Best Practices for Independent Contractor Agreements

Whether you're a small business owner or creative freelancer, at some point you're bound to seek the help of other business owners or freelancers to assist you.

Working with others on a 1099 basis, or independent contractor basis can be a smart, flexible way to scale your business without the commitment that comes with full-time employees. 

But there’s a catch—misclassifying an employee as an independent contractor can lead to serious legal and financial consequences. So, how can business owners ensure they’re getting it right?

In this guide, we'll walk through the key things to keep in mind when working with independent contractors to avoid the risks of misclassification and establish solid working relationships that respect the freedoms of your contractors. 

1. Understand the Difference Between Employees and Independent Contractors

The main distinction between employees and independent contractors boils down to the level of control. An employee typically works under a company's direct supervision, following its rules, schedule, and procedures. Independent contractors, on the other hand:

• Operate independently.
• Set their own hours.
• Use their own tools and resources.
• Have multiple clients.

Different states have different laws regarding the classification of workers. For instance, some states use the ABC Test, which is essentially the strictest test for classifying contractors. Under this test, a worker is considered an employee unless:

• They are free from the company’s control in performing their work.
• The work they do is outside the usual course of the company’s business.
• They are customarily engaged in an independently established trade or business.

If your state uses this test, it’s important to pay extra attention to the second point. For example, if your business provides marketing services and you hire someone to handle digital marketing for clients, that person may be classified as an employee in some states, unless a statutory exemption applies, such as a business-to-business exemption. 

2. Use a Well-Written Contract

A well-drafted independent contractor agreement will help establish the correct relationship to avoid misclassification. The contract between you and your contractor is very important - hence why they're called contractors. It is the first line of defense and reference if misclassification comes up.  Make sure your contract you have your contractors sign:

• Specifies the contractor's independence: Clearly outline that the individual will be responsible for how and when the work is completed, and that the relationship is one of a contractor.
• Defines the project scope: Include details about the work to be done, the specific deadlines, and term of the agreement. Contractors should not be providing services indefinitely, because this then starts to look like an employee relationship. 
• Outlines the payment structure: Compensation should avoid seeming like a salary - pay should be project-based, and/or hourly and invoiced appropriately by the contractor. A flat monthly payment, for indefinite services might once again start to leave the impression of an employee rather than a contractor.
• Clarifies tools and expenses: Specify that the contractor will use their own tools, equipment, and be responsible for their expenses.
• Details transfer of any intellectual property: If your contractor is creating anything for you, say a graphic design, then you want to make sure the proper intellectual property rights are being assigned whether that is a full transfer or license. 

3. Give Contractors Control Over Their Work and Avoid The Perception of Them Being Part of Your Business

One of the biggest red flags for misclassification is if a contractor’s daily work environment feels too much like an employee’s, or appears to be an employee of your business. To avoid this:

• Avoid dictating work hours: Let the contractor decide when and how to complete tasks.
• Stay hands-off with methods: Instead of controlling how the contractor performs their work, focus on the final deliverable.
• Allow for freedom of project management: Give them the freedom to subcontract or bring in extra help if necessary.
• Avoid making them “part of your team ”: Don't give your contractors a profile on your website as part of your team, and don't give them company emails or uniforms to wear. This blurs the lines to consumers and clients as to whether or not the contractor is an employee of yours - big no-no!

4. Conduct Regular Audits

Over time, your working relationships with your contractors may evolve. Business owners need to routinely review these relationship to help identify potential misclassification risks before they become an issue. During your audits, ask yourself:

• Has the scope of work changed?
• Is the contractor still maintaining independence?
• Have the roles and responsibilities started to look more like an employee’s?

If you spot any red flags, consider revisiting the contract or adjusting how you work with the contractor to avoid misclassification, or simply make them a part-time or full-time employee! 

5. Consider Professional Legal Help With Your Contractor Agreements

Creating a solid contract is made easy with contract templates. Templates provide a reliable foundation to protect your interests and ensure your agreements are clear and legally sound. Be careful pulling templates from the internet though; make sure that whoever drafted it knows what they were doing. While these can definitely get you started, having a legal professional review your contract—especially for complex projects—adds an extra layer of protection. This step helps identify potential red flags and ensures your contracts effectively safeguard your rights.

Bringing on independent contractors can be a win-win situation when done right. It allows you flexibility and access to specialized talent while giving contractors the freedom to manage their work. However, misclassifying employees as contractors can result in hefty penalties and back taxes. By keeping these best practices in mind and consulting legal professionals when in doubt, you can avoid common pitfalls and build successful, compliant contractor relationships.

Looking for help crafting the perfect agreement for your contractors? Check out our Independent Contractor Agreement Template for only $95. For even greater peace of mind, consider our legal subscription. This affordable service offers ongoing legal support, giving you access to expert business lawyer advice when you need it most - for only $79 a month! With both our templates and the subscription, you can confidently navigate your legal needs and focus on growing your business.