be included in any good risk management regime to address these relationships.