5 Things You Need in Your Contractor Agreement

How to build an agreement that works for you.

According to research by Intuit, more than 40 percent of U.S. workers will be independent contractors by 2020.

Unlike employees, contractors decide when and where they work, what equipment they use and whether to use subcontractors. Further, while you probably don’t have employment contracts with most of your employees, it is critical that you have written contracts with your contractors because your ability to monitor their performance, terminate their services and own the intellectual property they create, will largely be dictated by contract law, not employment regulations.

Perhaps the most practical approach for startups and small businesses is to utilize a master services agreement (MSA) with one or more attached statements of work (SOW). The MSA will outline the key legal terms that don’t change often while the SOW will outline the services and payment terms that change from project to project and contractor to contractor. Each SOW is attached to and governed by the MSA.

Since it is inevitable that you will find yourself in a dispute with a contractor at some point, you should work with an attorney to reduce your risk by creating a customized, and thorough, contractor agreement template that aligns with your business operations. That way, when the dispute arises, you’ll have a formal contract in place that can be used to speed up the dispute resolution process.

Here are five things your independent contractor agreement template should contain:

Term and Termination

Make it clear how long the MSA will last and how and when each party may terminate the MSA. It is common for MSAs to have an initial term of one to three years with some kind of renewal mechanism. For termination, make sure you have a termination right in case you no longer want or need the contractor’s services, and always limit your contractor’s termination right to require 30 or 60 days’ notice to prevent a burden on your operations if the contractor walks away. Alternatively, you can prevent them from terminating altogether.

Last, outline what happens upon termination—for example, describe how the final payment process will work and how long the contractor has to deliver the work product.

Services and Intellectual Property

The contractor’s services will most often be outlined in individual SOWs. You should be explicit about what you expect the contractor to perform—include deadlines, key performance indicators, app functionality, etc. This is also a good place to include a provision regarding the use of subcontractors. Sometimes they are expressly prohibited. Other times they are allowed but only with your written consent.

Most importantly, always include a section in the MSA that unambiguously states that all work product and associated intellectual property created under the contract will be owned by you, not the contractor. Without this language, the contractor will have a very strong argument that he or she owns all copyright associated with the work product they create.

Restrictive Covenants

If confidential information is changing hands, make sure your MSA includes a section on confidentiality that prohibits your contractor from using or disclosing your confidential information. Further, if your contractor will have direct contact with your clients or employees, you might include nonsolicitation terms to restrict the contractor from soliciting your clients or employees. In most situations, the nondisclosure obligation will survive the termination of the agreement for about five years, while the nonsolicitation obligation will survive for between one and three years.

Payment Terms

While each SOW can include project-specific payment terms, you should consider including default invoice and payment terms in the MSA itself. Most common is a requirement that the contractor submit invoices with net 30 payment terms.

If you change the default terms in a SOW, make sure you do so using unambiguous language. State when and how payments are to be made, whether payments are refundable deposits, whether they are dependent on the contractor hitting certain milestones, etc.

Contractor Status and Legal Terms

Finally, be sure your contractor agreement explicitly states that the contractor is, in fact, an independent contractor. It should state that the contractor will be liable for his or her own tax obligations and insurance needs, and it should require the contractor to indemnify you for anything he or she does wrong, including failure to pay taxes. As with all contracts, it should also end with the “boilerplate” legal terms such as nonassignment, nonwaiver, governing law, etc.

Together with your lawyer, you should be able to create a reliable, and reusable, contractor agreement template to help your business grow.

This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.