Saturday, January 19, 2013

Key Considerations in Independent Contractor/Consultant Agreements

When outsourcing work, it’s important that the worker is classified as an independent contractor and not an employee because the latter makes the employer liable for employee’s benefits, worker’s compensation insurance, taxes, vacation pay, etc. Generally, the more control the hiring party has over the worker, the higher likelihood such worker will be considered an employee. Read more on employee/contractor distinctions and tips on avoiding your contractors reclassified as employees here. A good independent contractor agreement should contain the following clauses.

Relationship of the Parties clause must clearly state that the worker is an independent contractor and not an employee, partner or agent. The contract must be titled Independent Contractor/Consultant Agreement to avoid confusion. Avoid using words like “partner,” “associate,” or “agent” because they imply joint liability where you will be liable for the other party’s mistake.

Assignment of intellectual property rights to the work product. Best IP protections for the hiring party contain "work for hire" designation but unfortunately in jurisdictions such as California this may reclassify an independent contractor as an employee. Read: Beware of the “work for hire” language in CA independent contractor agreements.

The more control you exercise over the method of work, the more directions you give, the higher the likelihood the contractor will be reclassified as an employee with all resulting penalties and financial burdens. Therefore, the Scope of Services clause should, if possible, be limited to desired results of work but the contractor shall be as free to achieve such results as reasonably practicable and not precluded from working for (competing) businesses. Providing tools, equipment and training weighs towards employee classification.

Contract Term – the shorter the lesser the chance the contractor will be reclassified as an employee.

Confidentiality clause must be included if the contractor will have access to sensitive information, trade secrets, client lists, etc. Tips on drafting nondisclosure agreements and clauses here.

Payment by the hour/week suggests employer/employee relationship. Paying for results/milestones is indicative of independent contractor. Reimbursement of expenses may also suggest employment relationship; a better strategy would be to estimate expenses before signing the contract and include them in a lump sum fee paid to contractor for job completion.

Indemnification is a clause that ensures a party will be reimbursed for the other party’s wrongdoings, although the odds of enforcing this clause against a remote party (i.e. web developer in India) are very slim.

Statement of Work (“SoW”) is a short convenient attachment to Independent Contractor Agreement that describes each new task/project to be performed. SoW states that all general terms in the master Independent Contractor Agreement apply. Executing Statements of Work as part of an ongoing working relationship is easier than drafting a whole new contract for every new task the contractor has to perform.