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Is an Independent Contractor Agreement Needed When Outsourcing a Job?

Many businesses prefer an informal approach to utilizing freelance or contract employees, but too casual an attitude can bring potential problems down the road. Read why you may need an independent contractor agreement and what you should consider including in the document.
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Many businesses prefer an informal approach to utilizing freelance or contract employees, but too casual an attitude can bring potential problems down the road. Any type of oral agreement between a business and independent contractor risks misunderstandings and misinterpretations regarding (a) the type of work needed to be done; (b) the amount of compensation involved; and (c) what happens if conflict occurs between the two parties.

Just as importantly, the IRS and the DOL look unkindly on businesses that purposely misclassify employees as independent contractors in an effort to skirt payroll taxes and compliance with minimum wage and overtime laws. That's why businesses should consider whether to develop a written contract specifying that the worker will not be treated as an employee for federal tax purposes and that Form 1099 MISCs will be filed for independent contractors.

What should be included in an independent contractor agreement? Here are some elements you should consider including:

Scope of Work

It's important to clearly define the scope of work a contractor is performing, perhaps chiefly to distinguish these services from responsibilities your employees are paid to undertake.

Legal and Tax Obligations

Since a contractor is responsible for his or her own business, you're not accountable for legal or tax obligations affiliated with their profession. While perhaps an obvious point, this should nonetheless be clearly delineated in the contractor agreement.

Payment

Your employees are paid on a regular payday, perhaps on a weekly, bi-weekly or semi-monthly basis. Contractors, however, generally invoice the company for their services or agree upon a project-based fee. Payment arrangements should also be clearly laid out in the agreement.

Expenses

Clarify that all expenses are the responsibility of the independent contractor.  While this is a standard practice for a correctly classified independent contractor, putting it in writing is recommended.

Employee Benefits

Again, it's usually understood that contractors are not eligible for employee benefits including but not limited to workers’ compensation insurance, unemployment insurance benefits, health insurance, disability insurance, and vacation. It's best, however, not to assume this is addressed as part of an "unspoken" agreement. Put it in writing.

Delivery Schedules

If you're hiring a contractor to undertake a specific project or job, don't simply wait for him or her to deliver the final product or service when they feel like it. Be specific about the type of work being done, as well as planned delivery schedules or deadlines. Do you want the relationship to begin and end on a certain date? Include all of these factors in the agreement.

Intellectual Property

Sometimes an independent contractor must have access to a company's intellectual property or other sensitive proprietary information. Consider having the contractor sign a confidentiality agreement which covers the non-disclosure of trade secrets.

When a business and independent contractor embark on projects based only on verbal agreements, there's a risk that a dispute may end up in court. So you should first be sure you have correctly classified the worker as an independent contractor.  Then, before the independent contractor provides services to your company, consider creating a written document outlining each party's responsibilities and obligations. Consider having all independent contractor agreements, as well as other contracts or agreements you may ask independent contractors to sign, reviewed by legal counsel. It can be a safer and more professional approach to getting things done.

 

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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.

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