Businesses thrive and succeed because they know how to utilize collaboration. There are situations where a project or a task requires a specialized skill or expertise beyond the in-house team. This is where independent contractors come in very helpful. To ensure a smooth and fruitful working relationship with this third-party provider, a well-drafted contractor agreement is crucial.
This guide dives into the essential aspects of contractor agreements, exploring their benefits and components. A sample template is also included here to get you started!
What is a contractor agreement and who uses it?
A contractor agreement is a written legal document that establishes a formal and secure working relationship between an independent contractor and a client. Employing a mutually agreed-upon contract minimizes misunderstandings and protects the interests of both parties through its outlined expectations and set timelines.
These are useful to companies or individuals employing freelancers or small-scale agencies for specific services. Unlike regular full-time employees working under the direction and supervision of a company, contractors operate alone, negotiating their fees and deliverables. In terms of payment, independent contractors receive them by the project, while employees receive regular wages and benefits.
How does a contractor agreement benefit businesses?
A contractors agreement serves both the company and the independent contractor as it strengthens their working relationship by promoting clarity, transparency, and trust. Here are five main ways how contractor agreements can benefit a business:
- Facilitate shared understanding: Creating a contractor’s agreement encourages fair negotiation between the contractor and the client as they build a project roadmap and agree on crucial factors such as compensation, deadlines, copyrights, and legal obligations. This puts those involved on the same page and reduces the chances of disagreements and conflicts.
- Protect the interests of both parties: A well-written contractor agreement protects the welfare of both parties throughout the project. It is valuable in providing clear guidelines on terms and conditions that legal teams can utilize when forming fair resolutions in case of disputes. For example, if a graphic designer and a client encounter disagreements on the number of revisions halfway through a project, the contract should have relevant clauses that legal teams can reference. Without a binding agreement, reaching a resolution can be significantly challenging.
- Strengthen reputation: A company that manages its external partnership with legal documentation is a model for responsible business practices. Standardizing contract agreements is valuable for displaying a company’s commitment to transparency and gaining its investor’s trust during mergers, acquisitions, and IPOs.
- Enhance legal compliance: An integral part of contractor agreements is its compliance guidelines, which aim to educate both the company and the independent contractor about their respective tax responsibilities. It encourages both parties to make accurate tax filings and be overall diligent with their tax compliance.
- Promote accountability: Formally agreeing on a contractor agreement creates a legal obligation for both parties to fulfill their commitments; promoting mutual accountability. This legal framework helps protect their interests, prevent potential contract breaches, and mitigates the risk of delays or non-performance.
What should be included in a contractor agreement?
In the United States, the population of independent contractors surged by 26% to 64.4 million in 2022. As the gig economy or freelance workforce continues to grow, companies need to prepare their workflows if they plan to employ independent contractors in years to come. Here are the fundamental elements that companies should consider when drafting one:
Scope of work
When drafting an independent contract agreement, it is a must to provide comprehensive details on the different aspects of the project. This entails disclosing project duration, deadlines and deliverables, and other legal obligations beyond the core tasks. Clearly defining these specifications removes ambiguity and establishes transparent expectations between both parties for smoother execution.
Policies on payment, expenses, and reimbursement
Being clear with payment terms through the contractors agreement protects both parties from disputes. For the contractor, it guarantees on-time payment, while it helps the client define their payment process to avoid delays in compensation. This section in the contractor agreement should cover payment methods, frequency, value and invoice handling. Additionally, both parties can agree to include terms and conditions for reimbursements, down payments and late payment penalties.
Contractor obligations
The contract between an independent contractor and a company should not only focus on the core services but also on the additional obligations contractors are required to meet for a productive collaboration. Examples of these obligations are:
- Reports and Paperwork: To follow through with timelines and deliverables, the contract may require comprehensive documentation on financial reports and progress updates.
- License Requirements: There are instances where the contractor needs to secure licenses or certifications for tools or procedures for it to move forward. To avoid misalignment and delays, this type of requirement should be clearly outlined in the contract.
- Personnel Acquisition: Some projects may require subcontractors for a more effective and efficient outcome. In such situations, the contractor agreement must specify the approval process and associated costs.
Intellectual property ownership
Protecting the intellectual property of a company is an SOP when working with third-party entities like independent contractors. Improper management of this concern may lead to disputes and costly legal battles between the parties involved. To reduce risks of IP violations, a contractor agreement must stipulate who gains the IP rights for the inventions, materials, designs, or trade secrets garnered during the collaboration. Explicitly setting this from the onset ensures that the legal and economic interests of both sides are protected.
Non-compete and non-solicitation
The need for including non-compete or non-solicitation in contracts varies depending on the industry, but both are not required in contractor agreements. For non-compete, it prevents an independent contractor from working with direct competitors of their client for a certain period. There are some instances where a company is stricter and even restricts the contractor from launching its own business (if it is within the same industry). On the other hand, non-solicitation prohibits a contractor from going into business for an agreed-upon amount of time with the client’s existing customer.
Termination
Adding a termination clause is a strategic move for both parties in case one decides to end the contract sooner than planned. It is important to note that ending a contract can be initiated by either side, as long as it is grounded on legitimate grounds. This clause should include a detailed description under which the agreement can be terminated, guidelines for issuance of notices, and company resources or assets to be returned. Common causes of contract termination are the following:
- Poor Performance: A company may process contract termination if a contractor consistently delivers subpar output.
- Misconduct: Termination can be requested if the other party is proven to commit offensive activities such as theft, breach of confidentiality, dishonesty, or fraud.
- Force Majeure: Termination can happen in the event of pandemics, natural disasters, regulatory changes, or other unforeseen circumstances beyond both parties’ reasonable control.
Dispute resolution
Dispute resolution is a guideline that directs what both parties should do during conflicts. It has information on the resolution process (e.g., negotiation, mediation, or litigation), escalation procedures, timelines, and the parting of costs.
Tips on How to Write an Independent Contractor Agreement
Contractor agreements are crucial in documenting the specific requirements of both the contractor and the company throughout their working relationship. Committing errors in drafting this legal document can expose those involved to high-stake risks. To maximize its benefits, here is a guide on how to fill out independent contractor agreements properly.
- Collect personal and business information: A strong contractor agreement starts by stating the legal names and addresses of both parties. In some contracts, it includes the project start date and Taxpayer Identification Numbers (TIN) in the introduction.
- Define deliverables, timelines, and payment terms: To effectively communicate expectations, a draft contractor agreement should include a detailed list of the services the company wants to acquire. Contractors will find it easier to evaluate the offer if more information is included, such as timelines and remuneration.
- Include confidentiality agreement: Not including this section may subject businesses to copyright issues and pay significant costs. Putting a non-disclosure agreement (NDA) or confidentiality agreement is vital to protect the intellectual copyrights of a company.
- Consult with a legal team: Seeking legal guidance before issuing agreements is highly recommended, especially for businesses new to drafting contracts. Doing so strengthens the legal foundation, protects both parties’ interests, and fosters a harmonious collaboration.
- Use software for contract management: Managing multiple independent contractors can be intricate, especially when updating and disseminating contractor agreements. Fortunately, there are innovative solutions to alleviate this burden and improve productivity. For instance, there are board portals that can facilitate secure video consultations with contractors and lawyers, online sign-off and centralized document archiving. Utilizing such a tool can help reduce associated costs because there is no need to print physical copies and mail them to recipients.
Independent Contractor Agreement Sample Template
Building a strong working relationship with independent contractors starts with a well-defined agreement. This sample provides a foundation for businesses to create their own independent contractor agreements, ensuring a mutually beneficial collaboration.
Sample Independent Contractor Agreement This Agreement is made between ________ (“Client”) with a principal place of business at ________ and ________ (“Contractor”), with a principal place of business at _____________. I. Scope of Work II. Payment Conditions III. Contractual Obligations b. Tax Compliance IV. Contract Termination V. Resolving Disputes VI. Confidentiality VII. Intellectual Property VIII. Entire Agreement IX. Governing Law CLIENT: CONTRACTOR: DISCLAIMER: This is a sample Independent Contractor Agreement and is not intended to be a substitute for legal advice. To ensure that this Agreement is suitable for your situation, it is best to consult a lawyer. |
How Businesses Can Effectively Oversee Contract Management
Effective contract management is a core business competency that companies should strive to have. If mishandled and left unsecured, this aspect of the company can lead to serious risks to reputation, safety, and finance.
Convene’s board portal provides a centralized platform for drafting, issuing, signing, and storing contractor agreements that enhance the experience for both business partners and independent contractors. This intuitive app facilitates seamless collaboration among users involved in the contract, offering the following features:
- Video Conferencing: Conduct remote negotiations and consultations with in-app video conferencing and integrations.
- Live Meeting Tools: Discuss the draft during meetings using live collaborative tools like Page Synchronization, Laser Pointer, and Live Annotations.
- Task Management: Assign tasks and track progress easily in real-time during meetings.
- Digital Signature: Sign documents securely within the platform with date and time stamps.
- Audit Trail: Streamline audit reporting and provide better insights on document access and downloads.
- Document Library: Centralized data management with custom permission for staff, business partners, and independent contractors.
- Two-Factor Authentication: Secure logins for web, laptop, and mobile.
Interested in streamlining contract management for your organization? Schedule a Convene demo to explore the functionalities of our board portal.
Jean is a Content Marketing Specialist at Convene, with over four years of experience driving brand authority and influence growth through effective B2B content strategies. Eager to deliver impactful results, Jean is a data-driven marketer who combines creativity with analytics. In her downtime, Jean relaxes by watching documentaries and mystery thrillers.
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