Important Terms in an Independent Contractor Agreement

Important Terms in an Independent Contractor Agreement

Employing the services of an independent contractor be your employee is supposed to be simple. There’s nothing complicated about what you require to hire employees. All you have to do is do a handshake and then get started you think?

Not quite. Like any other type of business relationship, it’s crucial to set the conditions that you’ll cooperate to avoid conflicts and potential lawsuits. The type of contract you choose to sign has certain important clauses you must include.

What Is an Independent Contractor?

The term “independent contractor” refers to an independent contractor (IC) who is a person who has their own business or trade that provides its services to the public at large. The standard rule can be that an employee can be an independent contractor when the payer is in control of the outcome of the work, but not over the way it is being done or the method of doing it. 

Independent contractors are classified as self-employed in contrast to an employee. They are required to pay self-employment tax for Social Security and Medicare–as well as income tax, however, they have to pay for this by themselves. It is not your responsibility to withhold any money you pay to the individual.

Is This Person an Independent Contractor?

If you’re hiring an individual contractor you must make sure the person you’re deciding to work with has the status of an individual contractor. This means the individual has the freedom to decide what work needs to be completed, at what time it’s required to be completed as well as in some instances the location in which it’s to be completed. If you set the hours during which the employee must be working and you hold the final control over when and how to perform the work, the individual is probably to be an employee. 

What to Include in an IC Contract

The beginning of an agreement is the best moment to make clear your understanding and the best method to accomplish this is to record everything in writing. You’ll be relying on assumptions if don’t record everything, and these assumptions could cause issues and could result in expensive and lengthy litigation in the future.

A contract between an independent contractor should contain several key sections. 

General Agreement and the Nature of the Work

The initial part of the agreement will typically be the statement of both parties stating what they will accomplish. For instance, the business may agree that it will pay the contractor for certain work, and the contractor agrees to perform the work before a specified date and with specific conditions.

The scope of work must be explained in detail. What exactly the contractor is expected to accomplish for you? If they are offering a product, what time will they be able to deliver the item, and in what manner?

Independent Contractor Status

The most important aspect of the contract clarifies that the worker is an independent contractor and not an employee. It outlines an individual’s rights to provide services for other people unless they directly compete or conflict with the duties of the company. It should also state the extent to which the work is performed by an independent contractor or if they may engage other contractors to perform certainly or all the tasks.

This section also provides details of any training that will be given to contractors. An independent contractor is typically an employee the training offered is usually very limited and confined to explaining specifics of the work being performed for the particular firm.

How the Independent Contractor is Paid

This is a common way of ensuring that payments made to the contractor independent don’t include withholdings for tax on income or payroll taxes (including FICA taxes for Social Security and Medicare). The federal and taxes on income from the state are deducted from the payments made to the contractor unless required by additional withholding obligations. The contractor is not subject to FICA taxes are deducted from the contractor’s salary and they’re never set aside by the company for the benefit of contractors.

The federal unemployment compensation or workers’ compensation funds are made by the business on behalf of an employee. And this contractor isn’t eligible to receive benefits for unemployment or workers’ compensation. Certain states may require unemployment benefits or workers’ compensation for ICs and ICs; consult the local employment office for specifics.

The contractor pays income tax on sales, Social Security, and Medicare taxes as a self-employed professional. Certain agreements require that the independent contractor show proof of the amount of these taxes.

Who Pays Expenses

The contract should specify who is responsible for what costs. The contractor usually is responsible for all expenses, including mileage, maintenance of vehicles along with the like; expenses for business trips, such as expenses; office supplies and equipment; licenses fees, permits, and licenses telephone and internet costs as well as payments to employees or subcontractors.

Eligibility for Benefits

The contract should contain an explicit statement that states that the contractor knows that they do not qualify for or are entitled to pension or health insurance, retirement benefits sick pay, vacation or holiday payment, or any other fringe benefits that are typically offered by employers.

Insurance

The contract language must clarify that the business will not offer insurance for liability or auto liability insurance, or other general insurance to the contractor. The contractor won’t be protected by the company’s insurance policy on liability. This clause will protect you in case of accident or loss occurs through the negligence of the company.

Based on the type of services offered to the client by the contractor the contract must mention that the contractor may be required to prove evidence of general business liability insurance. Some firms go even further and require a declaration by the independent contractor. This statement states that the business will be covered or held accountable should there be any injury or loss.

Termination of the Contract

Since it is a contract between an independent contractor and not an employer, the agreement must provide that either party can end the contract by giving or not giving notice, subject to the conditions.

Taking the Contract to Court

What happens if everything isn’t going as planned despite the effort you’ve put in to ensure that you know one another? Most contracts for businesses contain an obligatory arbitration clause that demands that contracts be resolved through arbitration instead of litigation.

Restrictive Covenants in IC Contracts

By what you expect from the work, it is possible to impose strict covenants on the contractor. The most frequent restrictive covenants include:

  • There is also a covenant of non-compete which prohibits her from establishing another firm within a specified period and within a specific region.
  • A prohibition against solicitationrestricting the contractor’s freedom from soliciting employees or customers of the company hiring them can also be beneficial.
  • A non-disclosure clause/confidentiality agreement that restricts the contractor from disclosing company secrets or using secrets for their gain.

Can You Prepare Your Independent Contractor Contract?

There are free templates to use for contracts available on the Internet as well, and you may be tempted to draft your own. However, every business is unique.

Seek the advice of an attorney to draft the independent contractor contract to ensure it is in line with the specific requirements of your business. It is possible to use the template to draft contracts with other independent contractors in the future.

 

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