Independent Contractor Agreements: What Every Small Business Owner Should Know

Independent contractors are rapidly gaining in popularity among small business owners. While there are numerous advantages to classifying workers as independent contractors instead of employees, misclassification can result in stiff fines and penalties. There are many important and critical distinctions between an employee and a contractor. While there is no one factor, in particular, that will determine the relationship, a properly drafted independent contractor agreement is a good way to define the relationship.

Define the relationship.

If the business owner and the contractor intend to form an independent contractor relationship, it's important to define that relationship clearly in the independent contractor agreement. The agreement should be in writing and signed by both parties. It should clearly state the nature of the relationship, the term (is it a single project? is it a one-month assignment? is it renewable? can it be terminated?), the compensation (including how and when payment is made), and who is responsible for expenses.

Who's in control?

An employer has control over where, when, and how an employee performs the job. An independent contractor is in control of the job. The independent contractor agreement should clearly state the contractor is solely responsible for the method of provision of services. In a true independent contractor relationship, the contractor may work from any location, at any time he chooses, and in any way he chooses. This includes the ability to hire his own employees or assistants.

Equipment and materials

An employer will provide an employee with all equipment and materials necessary to complete the job. An independent contractor should be responsible for supplying her own equipment. The independent contractor agreement should stipulate that the contractor is responsible for providing and maintaining all needed equipment. Additionally, the contractor should solely determine the method by which the services are provided.

Can the contractor compete?

The ability to compete with the business, and work for another business, is a characteristic of an independent contractor. While most employers require an employee to refrain from competing with the business and to advance the interests of the business, an independent contractor is a business in and of itself. Therefore, the contractor, unlike the employee, should be able to work for competitors and even compete directly with the business. Business owners may be tempted to include a non-compete clause in the independent contractor agreement; they shouldn't. Instead, the agreement should include a non-disclosure of confidential information provision.

What are the benefits?

Employees generally expect benefits in the form of vacation days, retirement plans, and health insurance. An independent contractor will not receive any of these. The independent contractor agreement should make that clear.

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This post is for informational purposes only. It is not intended to be, nor should it be construed as legal advice. Always consult an attorney, licensed in your state, before taking legal action.