Contractor Management 11 min

Independent contractor agreements: a guide for businesses

Written by Pedro Barros
Pedro Barros

Share

share to linkedInshare to Twittershare to Facebook
Link copied
to clipboard

If your business plans to work with an independent contractor, you need to understand how to draw up a contractor agreement. This agreement is legally binding and sets out what is expected of each party, making it a crucial document — especially if something goes wrong.

But what exactly should an independent contractor agreement contain? How can it protect your business? And, if you’re working with an overseas contractor, how does that affect the agreement?

In this article, we’ll explain how to create an agreement, and discuss what to include — and what to avoid.

So let’s dive right in.

What is an independent contractor agreement?

As mentioned, an independent contractor agreement is a legally binding contract between an individual contractor and a company (i.e. your business). It outlines the key elements of the collaboration, such as:

  • The scope and nature of the contractor’s role

  • Payment rates and schedules

  • Intellectual property (IP) ownership (if relevant)

  • Confidentiality requirements

It’s an important document for several reasons:

Complying with local labor laws

When it comes to independent contractors, different regions may have different laws and regulations, particularly in relation to things like taxes. For example, if you work with a US contractor — even if they’re not based in the US — you must fill out and submit a 1099 form to the Internal Revenue Service (IRS).   

By having a formal, mutually-agreed agreement in place, both parties are clear about what their responsibilities are, and what their liabilities are. 

Avoiding misclassification

If your relationship with your contractor starts to resemble an employee/employer relationship, you may create a misclassification risk. This can have serious consequences for your business, including penalties, fines, and reputational damage.

A formal agreement helps to avoid this. While different countries have different definitions of what exactly constitutes misclassification, you can protect both you and your contractor by outlining key areas of the working relationship such as:

  • The work schedule. Employees typically have a set schedule (i.e. Monday to Friday, 9am to 5pm), while contractors set their own hours.

  • Equipment and resources. Employers usually provide equipment for employees to complete their work, whereas contractors are responsible for procuring their own.

  • Pay. Most employees receive regular paychecks, with taxes and social contributions withheld. Contractors are responsible for filing their own taxes.

  • The length of the relationship. Employment contracts are generally ongoing (unless explicitly stated), whereas contractor agreements expire upon completion of the job. If your contractor has an indefinite contract, this could be seen as misclassification.

  • Benefits. Employees are entitled to statutory benefits, whereas independent contractors (in most cases) are not.

Ensure that your agreement clarifies these expectations. For example, if you’re hiring an independent contractor to create a logo for your business, the agreement might state that:

  • The job should be completed by a certain date

  • The contractor is responsible for providing their own software and tools

  • The agreement will be completed upon delivery of the final logo and receipt of payment

  • The contractor will be paid a one-off fee for the job (as agreed) and will receive no other benefits or compensation

To learn more about employee misclassification — and how to avoid it — check out our in-depth, expert guide.

What should be in an independent contractor agreement?

In most cases, there’s no one-size-fits-all template for independent contractors. Standard contractor agreements depend on the nature of the business, the role the contractor is performing, and any local laws that apply.

However, there are several things that should always be covered in any contractor agreement, as follows: 

Any independent contractor agreement should clearly state the beginning of the contract, the date of the agreement, and the identities of the two parties involved — including any relevant business details.

This section should clarify the legal relationship between the two parties as a client/contractor relationship, as opposed to an employer/employee one.

It should also clarify what will constitute the end of the agreement. Usually, an agreement is deemed to be complete once the contractor delivers the agreed-upon service or task, but it could also be a specific date, or conditional upon a particular event. Either way, make sure it is stated clearly in the contract.

2. The contractor’s obligations

In this section, you will need to lay out what exactly is expected of the contractor. The more detail you can provide, the better (although it doesn’t have to go into minute specifics about every facet of the job). For example, if you’re hiring a content writer for your company blog, it might be too vague to say:

“The contractor will write informative and entertaining articles for the client’s company blog.”

Instead, you might want to draft something like:

“The contractor will provide three, 2,000-word blog posts in line with the client’s company style guide (attached separately). Topics will be provided in advance by the client.”

This section will vary more than others, as it should be as specific as possible to each contractor and their respective subject matter expertise. In some instances, you may want to leave little room for interpretation from the contractor’s side. However, if you know and trust the contractor, you may be willing to provide more creative freedom.

Consider any variables unique to your business or the task itself, too. For instance:

  • Does the scope of work include anything besides material deliverables (i.e. services provided)?

  • Does the contractor need to obtain a special license or permit to do the work?

  • Should the deliverables be provided in a specific way or format?

Note that this section will usually take up the bulk of the agreement.

3. Payment terms, expenses, and reimbursement policies

Your agreement should clearly state the terms and conditions of payment, including the following:

  • The agreed-upon pay structure. This usually depends on the nature of the job; in some cases, it may be more appropriate to pay a one-off flat fee, and in others the contractor may want to be paid hourly or daily.

  • The frequency of payment. In some instances, the contractor may demand payment in multiple installments (e.g. 25% in advance, and the rest upon completion). If the contractor is providing a repeat service, they may want to be paid monthly or weekly.

  • The method of payment. This could be through bank transfer, a digital provider, or another method. Note that, if your contractor is abroad, you’ll need to account for currency and foreign exchange rates (alternatively, you can use a contractor management platform to remove this burden for you).

  • The procedure for invoicing. In most cases, independent contractors will provide you with an invoice for their work before you pay. In the agreement, you should outline the process for this, including when (if relevant) the invoice should be submitted by (e.g. by the 25th of each month).

If required, your agreement should clarify how your contractor will be reimbursed for any expenses incurred, such as travel. If the contractor is managing a budget on your behalf (i.e. they are running PPC ad campaigns for your business), you should also establish whether the contractor requires pre-approval before spending.

4. Confidentiality, NDAs, and exclusivity

Independent contractors are not employees, and so there is nothing stopping them from working with your competitors. As a result, you may need to insert a confidentiality clause (or similar) to protect your trade secrets and IP.

For instance, you may want to insert an exclusivity clause, which restricts the contractor’s ability to work with other parties during the contract period. However, the contractor is under no obligation to sign this, and may opt to refuse.

Alternatively, you can insert other confidentiality terms, such as:

  • Restrictions or limitations on the contractor’s ability to use any confidential information or IP developed during the contract term in other projects or for other clients

  • Conditions that protect your company’s trademark, trade secrets, or business processes

Note that exclusivity clauses should be used with caution as, in many countries, they could be considered restrictive covenants and may be unenforceable if they are deemed to be in violation of antitrust laws.

5. Ownership of work product

IP is an important area to cover, especially if you are working with overseas contractors. This is because IP laws may differ in the contractor’s country, and leave you exposed to potential issues.

The ownership clause will outline the rights and responsibilities of both parties regarding any IP created during the project, including any patents, trademarks, copyrights, and trade secrets.

It should define the following:

  • Who owns the rights to any IP created by the independent contractor during the project

  • Whether the independent contractor will have the right to use the IP after the agreement ends and, if so, in what capacity

  • Which obligations (if any) the independent contractor may have to protect and register the hiring party’s IP created during the contract

  • Obligations the independent contractor may have regarding pre-existing IP that the independent contractor may bring to the project

IP law can be complex, so it’s a good idea to have your legal team review this section of the contract. If you don’t have an in-house legal team, Remote can help you protect your IP abroad.

This section of the agreement should clearly state that the contractor is responsible for filing and paying their own taxes and state contributions, as well as obtaining their own insurance and equipment. This is important for avoiding misclassification risk, and for complying with tax and labor laws.

If the contractor’s services involve some level of risk, requiring proof of liability insurance can help shield your company from potential lawsuits.

The agreement should also clearly state any liability that your business won’t be held responsible for, such as any damages or losses that result from the independent contractor’s actions or omissions. This can include liability for things like property damage, personal injury, or third-party claims.

7. Termination of the agreement

Ideally, your contractor will deliver the agreed-upon service in the time specified, and everyone will be happy. However, this doesn’t always happen.

As a result, it’s a good idea to include a termination clause that defines the conditions and procedure for ending a contract early. Note that this can work both ways, and that the contractor may also want to include a termination clause.

A termination clause should include the following:

  • A detailed description of the conditions under which the agreement can be terminated by either party (e.g. for a breach of contract or non-performance)

  • Any notice requirements that must be met before the agreement can be terminated

  • Obligations that the parties will be required to fulfill upon termination, such as returning resources, destroying confidential information, or submitting a final report

  • Provisions for resolving disputes or addressing any outstanding issues that may arise upon termination

What about international contractors?

If your contractors are all in the same country as you, then it’s possible to use standardized agreements (although in some countries, such as the US, laws and regulations can still differ between individual states or provinces).

However, things are more complex if your contractors are based abroad — especially if they are spread across different countries. There are different tax and labor regulations to consider, currency and exchange fees to account for, and even potential language barriers.

This is why it’s recommended to use a contractor management platform, like Remote’s. We provide bilingual contractor agreements for specific countries, each of which are vetted by our in-country experts to be fully compliant with that country’s local tax and labor laws.

The platform also allows you to:

  • Manage all your international (and domestic) contractors in one place

  • Receive and pay invoices in one click — in multiple currencies

  • Simplify your reporting and tax filing, including 1099s

Learn more about Remote’s Contractor Management platform.

Independent contractor agreements with Remote

To hire an independent contractor, you must have an agreement that is robust, clear, and compliant for both parties — especially if they are based abroad. Remote can help you produce tailored, fully-compliant agreements quickly and easily, allowing you to focus on choosing the right contractor for your business.

To learn more about hiring, onboarding, and paying independent contractors, check out our in-depth, expert guide.

Alternatively, try our Contractor Management platform for free! Start your free 30-day trial here, and begin onboarding today.

Onboard, manage, and pay global contractors in one click

Sign up with Remote for locally compliant contract templates at just $29 per contractor per month, with no hidden fees.

Subscribe to receive the latest
Remote blog posts and updates in your inbox.