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What is an employment agreement?

HR & Compliance

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Updated on:
April 11, 2024
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Updated on :

April 11, 2024
What is an employment agreement?

Navigating the intricacies of employment relationships can be complex, yet it is crucial for any successful business or career. One foundational aspect that brings clarity to this relationship is an employment agreement. This guide aims to provide an in-depth understanding of employment agreements, how they differ from independent contractor agreements, and why they are indispensable in today's professional landscape.

Key Components of an Employment Agreement

An employment agreement typically includes the following key terms:

Role Description: A detailed account of the job responsibilities and expectations.

Employment Tenure: Whether the employment is indefinite or for a set period.

Compensation Structure: Including salary, potential bonuses, and benefits such as payment frequency.

Termination Clauses: Specifications about how and under what conditions the employment may be terminated.

Non-Compete Provisions: Some agreements incorporate a non-compete clause, restricting employees from engaging in similar business activities after leaving the company or working with direct competitors.

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Importance of Having an Employment Agreement

  1. Clarity and Transparency: Both parties know what to expect from each other, enhancing the independent contractor relationship.
  2. Legal Protection: In case of disputes, the written contract serves as a legal document. Dispute resolution methods and governing law should be outlined to applicable law.
  3. Structure: Helps in performance reviews and setting milestones, ensuring legal compliance.
  4. Confidentiality: Protects sensitive company information, including trade secrets and other intellectual property.

How to Draft an Employment Agreement

While there are many sample contracts available online, it’s essential to tailor the independent contractor agreement to fit the contractual relationship and the specific needs of both parties involved. If you need a starting point, check out this sample letter of agreement between employer and employee.

What Is an Independent Contractor Agreement? [Benefits and Essential Terms]

An independent contractor agreement is designed for a more flexible, non-full-time employee work arrangement. It specifies the nature of the work and payment structure and generally affirms that the contractor is not eligible for employee benefits. Independent contractors often have more freedom but forego certain privileges like company-sponsored benefits.

Benefits of an Independent Contractor Agreement

Flexibility: One of the major benefits, in line with an independent contractor arrangement, is the flexibility it offers to both parties. Contractors can choose when and where they work, while businesses can bring in specialized skills on an as-needed basis.

Cost-Effectiveness: Hiring an independent contractor eliminates the cost of benefits like health insurance, retirement plans, and paid leave.

Reduced Liability: Companies are generally not liable under labor law for the actions of independent contractors, thus reducing legal risks and ensuring legal compliance.

Skill Variety: Businesses can tap into a wide range of skills and expertise for different projects without long-term commitments and human resources obligations.

Essential Terms in an Independent Contractor Agreement

Scope of Work

The written contracts must clearly define the contractor's services, deadlines, and milestones.

Payment Terms

Clearly specify how and when the contractor will be paid. Include details on invoicing, payment schedules, expenses incurred and any upfront fees.


A non-solicitation clause that protects sensitive and confidential information from being disclosed to third parties.

Termination Clause

This outlines how legal action can be initiated and the circumstances under which either party can terminate the agreement.

Non-compete Clause

Some contractor agreements may include a non-compete clause, restricting contractors from offering their services to competing businesses for a specified period.

Legal and Tax Obligations

The contractor agreement should clarify that the independent contractor is responsible for their own income taxes and legal obligations.

How to Create an Independent Contractor Agreement

Creating an independent contractor agreement doesn't have to be complicated. There are many templates available to help you draft a comprehensive written document, but it is often advisable to consult with legal professionals for a customized agreement. If you need a template or a sample to get started, this sample letter of agreement between employer and employee can serve as a useful resource, although it is aimed at employment contracts.

What Is the Purpose of an Independent Contractor Agreement?

Clarification of Status

One of the foremost purposes is to clarify the status of the contractor as separate from an employee. This is crucial for tax and legal implications, as misclassification can result in hefty penalties from regulatory bodies.

Defining the Scope

The agreement meticulously details the scope of work, expectations, and deliverables, ensuring both parties are on the same page. This eliminates ambiguities and prevents disputes down the line.

Financial Terms

Financial terms including payment schedules, invoicing details, and any retainer fees, are laid out clearly to ensure transparency.

Risk Mitigation

A well-drafted independent contractor agreement acts as a safety net for both parties in case of disagreements or disputes. It is a reference point that can be legally enforced if required.


Many agreements include a confidentiality clause that protects sensitive business information. This is especially important in industries where proprietary information is at stake.

Termination Guidelines

Setting terms for termination ensures that both parties know how to conclude the agreement respectfully and legally. It may also include clauses around notices and penalties.

Do Independent Contractors Need an Agreement or Contract?

The answer to this question primarily hinges on the nature of the employment relationship. It's crucial to differentiate between an independent contractor and an employee, as they each fall under different legal and tax obligations.

What Steps Should a Business Take to Hire Independent Contractors?

The flexibility, specialized skill sets, and cost-effectiveness of independent contractors make them an increasingly popular choice for businesses in today's dynamic market landscape. However, hiring an independent contractor involves more than just a handshake and a verbal agreement. Here are the critical steps businesses should follow to ensure a successful and legally sound working relationship with independent contractors.

Step 1: Define Your Needs

The first step is to clearly identify the tasks and projects that you want the independent contractor to handle. Determine the specific skill sets required, the timeline for project completion, and the budget.

Step 2: Search for Qualified Candidates

Use industry-specific websites, social media platforms, or professional networking sites like LinkedIn to find potential independent contractors. You may also consider using freelance job boards or getting recommendations from your professional network.

Step 3: Conduct Interviews and Check References

Once you have shortlisted candidates, conduct interviews to assess their skills, experience, and fit for your project. Checking references or reviewing past work can also provide valuable insights.

Step 4: Verify Legal Eligibility

Ensure that the independent contractor is legally eligible to provide services in your jurisdiction. This might involve checking for necessary licenses, certifications, or any other legal requirements relevant to your industry.

Step 5: Negotiate Terms

Before formalizing the relationship, negotiate terms such as payment rates, deadlines, deliverables, and any other expectations. Make sure both parties are clear on these aspects to avoid future disagreements.

Step 6: Draft an Independent Contractor Agreement

Create a comprehensive independent contractor agreement outlining all the terms and conditions. This legal document should specify the scope of work, payment terms, confidentiality, and any non-compete clauses, among other essential elements.

Step 7: Take Care of Tax Forms

In the United States, you will need to have the contractor complete an IRS Form W-9 for tax identification purposes. This is crucial for tax compliance, as you'll need to report payments to the IRS using Form 1099-NEC. Also, independent contractors must handle their self-employment taxes.

Step 8: Onboard the Contractor

Provide the independent contractor with any necessary resources, tools, or information to start work. Though they are not employees, a smooth onboarding process can set the tone for a successful working relationship.

Step 9: Monitor and Communicate

Keep the lines of communication open throughout the project duration. Monitor progress, offer feedback, and make any necessary adjustments to the scope of work as needed.

Step 10: Make Timely Payments

Upon successful completion of milestones or the entire project, ensure that payments are made as per the terms in the independent contractor agreement.

Step 11: Review and Close Out

Once the project is complete, take the time to review the contractor's performance. Was the project delivered to your satisfaction? Would you consider hiring this contractor again for future projects? Make sure also to complete any remaining administrative tasks, such as issuing a Form 1099-NEC for tax purposes.

Hire Talent Compliantly With Skuad

Understanding the nuances of employment agreements and most independent contractor agreements is crucial for both employers and workers. These legal documents set the foundation for a transparent, respectful, and compliant working relationship. If navigating the complexities of international employment laws seems daunting, Skuad’s Employer of Record platform has you covered.

Skuad enables organizations to hire and onboard talent in over 160 countries compliantly, without the need for setting up a local entity. With Skuad, you can focus on building your team and achieving your business goals, leaving the complexities of compliance to the experts. To know more, talk to Skuad experts today.


What is the difference between an employment agreement and an employment contract?

Both terms are often used interchangeably, but subtle distinctions can exist. An employment agreement generally refers to a less formal, broader understanding between employer and employee. An employment contract is usually a more formal, legally binding document detailing specific obligations, terms, and conditions for both parties involved.

What voids an employment agreement?

An employment agreement may be voided if it includes illegal terms, is based on fraudulent information, or if one party lacks the capacity to understand the agreement. Other factors that can cancel an agreement include duress, undue influence, and mutual mistake. Always consult legal advice for specific situations.

About the author

Catalina Wang is a Human Resource Consultant. She manages recruitment, onboarding, and contract administration staffing for many organizations and remote teams. She’s passionate about efficient HR management and the impact of tech on hiring practices.

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