Independent Contractor Agreement: Your Guide To Regularize New Work Environment

The new work environment is witnessing more skilled talents preferring to act as independent contractors globally. In the United States alone, independent contractors make up an estimated 6.9% of the workforce and are set to rapidly increase in coming years. 

However, this dramatic transformation in the global workforce brings forth the issue of misclassification – mistakenly categorizing an independent contractor as an employee. This has reportedly caused major legal and financial repercussions for several businesses. Here's where a well-drafted independent contractor agreement becomes crucial.

This guide will help you familiarize yourself with best practices to create effective agreements and share an example of independent contractor agreement to collaborate with your independent workforce.

Who are Independent Contractors?

From web developers and creators to marketers and data analysts, independent contractors are self-employed professionals offering businesses specialized skills and project-based flexibility. 

The contractor and client agreement differs from the traditional employer-employee relationship ​​in terms of control over their work methods and the amount of resources that companies invest in them. You may gain more valuable insights on hiring and managing remote contractors in our previous blog. 

Key Differences Between Employers And Contractors

You may further use our detailed checklist to avoid employee misclassification as independent contractors and escape from penalties.

Benefits Of Negotiating A Contract With Independent Contractor

A well-negotiated independent contractor agreement benefits both parties, given the level of freedom in a contractor and client relationship:  

• The agreement outlines the scope of work, deliverables, deadlines, and communication protocols, ensuring everyone is on the same page.
• A clear independent contractor contract strengthens your legal defense if the worker's classification is ever challenged.
• The contractor payment agreement ensures fair compensation for the contractor's work.

What is an Independent Contractor Agreement?

An independent contractor agreement lays down the contractor and client relationship in terms of the rights and responsibilities of both parties. In most cases, the independent contractor contract is legally binding and includes key elements like

• Contractor and client information 
• Scope of work and effective start date
• Payment Terms
• Intellectual property and non-compete agreement
• Indemnification and confidentiality clause

Moreover, different terms are used to describe independent contract agreements based on the specific situation: 

Freelance Contractor Contract

• You can draft a freelance contractor contract where the contractor provides services on a project-by-project basis.
• You may utilize creative or technical skills for a specific project without hiring an individual on your payroll.  
• The independent contractor agreement will typically outline the specific project scope, deliverables, and payment terms.

Employment Contract For Independent Contractor

• Although it can be misleading as a core characteristic of an independent contractor is their non-employee status, an independent contractor employment agreement can be drafted to fulfill time-sensitive job duties.

1099 Contractor Agreement

• The IRS Form 1099 is used to report payments made to independent contractors by companies in the United States. 
• You must use a 1099 contractor contract to emphasize the independent status of contractors for tax purposes instead of handing over Form W-2. 

Further, here is a quick start guide for employers to learn more about contractor onboarding. 

How to Write an Independent Contractor Agreement?

You may consider the following viewpoints in writing a solid independent contract agreement: 

• Identify key considerations: Consider factors like payment terms, confidentiality requirements, intellectual property ownership, termination clauses, and dispute resolution procedures.

• Familiarize with local regulations: This includes understanding the finer nuances of labor laws that differentiate a non-payroll independent contractor from an employee on a regular payroll.

• Define job duties: Give comprehensive information on the project, including scope of work, deliverables, and timelines.

• Reach out to managed service providers like Skuad: While free templates can be a starting point to draft work contracts for independent contractors, you should tailor them to your specific needs and ensure it is legally compliant with local labor laws. 

Learn more about incorporating non-compete agreements and non-solicitation agreements for independent contractors. 

Examples of Independent Contractor Agreements

Most independent contractor agreements remain consistent (as detailed below) with specific variations depending on the nature of the project and the type of contractor you're working with. 

Sample Independent Contractor Agreemen

This Independent Contractor Agreement ("Agreement") is made and entered into as of [DATE] by and between:

• [Your Business Name] ("Company"), a [State of Incorporation] corporation with a principal place of business at [Your Business Address] ("Company Address").

• [Contractor Name] ("Contractor"), residing at [Contractor Address] ("Contractor Address").

WITNESSETH

WHEREAS, Company desires to engage Contractor to perform certain services as set forth herein, and Contractor desires to provide such services;

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the parties agree as follows:

1. Services. The contractor agrees to perform the following services for the Company (the "Services"): 

[Detailed Description of Services]

2. Term. The term of this Agreement shall commence on [Start Date] and shall continue until [End Date] (the "Term"), unless earlier terminated as provided herein.

3. Compensation. Company shall pay Contractor a fee of [Total Fee] for the Services performed hereunder, payable as follows: [Payment Schedule].

4. Independent Contractor. Contractor is an independent contractor and not an employee of the Company. Contractor shall be responsible for all taxes and social security contributions associated with the performance of the Services hereunder.

5. Intellectual Property. All intellectual property rights created by the Contractor in connection with the Services hereunder shall be the sole and exclusive property of the Company.

6. Confidentiality. Contractor agrees to hold in confidence all Confidential Information (as defined below) of the Company. "Confidential Information" includes all information disclosed by the Company to the Contractor, whether orally or in writing, that is designated as confidential or that ought to be treated as confidential.

7. Termination. This Agreement may be terminated by either party upon [Number] days' written notice to the other party.

8. Dispute Resolution. Any dispute arising out of or relating to this Agreement shall be settled by [Arbitration or Litigation, specify location] by the rules of [Arbitration Association, if applicable].

9. Governing Law. This Agreement shall be governed by and construed by the laws of the State of [Your State].

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

[Your Company Name]

By: [Your Name]

Title: [Your Title]

[Contractor Name]

Contractor Payment Agreement

You may have an additional contractor payment agreement along with the main contractor job contract. Here's a breakdown of the key elements to consider:

• Payment schedule: You may adopt any one of the following payment structures:
  • Milestone-based payments: Payments are made at specific stages of project completion.
  • Hourly rate: For projects with more variable timelines or ongoing work, the independent contract agreement might specify an hourly rate.
  • Fixed Payment Upon Completion: A single payment might be made upon successful completion and acceptance of the entire project

• Payment method: You can specify the platform through which you would pay the contractors. 

• Late payment terms:  Outline any penalties or interest charges that will apply if payments are not released by the agreed-upon due date. 

• Expenses: Clearly define the types of expenses that are eligible for reimbursement (e.g., software subscriptions) and establish the process for submitting expense claims.

• Taxes: The 1099 contractor agreement requires you to furnish IRS Form 1099-NEC/1099-K to freelancers or independent contractors, mentioning the total amount paid for their services during the financial year.

Free Independent Contractor Contract Template Risks

Readily available free templates of independent contractor contract agreement are generally a marketing gimmick and often come with hidden drawbacks:

• Location-specific labor regulations may not be overlooked, leaving you vulnerable to legal issues.
• A generic template of an independent contractor agreement might not capture the unique requirements of the project and contractor relationship, leading to potential confusion.
• Free templates might only address some of the crucial elements like ownership of intellectual property or confidentiality clauses, exposing your business interests. 

Here is when you can consult HR & payroll service providers that facilitate legally compliant hiring of international contractors. 

Challenges of Managing Independent Contractor Agreements

Managing independent contractor agreements in-house can be challenging, more so because: 

• Onboarding and managing a large pool of contractors takes up significant time and in-house resources to process invoices and payments on time.
• Misclassifying an independent contractor as an employee may expose your business to heavy fines and penalties from local authorities.
• The labor laws in most countries prevent employers from renewing the contract agreement repeatedly. In such cases, you must make immediate arrangements to consider independent contractors as regular employees on the company payroll. 

Streamlining Private Contractor Agreement with Skuad

Skuad offers features specifically tailored for managing international contractors. 

Skuad can assist with labor law compliance requirements in 160+ countries, helping to minimize the risk of misclassifying international contractors. The platform offers automated invoice processing and facilitates payments to contractors in different currencies.

Thousands of global businesses and independent contractors are trusting Skuad to stay compliant. Take a free demo today to get started! 

FAQs

1. How do you structure an independent contractor agreement?

You can outline the scope of work, deliverables, timelines, payment terms,  confidentiality obligations, intellectual property ownership, and termination clauses to structure an independent contractor agreement. 

2. What is a 1099 independent contractor agreement?

A 1099 independent contractor agreement helps ensure the contractor receives a 1099 tax form instead of a W-2, reflecting their responsibility for self-employment taxes. 

3. Should I have a contract for an independent contractor?

Yes, a contract for engaging an independent contractor is a legally binding document and you must have one. It clarifies expectations, minimizes misclassification risks, and ensures clear ownership of intellectual property. 

4. What is the hourly rate agreement?

An hourly rate agreement is a special payment agreement that specifies the rate of the contractor for each hour of work performed. It is most likely used in projects with variable timelines or ongoing work, allowing for flexibility in payment.