Contract School: Independent Contractors

May 27, 2021 | Business Law

It helps to be on the same page in any relationship—as seen in any heated discussion about who takes out the trash or cleans up after dinner or fixes the clogged sink drain.

And a good contract can go a long way toward creating a smoother business relationship by defining services to be performed, ensuring legal protections, and clarifying roles, expectations, and responsibilities. 

It’s why you take care not to use non-specific forms with employees and clients—and why you should use high-quality legal agreements for independent contractors, too.

Independent contractors aren’t employees

Before you get started on your contract, make sure that the person you’re about to sign with meets the legal requirements in Texas for being an independent contractor (and not an employee). It’s not about what either of you would like to call the worker—it’s about whether or not the working relationship meets state standards.

If you’re hiring an independent contractor, then you’re hiring for a project. The end results need to meet the criteria set out in your contract, but you don’t have any control over how the project is done. Independent contractors are self-employed and can work for anyone they choose to.

Scope of work

Your contract should include a detailed description of the work to be done. This is extremely important, as it’s what you’ll have to fall back on if you don’t like the results. You’ll also want to establish a completion date, conditions, and pay for the project.

The contractor may ask for a way to address scope creep, which is when you or other officers at your company change the scope of the project once the contractor has already started.

Define deliverables, timelines, and actionable metrics, too. Setting expectations is key in working with anyone! 

Independent status

The contract should specifically address the contractor’s independent status—and that they aren’t an employee. This includes acknowledging their right to work for whomever they please, so long as it doesn’t directly compete with the project you’ve hired them to do.

It also acknowledges that they won’t receive any benefits, such as health insurance or sick pay.

Pay

This section should explicitly address how the contractor will be paid, and that since they aren’t an employee, you don’t need to withhold any taxes for them. They’ll likely ask you to specify how you’d like to be billed and will want to set net terms, or the amount of time in which you have to pay them after receiving an invoice.

In Texas, you don’t need to make unemployment insurance payments when working with independent contractors. And most private businesses don’t need to pay workers’ compensation insurance for contractors, either, so long as they’re not working with government entities. You will likely need to issue a 1099 to the contractor, so make sure that your tax professional is aware of this fact and that you get the appropriate information from the contractor before you make the hire.

Expenses

Typically, the contractor covers expenses, including travel, tools, equipment, fees, licenses, subcontractor payments, employee wages, and more.

Liability

This section should state that your business won’t provide liability insurance for the contractor, including auto insurance or general insurance. It’s key to protecting you if the contractor gets injured on the job or suffers some other loss while completing the project. 

In some instances, you may want to require proof that the contractor has business liability insurance.

Termination and mandatory arbitration

Be sure to include how the contract could be canceled early. Common reasons are nonpayment on the business’s part, breach of contract by either party, or the contractor’s work not matching up to what was outlined in the contract.

In general, the contract should also include a mandatory arbitration clause, so that disputes can be settled by arbitration, rather than costly litigation.

Non-disclosure and non-compete

Depending on the type of work the contractor is doing for you, you may want to include non-disclosure and/or non-compete clauses in the contract.

Non-disclosure clauses, also known as confidentiality agreements, specify that the contractor can’t disclose or use your business’s secrets for their own benefit.

A non-compete clause prevents the contractor from establishing a competing business within a certain timeframe or area. Note that contractors will object to wording that prevents them from moving on to the next client, as that’s how their business works.

In some situations, you may want to include a non-solicitation clause, so that the contractor can’t bring your customers or employees with them when they finish your project.

We must end with the caveat that the terms of any non-disclosure and non-compete must be reasonable to be enforceable. Each state seems to have its own opinion about what constitutes reasonable terms. so double-check with your attorney first.

Specifics matter

When it comes to working with independent contractors, the specific details matter immensely. General forms can’t provide the same level of security—so take time to talk things through with your business attorney.

If you have questions about contracts or other business matters, contact us. Our experienced Texas attorneys can guide you through the process.

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