Essential Terms for Contractor Agreements: Protect Your Business as You Scale

October 14, 2020

Contractors give companies easy access to incredible talent. Independent contract arrangements are flexible, convenient, and allow businesses to take on projects beyond the scope of their ordinary services as they scale. But they aren’t without risk: for the contractor or for the contracting company.

A robust contractor agreement is a good start towards the proper classification of an individual as an independent contractor. These are the essential terms we would typically consider for contractor agreements:

Contractor Agreements and California’s AB5

In light of the recent passage of AB5 in California, companies that hire independent contractors should evaluate whether these individuals are true contractors or whether they would be better classified as employees.

Pursuant to AB5, with a few limited exceptions, a company must satisfy three requirements to prove that a true contractor relationship exists. The company must show that the individual:

1.  Is free from the direction and control of the hiring company;

2.  Provides services that differ from the ordinary business of the company; and

3.  Has and operates an independently established business of the same nature as the work performed.

Your contractor agreement plays a crucial role in outlining the scope of a contractor’s services – and will be used to as the starting point in proving proper classification of a contractor. To minimize the risk of assessed penalties and past wages for misclassifying a contractor, companies should strongly consider including the following points in any contractor agreement:

The contractor:

–  Has the right to set his or her own working hours;

–  Controls where and how the work will be completed;

–  Will be paid based on the completion of a project (preferably based on milestones, not an hourly rate); and

–  Is responsible for costs incurred in the performance of the work.

Confidentiality Clauses in Contractor Agreements

Confidentiality clauses protect your company’s proprietary information from your competitors. No doubt you have a confidentiality clause in your employment agreement (if you don’t, get in touch!). There’s no reason to leave it out of your contractor agreements.

This clause should prohibit the contractor from using or disclosing any confidential information revealed to the contractor for the duration of the contract for services. The term ‘confidential information’ should be carefully defined in the agreement too.

Graphic displaying intellectual property rights in independent contractor agreements (man holding a copyright symbol)

Outline Ownership of Intellectual Property

Unless otherwise outlined in the contractor agreement, any intellectual property a contractor creates while undertaking projects for your company belongs to them.

Your contractor agreement should specifically outline that intellectual property created under the umbrella of the project is assigned to your company. This clause prevents contractors from profiting from or licensing ideas they had while performing services for you – and potentially even selling them to your competitors.

These clauses are relevant for technical and expert contractors and for administrative, business, or non-technical contractors – who could create company documents, advertising materials, or marketing plans throughout your contractual relationship.

Define Dispute Resolution Processes

Defined dispute resolution processes are an essential term for contractor agreements that minimize costs associated with any disagreements. These clauses also provide certainty and direction for the parties involved.

The provision should set forth alternative dispute resolution methods, such as mediation, to mitigate the costs of solving disputes.

Robust Contractor Agreements from Experienced Corporate Attorneys

CGL is a full-service law firm with experienced corporate attorneys on hand to help your business with its contractor agreements. In fact, our flexible offering is built on a remote workforce comprising a pool of talented independent contractors, which we pull from as needed.

Our attorneys have BigLaw experience – while our fully-distributed model allows us to offer our services at a fraction of the price of traditional law firms.

Disclaimer

The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site do not create an attorney-client relationship between CGL and the user or browser. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

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