Independent contractor agreements or consultant agreements are perfect for when a self-employed individual contracts with a company to provide their services NOT as an employee. Organizations making use of independent contractors should be aware of the difference between an independent contractor and an employee and the risks involved with mischaracterizing an employee as a contractor (for more information on this topic see the previous post, what is the difference between an independent contractor and an employee?). However, when an independent contractor agreement or consultant agreement is the appropriate contract to use for your business, there are key issues you will need to address.
This post will provide five key elements for a business to include when they are hiring a staff member to provide services as an independent contractor.
1. A Definite Term
Because you want to avoid a finding that your contractor is in fact independent and not simply an employee masquerading as an independent contractor to avoid minimum standards legislation such as the Ontario Employment Standards Act or the complications of withholding income tax from the contractor, you’ll want to set a defined length of time the contractor will be working with you for.
This defined period of time can be for a period of months or until a specific project is complete however, the longer your contractor works for you (including by repeatedly extending the length of the contract) the more likely it is that your contractor will be found to be an employee. For this reason, organizations making use of an independent contractor should set a defined term for the length of the agreement on either a project basis or fixed term. Throughout that period the contractor should be free to engage in work for other businesses to increase the chances they will remain classified as an independent contractor (but more on that below).
2. Control over method and manner of services
As with your business, when you provide work for a client, you generally have control over the method and manner of how the services will be provided. Exercising control over an independent contractor when it comes to how the contractor provides you with services such as setting working hours or determining what tools the contractor must use to provide the services, generally indicates an employment relationship and should be avoided as much as possible. This is why your independent contractor agreement should allow for the contractor to outsource work (where appropriate) and provide that the contractor will furnish, at the contractor’s expense, the equipment, supplies, tools, or other materials that will be necessary for the contractor to complete the services.
While at first glance, you may want to prevent your contractor from providing their services to any of your competitors, one of the worst things you can do is restrict your contractor’s ability to provide their services to other businesses. As the name suggests, independent contractors are “independent”. As a business owner, you have the freedom to choose who you do business with. If your contractor is independent (and therefore technically a business owner themselves) they should be free to offer their services as much as possible.
Placing limitations on who the contractor can do business with will greatly increase the chances that your contractor can be found to be an employee and you on the hook for severance pay or income tax your contractor failed to remit. For this reason, when it comes to independent contractors non-competition provisions should be avoided or (where necessary) only go as far as reasonably necessary.
In contrast to the issue of non-competition provisions above, you will want to protect your independent contractor from revealing or taking advantage of any confidential information they receive in the course of providing your business with their services.
Confidential information can include all types of information conveyed to the contractor whether spoken, written, printed, electronic or in any other form. While employees generally owe a duty to their employer not to reveal or take advantage of confidential information obtained during the course of their employment, the same duty is not owed by independent contractors. This is why it is important to include confidentiality provisions in the independent contractor agreement to protect your business’s trade secrets and to tailor confidentiality provisions to your specific business and industry. Where maintaining confidentiality is particularly important, business owners may want to make use of a more robust confidentiality agreement or non-disclosure agreement attached as a schedule to the independent contractor agreement.
5. Indemnification and Insurance
Indemnification provisions can provide protection against any mistakes or omissions made by the contractor in the course of providing their services to your business. In essence, by agreeing to indemnify you, the contractor is agreeing to compensate you for certain types of damages or liability to your business that is caused by, for instance; the contractor’s breach of confidentiality provisions, infringement of a third party’s intellectual property rights, or consumer data breaches.
Indemnification provisions provide recourse against the contractor for negligent or careless actions and provide an incentive for the contractor to exercise extra caution when performing their services under the agreement. If you are presenting the independent contractor agreement to the contractor to sign on a take it or leave it basis, you can and should include indemnifications to add an extra layer of protection for your business.