1099 Independent Contractor Agreements: 11 Things to Know
An independent contractor agreement is a legal document signed by your company and 1099 workers to outline terms and conditions of work. The agreement clarifies the nature of the relationship (for example, that the independent contractor is working on a per-project basis or for a fixed time period vs. being hired as an employee) and also indicates what is expected. This should include the scope of work to be performed, any confidentiality agreements, ownership of work, payment terms, payment schedule as well as any operational or legal parameters unique to your business. It should also provide guidelines for handling changes or disagreements should they arise during the course of the relationship.
Why should you use an independent contractor agreement?
It's important to work with your legal counsel to draft a contractor agreement template that can be easily utilized across your contractor workforce and customized to protect your business from liability when engaging with independent contractors. You should never assume that just because the work might be minor, there's no need for an agreement to be in place. The one time you don't use an independent contractor agreement, a disagreement could come up and you'd find yourself in a communication breakdown at best, and legal trouble at worst. Independent contractors are wise to insist on having contracts with their clients for all the same reasons.
Independent contractor agreement best practices
Having a standard independent contractor agreement or contractor agreement template that can be customized for workers is common practice. Then you can easily customize the document to the individual needs of a project or a particular worker or the changing needs of your business. Here are some items to consider:
1. Establish the contractor relationship
This is language often stated up front that indicates the independent contractor is not an employee of your company. As a contractor, they will not receive benefits such as health care, retirement contributions or disability, for example. Many businesses often mention here that the independent contractor will need to complete and sign an IRS Form W-9s. Additionally, the independent contractor is responsible for filing and paying tax on all payments; your company is not typically responsible for any employment tax withholdings on behalf of the contractor. There could be a federal or state withholding obligation if the independent contractor fails to provide your company with a valid taxpayer identification number (TIN).
2. Define length of engagement for independent contractor jobs
Independent contractor agreements may be per-project with an agreed upon deadline and date until which the contract is valid, or they may be ongoing, until one party terminates the agreement. If you're working with independent contractors on a long-term basis, say for a period of six months or a year, be sure to indicate the end date in the contract. Also note on your calendar when it's time to re-evaluate contracts with individual contractors whose contracts you plan to renew.
3. Determine scope of work and deliverables
The more specific you are in this section, the less chance of misunderstanding or miscommunication during the project or when it's time for payment. Indicate exactly what is expected, whether a set amount of hours or a specific deliverable, and by what date. Be clear about what happens after the deliverable date as well:
- Will there be a review period?
- Will there be revisions? (e.g., in creative fields)
- Will others need to sign off on the deliverable?
If there are multiple items included in the deliverable, break down each item and list them out. If an independent contractor is providing consulting services, indicate a list of the types of work that will be performed and what goals you plan to achieve as a result.
If the work is ongoing and location/hours-specific, make sure the language reflects this.
4. Agree on payment terms
Payment terms are usually Net 15 or Net 30, meaning you pay the independent contractor within 15 or 30 days, respectively, of when you receive the invoice. This depends on your company's payment processes, of course, and your general policies around paying contractors. If you have flexible payment terms and are open to negotiation, your independent contractors will thank you for it. Some contractors may ask to be paid Net 7 or even upon receipt of invoice. This is entirely between you and the worker to negotiate, but whatever you decide, be sure to put it clearly in writing.
You should also agree on how the contractor will be paid. Whether it's via ACH, pay card, or an electronic payment method, this should be laid out in the agreement.
5. Professional obligations
Depending on your industry, there may be certain standards and expectations all independent contractors should uphold and would be worth noting in your independent contractor agreement. Examples include:
- Provide or perform work yourself (no subcontracting)
- Use only secure Wi-Fi systems
- Perform work on-site only
- Use professional Zoom background
- Create original work (no plagiarism)
Add any other expectations unique or relevant to your company. For example, does your project require liability insurance? Certain types of certifications or licensing? You may want to build a clause into the agreement that confirms the worker has their own general liability insurance or cyber risk insurance.
6. Maintain confidentiality
Independent contractors who work for you may have existing relationships with your competitors, or may develop a relationship in the future. It is standard practice to include a confidentiality statement (sometimes referred to as "non-disclosure agreement") in independent contractor agreements to protect the confidentiality of a company's proprietary information and help avoid conflicts of interest. The agreement should specify that all work performed by the contractor on behalf of the business, and any and all materials and information shared while working for you, remains confidential, and that this is a legally binding agreement to do just that.
It's common for independent contractors to want to show a portfolio (if they're a designer or content creator, for example) or for an IT professional to want to talk about their experience if they're applying for another position. If you have specific concerns around possible sharing of proprietary information, you may want to expressly specify that contractors may not share about the work in any future engagements or portfolios.
7. Put in a non-solicitation clause
It happens. Sometimes the people you hire are so talented and have such a great rapport with your own clients that they develop a relationship independently of you. Talk to your counsel about whether it may be appropriate to include a non-solicitation clause in your independent contractor agreement to ensure that for whatever amount of time you indicate (commonly one to two years from the last day the person works for you), that independent contractor cannot independently solicit work from your clients.
8. Indicate grounds for termination
Businesses as well as independent contractors need an "out" from the agreement in case things aren't working on either side. This is generally the right to terminate "for any reason, at any time." Although it sounds harsh, it could be simply because the job fell through and you no longer have need for the worker. Or the contractor has a family emergency and they can no longer perform the work as agreed. Make sure to include the amount of advance notice agreed upon to terminate.
You may also want to state how much you will pay if partial work has been completed and the contract is being terminated. One-half of the total, for example, may be reasonable, or a certain percentage of the total based on how far along the worker is in the project, may make sense.
9. Determine how you'll handle disputes
Most businesses include some kind of provision relevant to their state laws around what to do if there is a discrepancy or a dispute to be handled. Consult with your legal advisor on standard language for this section.
10. Develop a contractor agreement template
For the business that will be onboarding and managing contractors at scale, a reusable and customizable independent contractor agreement template can be highly valuable. Not only does it hold the various parties across your organization to the same business standards for how they will use their contractors (regarding qualifications, credentials, and worker requirements), but it allows for a more streamlined onboarding experience for workers. By partnering with an internal legal team, an organization can pull together a buttoned-up and compliant template that upon completion, can be shared across the organization and shared with workers who are ready to sign and get to work.
11. Move to Using Electronic Contractor Agreements
For many businesses, there are oftentimes multiple groups within the organization that use contractors, so it is essential to have company-wide policies that dictate how workers should be screened and engaged. Given the high number of contractor agreements that an organization would likely have, utilizing an independent contractor agreement template and having a digital process for collecting and storing them would be recommended. In addition, there seems to be an increased focus on mandating written agreements between contractors and the business they service – see the requirement in New York state – which can cause compliance headaches for those organizations not taking advantage of a digitized process. Providing an easy way for contractors to view and sign agreements, like through a contractor app, will also help ensure workers are onboarded quickly and efficiently.
Learn more
WorkMarket by ADP® recently partnered with Worldwide Business Research (WBR) Insights – a world leader in industry-driven thought leadership conferences – to perform a survey to better understand how businesses are utilizing independent contractors (1099 workers, freelancers), and the challenges and opportunities they face.
This inforgraphic outlines some of the key insights from the report.
