Independent Contractor Agreement: A Comprehensive Guide
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- An independent contractor agreement is a document outlining the business relationship between a hiring company and a contractor.
- These legally binding written documents establish clear expectations, protect both parties and avoid employment misclassification disputes.
- Companies using Deel Shield can have Deel legally hire contractors on your behalf, create compliant contractor agreements, and assume total liability in the event of misclassification claims.
The way we work has changed. Remote work is the new normal, and the “gig economy” is in full swing. One shift that continues to accelerate is independent contracting.
Independent contractors (ICs) are workers who provide services to a business as non-employees. That’s right: independent contractors are not legal employees of the companies that pay them.
Companies must provide full-time employees salaries and statutory benefits (like health insurance and worker’s compensation). Companies also have a high degree of control over when and how employees work.
Companies are not required to provide employee benefits to ICs and have far less control over their working relationship. Thanks to LinkedIn, Upwork, and other online job boards, finding contractors is more accessible than ever.
However, hiring an independent contractor is more complex than you might think. You must file the proper paperwork with the relevant tax authorities and create and sign an independent contractor agreement.
An independent contractor agreement clearly outlines the terms of your working relationship and demonstrates the worker is not an employee of your company. Without an airtight IC agreement, you may be found guilty of employment misclassification and face steep misclassification penalties.
These legal hurdles get even more complicated should you attempt to hire an independent contractor in another country.
What is an independent contractor agreement?
An independent contractor agreement is a document outlining the business relationship between a hiring company and a contractor. These legally binding written documents establish clear expectations, protect both parties and avoid employment misclassification disputes.
Unlike an employment contract, an independent contractor agreement includes specifications about the worker’s services or projects, including the deadline and desired outcome. For example, suppose you hire a freelance graphic designer to create a website for your company.
The contractor agreement needs to specify the full set of deliverables and their due dates, payment rates, and guidelines for the website’s look and feel.
Why are independent contractor agreements important?
Contractor agreements are important because they protect the contractor and the company in the case of legal, material, and job-related disputes. In addition to setting expectations around the scope of work, client needs, compensation and deadlines, the primary goal of an IC agreement is to clarify that the business relationship is not a joint venture or full-time employment to avoid a misclassification dispute.
But remember, while an effective independent contractor agreement is an important layer of protection, it will only carry weight if the business relationship reflects the details outlined in the agreement. If your agreement describes a contractor relationship but treats the contractor as an employee, you are still at risk for misclassification.
IC agreements are even more important when hiring foreign independent contractors because they must account for the intricacies of local labor laws and regulations.
Sudarshan Sivaraman, Head of Customer Success & Sales, Turing
Why is misclassification such a big problem?
Worker misclassification is a significant problem with far-reaching consequences for workers and the economy. It refers to improperly classifying employees as independent contractors or freelancers rather than recognizing them as full-fledged employees. This misclassification allows employers to avoid providing the benefits, protections, and rights that employees are typically entitled to under labor laws and regulations.
The US Internal Revenue Service (IRS) has implemented various measures to combat misclassification and enforce compliance. These include conducting employment tax audits to examine the working relationship between employers and workers to determine if the classification is accurate and providing processes for workers who believe they have been misclassified to request a determination from the IRS to clarify the worker’s status and to report their share of uncollected Social Security and Medicare taxes.
Learn more: Employee Misclassification Guide: Independent Contractor or Employee?
Chloe Riesenberg, People Specialist, Project 44
Do I need an independent contractor agreement?
Companies should draft tailor-made contractor agreements for each contractor to avoid legal and financial penalties. When a contractor starts a new company project or service, you must create and sign a new independent contractor agreement.
If you aren’t sure of the correct worker classification, check out our guide on independent contractors vs. employees for clarification.
The term independent contractor encompasses a range of working relationships: an independent contractor could work 40 hours a week with a single company. Another independent contractor could complete a few hours of work a week for multiple companies. Either way, working engagements must include independent contractor agreements to establish legal independent contractor status.
According to the IRS, in the US, all independent contractors are self-employed, but not all self-employed people are ICs.
Check out our guide on independent contractors vs. self-employed to learn the difference.
What should an independent contractor agreement include?
The entire agreement should cover the following:
General information about the contractor and client
The first section of the contractor agreement defines the client company and the contractor or entity providing the service. Include identifying information and contact methods for both parties, like legal names and email addresses.
When creating a contract with Deel’s contract workflow, the platform will prompt you to add all necessary contractor details.
Services and scope of work
The next clause in the document describes the terms of services the IC will provide. Many contractor relationships include overarching service terms in the primary agreement and then create separate statements of work for each additional project. If you choose to do this, state that the stipulations made in the original agreement apply to all future statements of work.
Most scope-of-work statements use the wording, “The contractor will provide the following services:” followed by the list of agreed-upon services. The client company must create a thorough brief for the best results. A brief provides ample details about the work product, including its purpose, relevant user/buyer information, and more. The brief prevents misunderstandings and leads to faster, higher-quality work.
The contract should also clarify the contractor is free to determine the pace at which they complete the project so long as they meet any specified deadlines. The client company has little control over the contractor’s methods of deliverables; they are only entitled to receive deliverables by the specified date.
The Deel platform prompts you to choose the team and entity, and complete details like the contractor’s tax residence and job title. If useful, you can use one of the saved prompts for the scope of work.
The effective date of the agreement
The effective date indicates the beginning of the agreement and the work in question. It clarifies when the business relationship begins and when the contract provisions become active.
Permission to hire subcontractors
This part of the agreement should specify whether the contractor has the right to hire assistants as subcontractors to perform services for the client company.
The client should give prior written consent for such hiring (or exclude it from the agreement). This clause should also note that the contractor is responsible for paying the subcontractors and their taxes, freeing the client from any financial liability. Emphasize that even if the client agrees to let the contractor use assistants, those assistants are the contractor’s responsibility, not the client company’s.
Clearly state that compliance with the contractor agreement extends to subcontractors as well.
Equipment and facilities
Contractors typically perform all services from their facilities, whether an office space or their home. If you hire a contractor that can work remotely, decide if you will provide them with a coworking space membership or equipment.
When using Deel, you’ll have the option to request a background check and identity verification and provide stock options, coworking membership, and equipment.
Compensation for the services provided
The agreement specifies how much the company will pay the contractor, whether you will make installments, and details about the payment frequency. For example, the contracts might note whether payment depends on deliverables and the expected delivery date.
Agreements may not mention the specific, such as the payment method and pay-by date. However, it’s best practice to state that the business will make a reasonable effort to pay the contractor promptly.
Discover 9 of the Best Ways to Pay Independent Contractors Online.
When creating a contract through Deel, the platform will provide market rate insights and prompt you to pay the contractor in their local currency, a legal requirement.
Hero Gaming, Gamified casinos, Malta
Expenses, travel, and reimbursement policies
Typically, independent contractors are responsible for covering the costs associated with providing their services. This often includes operating expenses such as office supplies, phone bills, internet, software subscriptions, and any equipment necessary to deliver the contracted services. Additionally, contractors may also bear the expenses related to transportation when required for their work.
In certain situations, however, the contracted services may demand specialized equipment or necessitate travel to fulfill the terms of the agreement. Devote a section of the contractor agreement to outlining any special provisions and travel requirements. Describe your reimbursement policy should either come into play.
HR teams can manage employee expenses, reimbursements, and stipends for travel or wellness through the Deel dashboard. Have a clear view of what you’ve paid and what’s still pending.
Your team also gets access to request an expense, attach receipts, and view the status of their expense request along with a record of paid items.
Benefits and liability exclusion
Establish independent contractor status by clarifying that the contractor has no claim to usual employee benefits. This section of the agreement states that the client company does not cover the contractors’:
- Social security
- Health insurance
- Worker’s compensation
- Sick or vacation pay
These exclusions enable the client company to forego payroll taxes and avoid withholding social security contributions from the payments made to the contractor. The independent contractor carries the tax obligation and is responsible for reporting and paying their self-employment taxes.
While contractors don’t usually get the same benefits as employees, that doesn’t mean they shouldn’t receive company perks. With Deel, you can offer competitive healthcare options, discounts, and perks from brands your team love, directly through the Deel dashboard.
Termination of the agreement
Typically, the termination of the contractor agreement is tied to the completion of deliverables. Define those deliverables in as much detail as possible, including an expected due date.
Sometimes, companies hire independent contractors on a long-term or even indefinite basis. State the conditions for termination of this agreement along with the number of days’ notice required for termination.
Although clients cannot technically fire independent contractors, they can terminate independent contractor agreements early under certain circumstances. Most often, when the contractor’s work wasn’t delivered as expected, or either party disregards the terms of this agreement.
Both parties should respect the legal aspects of the independent contractor agreement and follow any written notice provisions. The client should pay the contractor for the completed work, even if terminating the contract early.
To end a work agreement, you can initiate a termination on the Deel platform. Choose if you want to end the contract on a specified future date or terminate immediately. We will inform you if the end date is less than the standard notice period for contract terminations to ensure you meet local regulations.
The indemnification clause covers the client’s liability for any fees, costs, and judgments against the contractor. It states that the contractor agrees to indemnify or compensate the client for all losses and claims that result from the contractor’s misactions. The clause mainly serves to protect the client from legal consequences for the acts of their contractor.
The severability clause says that if any provisions of this agreement become unenforceable or invalid, the rest of the contract remains intact. In other words, if one section of the contract were to change or become invalid, the entire contract other that section will remain valid, and both parties will retain the protections it provides.
The governing laws (or applicable laws) section states which party’s laws of the state or country will apply to the agreement if legal trouble arises during the term of this agreement. Clarifying applicable governing laws is especially important if the parties involved are not in the same country and cannot resolve an issue through arbitration.
The state and country of the client company’s headquarters are the most common choice for applicable laws. However, the court may disregard the agreement governing law statement if most services occur at the contractor’s residence. There’s no simple answer here, so we encourage you to consult with an attorney or use a pre-built service to handle international independent contractor relationships.
The waiver clause releases any rights in the business relationship between the hiring company and the contractor. Waiver clauses are standard practice but must appear in writing.
This section indicates that the contractor must have liability insurance and that the client is not responsible for covering the contractor with their insurance policy.
Warranties and professional capacity
The warranties and capacity section is one of a few essential provisions in independent contractor agreements. Here, the contractor agrees they have the capacity, methods, and equipment that warranties they will fulfill the task.
Independent contractors have the right to work with multiple companies and provide deliverables however they prefer. However, the client company needs to know they have the capacity and capability to complete the job they hire the IC to do.
Intellectual property and ownership
Working with contractors or freelancers requires clear boundaries over who owns the project’s end result. Outline ownership over any intellectual property developed by the contractor to avoid any legal battles. This clause is especially important for international hires, as intellectual property laws differ per country.
When creating tailored employee contracts via the Deel platform, you can seamlessly transfer IP ownership to you. Similarly, hiring independent contractors through Deel has built-in IP clauses that assign all contractor-created work to the company.
Independent contractors often work with sensitive and sometimes even confidential information. Sharing this information can be risky since you have yet to establish trust with the IC.
Include a confidentiality clause or non-disclosure agreement (NDA) in your contractor agreement to mitigate risks. Clarify what constitutes confidential information, including:
- Patent rights
- Trade secrets
- Marketing plans
- Business strategy
- Customer databases
This section acknowledges the contractor understands what qualifies as confidential information and agrees not to divulge or disclose this information to any third parties. Breaching a confidentiality agreement can be a cause for terminating the contract.
Add compliant non-disclosure agreements to existing contracts using Deel’s pre-written standard NDA document or upload your own signed NDA. All new and existing employees and contractors can countersign the form right on the Deel platform.
A non-compete agreement is a binding document that prevents an independent contractor from working with their client’s competitor during the contract duration and, at times, a set period of time afterward.
Not all countries and US states allow non-compete protection for independent contractors. For example, Joe Biden’s 2021 executive order asks the federal trade commission to limit the use of non-compete clauses to promote productive competition in the US economy, complicating the issue further.
If the country or state where you’re operating is not allowing a non-compete agreement, opt for a confidentiality or non-solicitation clause instead.
Avoid using independent contractor agreement templates that legal experts haven’t vetted
If you just learned that you must create an agreement for every independent contractor you hire, your first instinct might be to turn to the internet to find a free contractor agreement template.
We understand your desire to save time but proceed cautiously: these free templates are often extremely basic and only apply to certain contractors. Local labor and tax laws differ between countries, so a template that works for one country could leave you legally vulnerable in another.
Check out our guides on the UK’s IR35 (for non-payroll workers) and Serbia’s independence test for lump-sum entrepreneurs. The differences are subtle but important, and even a slight misunderstanding opens you up to employment misclassification risk.
If you decide to use an independent contractor agreement template when hiring contractors in a foreign country, consult a law firm in that country to properly customize the agreement to ensure compliance and protection. Attorney’s fees are a small price compared to local tax authority fines. Alternatively, use a service like Deel that provides contractor agreements compliant with local laws.
Get our free Independent Contractor Agreement Template you can tailor to comply with the local regulations of your contractor’s home country - vetted by legal experts!
Client companies often create independent contractor agreements but do not have the only say. Contractors can negotiate their independent contractor agreement, especially if they request.
Independent contractors most often negotiate details related to:
- Scope of work
- Terms of termination
- Payment terms
- Confidentiality and non-compete clauses
Client companies should be flexible and accommodating when considering contractors’ reasonable needs. Before signing the contract, both parties should list and request any changes they’d like to reflect in the contract.
How often must an independent contractor agreement be renewed?
Most independent contract agreements state the working arrangement’s duration (and termination date). However, you should take the time to renew your agreement if there are changes regarding the following:
- Basic information (business name, address, type of entity)
- Scope of work, deliverable requirements, or due dates
- Payment terms or compensation
Quickly edit or update contractor agreements on the Deel platform. After you confirm the signature, the amended contract will be sent to the contractor to countersign.
Clients can make amendments to the following:
Payment details (rate, invoice cycle, payment due date)
Scope of work
End of contract (end date and notice period)
Let Deel create your independent contractor agreements for you
These guidelines are a great start to creating an independent contractor agreement or at least understanding its elements a little better. Creating an iron-clad contract can take time, but it is most certainly worth the investment.
If you want to hire independent contractors for your business, Deel can help you streamline the hiring and onboarding process. We can facilitate localized contracts and contractor agreements, simplified tax form collection, and the best payment experience for you and your contractors.
Want to avoid misclassification? Upgrade to Deel Shield and we'll legally hire contractors on your behalf, create compliant contractor agreements, and assume total liability in the event of misclassification claims.
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