In Employees And Independent Contractors, Part I: Using Contractors To Avoid Liability, we learned how your business can use independent contractors to shield itself from liability. Once you have consulted with your attorney and determined how to structure your relationship to your independent contractor you should then work with your attorney to draft an independent contractor agreement is appropriate to your situation.
The two purposes of this type of agreement are: (1) to ensure that the relationship between your business and the person or entity that you are hiring will be treated as an independent contractor relationship rather than employer/employee by the courts; and (2) to put you in a favorable legal position with respect to any disputes that may occur between your business and the contractor.
Below is a non-comprehensive list of some of the most important clauses that employers should include in their independent contractor agreements:
- Services and Rate: These clauses describe the services to be performed by the contractor under the agreement and the pay that the contractor will receive for such services. The expectations of the parties should be explicit and detailed, so as to prevent after-the-fact disagreements as to each party’s obligations.
- Characterization: This clause explicitly characterizes the relationship as an independent contractor relationship. The intent of the parties is one factor courts use to determine whether an individual is an employee or an IC. A proper characterization clause will make this intent clear.
- Conflicts: The agreement should prevent the contractor from engaging in activity that conflicts with your company’s business interests.
- Expenses and Taxes: Making the contractor responsible for his or her own expenses and taxes in connection with the agreement not only saves your company money, but is another indication that the IC is not an employee.
- Benefits: The contract should make clear that the contractor is not entitled to participate in your employee benefit plan.
- Agency: The contractor should not have the authority to enter into contracts on behalf of the company.
- Indemnification: This clause provides that, should your company be sued based on the contractor’s actions, the contractor will be responsible for paying the expenses of your defense.
- Confidentiality: The contractor should be prohibited from disclosing any trade secrets or other confidential information of the company.
- Applicable law: You should decide which state’s law will apply to the agreement. This will prevent confusion as to each party’s rights under the agreement. It will also prevent either party from cherry-picking favorable state law should a conflict arise. Since it is usually more difficult for employers to successfully forum shop, this clause will tend to benefit the employer.
- Licensing: The contractor should warrant that it is licensed to perform the agreed-upon services. If the contractor is not licensed and makes such a warranty, this clause makes it easier for the employer to recover from the contractor. It also protects the employer from liability to third parties.
- Insurance: The contractor should be required to cover sufficient liability insurance and to name the employer as an additional insured. Again, this protects the employer from third party liability.
- Non-compete: Depending on your business model, it may be appropriate to require the contractor to engage in any business that competes with your company for a reasonable period of time and within a reasonable distance from your business.
- Enforcement: Any attorney fees or other costs or expended by either party to enforce the agreement or recover damages for a breach should be recoverable from the breaching party. Often, without this clause, enforcement of the agreement is not economically feasible, because the recovery would not be sufficient to outweigh the costs of enforcement.
There is no such thing as a one-size-fits-all independent contractor agreement. After reviewing your particular situation, your attorney can help you tailor each of the above clauses to your business’ needs and add additional language that will work to your benefit.
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