10 Tips on Drafting an Independent Contractor Agreement

In our previous PayDay titled “Employee or 1099-Be Careful“,  we discussed numerous factors which the IRS and DOL analyze to determine whether a worker should be classified as an “employee” or an “independent contractor”. If you decide that  you will classify the worker as a “1099 contractor”, it is VERY IMPORTANT that you draft a written “independent contractor agreement” in which you “spell out” the many provisions which strengthen your position that the worker is indeed an “independent contractor”.

Here are 10 tips to help you draft an effective agreement:  

  • Names and titles – An independent contractor or consulting agreement should state that the person is performing services as an independent contractor. Avoid employee-sounding words/narrative.
  • Instructions and training – A worker who is required to comply with an employer’s instructions about when, where, and how to perform a job is often an employee. Training workers and requiring they attend meetings may indicate      that the employer wants services performed a particular way, so distinguish between existing contractor skills and those taught by the employer.
  • Control – Allowing workers to delegate duties tends to support independent      contractor status. The agreement should specify that any assistants must be hired, supervised, and paid by the independent contractor.
  • Duration and hours – There is no limit on contract duration, but shorter is      better. An ongoing 20-year relationship with 20 annual renewals may not      present a persuasive argument for independence. Hours set by the employer      also suggest employee status, but putting work scheduling in the worker’s      hands can help to support independent contractor status.
  • Full time and exclusivity – The agreement should make clear whether full-time work is required. An alternative to full time might be to set a deadline for a final product. An exclusivity requirement hurts independent contractor status, while a lack of exclusivity helps even if the worker does not choose to work for another employer. No one factor controls the situation.
  • Work site and reports – Work performed on the employer’s premises suggests control, especially if it could be done elsewhere. Where possible, the      agreement should allow the contractor to determine where to work. Reports      can also be telling, so try not to require periodic oral or written reports.
  • Payments and expenses – Payment by the hour, week, or month generally suggests an employer-employee relationship, provided it is not merely a convenient way to pay a fixed sum for a job. A lump sum or progress payments are better than hourly, weekly, or monthly payments. Avoid reimbursements for expenses, which may suggest an employer-employee relationship. Such      provisions should be clearly noted in the agreement.
  • Equipment and investment  – A person providing his own equipment, tools, and supplies is more likely to be an independent contractor, but be specific what tools and equipment you mean. Having an independent contractor bear his own costs tends to support his independence.
  • Profit or loss – If a worker risks economic loss because of investment or liability for expenses, it suggests independence. In drafting an agreement, avoid      financial safety nets that preclude workers from experiencing losses. Workers who make their services available to the general public appear independent, so consider allowing the worker to advertise.
  • Discharge and termination – The right to discharge a worker generally suggests that the worker is an employee. An independent contractor agreement may include detailed termination provisions that do not permit the contractor to      terminate the arrangement at any time without liability. One model is payment for a finished product, with termination geared to a percentage of completion.

 In Conclusion: Although drafting a contract is a challenge, a good  agreement can help secure independent contractor tax  status. But keep in mind that no matter how thoroughly an agreement is drafted, it is not entirely safe from recharacterization of a worker to employee status.

  Call AccuPay at 317-885-7600 if you have questions about worker classification.

PayDay is an email communication of payroll news, legal  updates and tax considerations intended to inform clients and colleagues of AccuPay about current payroll issues and planning techniques. You should consult with your CPA or tax advisor before implementing any ideas, comments or planning techniques.

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