What is an Independent Contractor Agreement?

Independent contractors and employees have distinct sets of rights and responsibilities. To avoid liability and ensure the work is completed to your fullest satisfaction, the agreement you create between your business and an independent contractor must reflect those differences. 

The purpose of an independent contractor agreement is to codify your working arrangement with an independent contractor to avoid conflict or dissatisfaction.

This is what you should know about independent contractor agreements, including why they’re important, what they should include, and best practices for managing them.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice.

What is an independent contractor agreement?

An independent contractor agreement is a contract created at the beginning of a business transaction between an independent contractor and the client for which they’re performing a service. This document specifies the obligations the contractor will have to fulfill in order for the client to consider the work completed to their satisfaction. Critically, it also affirms that the contractor and client are not in an employee-employer relationship.

The IRS defines an independent contractor as a self-employed individual who performs services for paying clients but gets to decide what work will be done and how it will be done. The client only controls the result of the work. 

For example, most plumbers are independent contractors for their clients. They will have you sign an independent contractor agreement before fixing your toilet. This contract will specify that you will pay them an agreed-upon sum when the toilet is fixed, but gives the independent contractor the freedom to fix it however they decide.

Independent contractors have different obligations and legal rights than employees—for example, contractors usually aren’t eligible for benefits, and are responsible for their own tax withholdings. Independent contractor agreements clarify these rights before a transaction takes place. Storing up-to-date versions of all independent contractor agreements you create and/or sign is important for tax and legal purposes.

When do you need an independent contractor agreement? 

You’ll need to produce an independent contractor agreement before any contractor begins providing services on your behalf. 

Before you write up any contract, you’ll have to determine whether the professional working for you should be considered an employee or an independent contractor. You can figure this out by answering the following questions (based on common law rules):

1. Behavioral: Does your company control or have the right to control what the worker does and how they do it?

2. Financial: Do you control the business aspects of the worker’s job (ie: how they get their tools and supplies, how and how much they are paid, etc.)?

3. Relationship: Has the professional signed a contract with your company? Are they receiving company benefits? Will the relationship continue beyond the scope of the current project?

The answers to these questions will determine whether or not the professional is an independent contractor.

Who are the parties involved in an independent contractor agreement?

There are typically three parties involved in an independent contractor agreement: the contractor themselves, the person paying for the services, and the relevant tax authority. 

Unlike employees, independent contractors are responsible for paying their own income taxes. When the time comes to fill out your businesses’ taxes, you should have a copy of all the independent contractor agreements you used in the last fiscal year to prove that you don’t have to pay the taxes involved in the employment of the contractor. Failure to produce this document during an audit could result in penalties.

What should an independent contractor agreement include?

Independent contractor agreements should include the following sections:

• Identifying particulars: The name and contact information for all parties involved.

• Scope: Describe the work the contract is expected to perform. 

• Independent contractor status: Explicitly state that the worker performing the services is an independent contractor and not an employee.

• Confidentiality agreement (when applicable): If the contractor will require sensitive information to complete their work, have them sign a confidentiality agreement as part of their initial contract.

• Restrictive covenants (when applicable): When necessary, you may want to include clauses restricting how the contractor working for you can conduct other business while completing your contract. This could include a non-compete clause or a non-solicitation clause, for example. 

• Payment and expenses: How the contractor will be paid and who is in charge of any expenses incurred during the completion of work.

• Duration of agreement: How long the contract will last and when you will consider it complete.

• Tax specifications: Who will be responsible for paying for taxes resulting from the work completed. 

• Ownership of resulting property: Who will own any property that will result from the contractor’s work. 

• Termination clause: Situations in which the contract may be terminated and the consequences for this termination for all parties.

• Dispute resolution terms: A plan for resolving disputes that may arise between parties during the contract’s term.

Best practices for drafting independent contractor agreements

To ensure the effectiveness and enforceability of your independent contractor agreement: 

• Make your scope as specific as possible: Include your expectations in as much detail as you can. This will help ensure the completed work matches them.

• Always include an end-date: If you need to continue the relationship after this term, you should create a new agreement.

• When in doubt, include a confidentiality agreement: This will help protect your businesses’ proprietary information. 

• Meet with a legal professional on restrictive covenants: To be enforceable, these covenants must be narrowly defined and specific.

• Agree on payment in advance: Do not make your payment section ambiguous; include exactly how much the contractor will be paid and when. 

• Create a template: This will help you save considerable time and keep your agreements consistent.

Manage your independent contractor agreements as easily as possible

Store your template for independent contractor agreements and completed agreements in a centralized database. This will help you save considerable time both drafting new agreements and consulting existing agreements when necessary.

Docusign Navigator, part of Docusign Intelligent Agreement Management (IAM), provides your workplace with a single repository for storing, accessing and analyzing your saved agreements.

Learn more about Docusign IAM.

This content is for general educational purposes only and is not intended, and should not be considered, legal advice. Laws frequently change and this information may not be current or accurate.  Docusign disclaims all warranties of any kind with respect to this material including merchantability, fitness for a particular purpose, or accuracy.  You should consult with a licensed attorney in your area for legal advice.