Considerations in Drafting Independent Contractor Agreements

by Mary Hodges

An increasing number of businesses are hiring independent contractors to perform services. This type of relationship is attractive to many companies for various reasons. Independent contractors can be hired to complete specific projects or the employer can compensate the contractor for the services rendered without having to worry about extra costs such as unemployment or workers’ compensation insurance, payroll taxes, vacation pay, or overtime. However, because of the increasing popularity of engaging independent contractors, federal and state governments have placed a higher emphasis on proper classification of independent contractors. Disputes can also arise between the company and worker where the individual claims some type of relief available to employees but unavailable to independent contracts. Thus, classification of workers is extremely important because a company that misidentifies an employee as an independent contractor could potentially be exposed to liability under various tax and employment laws.

Because of issues that can arise from classification of workers, written independent contractor agreements have become increasingly important because that agreement can define the relationship between the employer and contractor and can set forth the parties’ expectations. Furthermore, the mere existence of an independent contractor agreement can serve as evidence of the type of employment relationship between the company and individual. Thus, is it essential for these agreements to include certain language or “buzz words” that indicate an intent to create an independent contractor relationship.

When determining the specific language or “buzz words” to include when drafting the agreement, a good place to start is review of how state and federal law define an independent contractor. For instance, an important resource to use is the 20 Factor Test implemented by the IRS when analyzing classification of employees. These factors look to things such as behavioral and financial control of the company. Another employment test that could be considered is the “economic realities test” used by the Department of Labor for challenges asserting employee status under the Fair Labor Standards Act. This test examines whether the individual is dependent on the company it works for or if he or she is in business for themselves. In addition, the primary test used by the EEOC when determining classification is “the hiring party’s right to control the manner and means by which the product is accomplished.” State laws and other government departments may utilize additional tests in other situations affected by worker classification. Before drafting an agreement that pertains to work in a specific state, it is always important to examine that state’s law.

As clear from the various tests outlined above, each employment situation is different and thus, there are no bright-line rules that apply to every scenario in which an independent contractor is engaged. There also may be differences in the standard independent contractor relationship across various industries that should be considered when drafting an agreement. However, one of the more prevailing factors in defining classification of a worker is the degree of control the company has over the person’s work. Therefore, an independent contractor agreement should specifically define the services to be rendered but should be careful not to dictate how those services are to be performed on a day-to-day basis. Indeed, while degree of control is a significant factor that should be properly implemented within an independent contractor agreement, there are several other important provisions that need careful attention and can affect classification.

Once an independent contractor agreement is in place, it is just as important for the employer to preserve the classification by making sure the contractor is treated like a contractor rather than an employee. Remember, the agreement is just the first step in defining the relationship. The conduct of the parties is just as important. For example, if the contract provides that the individual has control over how the services are performed, the company cannot later turn around and instruct the individual how to perform those services.

If you need assistance with drafting or negotiating an independent contractor agreement, or representation in a dispute regarding worker classification, contact the attorneys at Cosgrove Law Group, LLC.