Independent Contractor Agreements
If you are a business owner and need specialized workers or have a short-term project, you probably turn to independent contractors. While there are many benefits to working with independent contractors, there are legal risks. Best practice is to get good legal advice to ensure you do not violate any federal, state or local labor laws. Furthermore, an experienced attorney can draft an independent contractor agreement to help you avoid disputes, enforce your rights and provide evidence that you have complied with labor laws.
What Is the Difference Between Being an Independent Contractor and an Employee?
Generally, workers are classified as either employees or independent contractors and it is important to know the difference. Traditionally, employees have more rights than independent contractors under labor and employment laws, such as the right to minimum wage, overtime, unemployment benefits, healthcare coverage and other benefits. As a result, the law imposes significant financial and legal consequences on employers for misclassifying an employee as an independent contractor and denying them benefits.
Courts determine if a worker is an employee or an independent contractor by considering several factors; however, the primary consideration is the type of relationship and the level of behavioral and financial control asserted by the employer over the worker.
Factors Indicating an Independent Contractor Relationship
An independent contractor is generally someone who is in business for themselves and operates free from supervision, direction and control in the performance of their duties to the company. Workers are likely independent contractors if they: are business owners; have specialized expertise; offer their services to the public, as opposed to just one employer; pay their own taxes; keep a separate place of business; own their own equipment and supplies; determine their hours; negotiate or set their payrate; work with other clients; and are free to refuse work offers. In addition to having the freedom to set or negotiate their own pay rate, independent contractors also often work for a specific contracted amount, whether it is daily, weekly or at the completion of a job. Typically, they assume their own risk for profit or loss and pay their own expenses, unless otherwise specified in their contract with the company.
Factors Indicating an Employer-Employee Relationship
Generally, an employer-employee relationship is defined by many factors, but the biggest sign is if the employer exercises more control over the employee. An employer-employee relationship may exist if the employer: chooses the timeframe, the location and method for how the employee performs their services; sets the job description and responsibilities; provides supplies, an employee handbook and equipment; reserves the right to supervise, review and approve the work product; sets the hours of work and the rate of pay (usually, hourly or salary); and requires attendance at meetings or trainings. In addition, workers are more likely to be employees if they receive additional benefits, can be reimbursed for expenses relating to their job and perform their services exclusively for the employer.
Is an Independent Contractor Agreement Necessary?
A written independent contractor agreement is not usually required outside of New York City, but it is a recommended practice to avoid misclassification claims. A well-drafted agreement helps ensure that both parties’ expectations are clear and enforceable. It also serves as written evidence to government agencies that the parties intended to create an independent contractor relationship, even if it is not determinative of the issue. The agreement should outline the work to be performed and each party’s duties and obligations, keeping in mind the distinction between employees and independent contractors.
Moreover, in addition to having an independent contractor agreement in place, there are other ways a business can minimize exposure to misclassification claims, such as making sure not to: supervise the independent contractor or their assistants; give the independent contractor a company email, title, business cards or stationary; give the independent contractor an employee handbook; invite the independent contractor to employee meetings; prohibit the independent contractor from using subcontractors; or require the independent contractor to give regular status reports.
New York City Law
In New York City, written contracts for independent contractors are required under the Freelance Isn’t Free Act (FIFA). The Act mandates certain protections for independent contractors, such as a written contract, timely and full payments, the right to file a complaint with the Office of Labor Policy and Standards and protection from retaliation.
FIFA was enacted to protect individuals from being taken advantage of by employers; however, not everyone qualifies. An independent contractor may qualify if they own their own company, as long as their company does not have other employees. Moreover, there are exceptions in the law for certain sales representatives, lawyers, doctors and government contract workers.
Independent contractors are also covered under the New York City Commission on Human Rights Law (NYCHRL), which protects them from employment discrimination and harassment. The NYCHRL also gives them the right to receive reasonable accommodations for disability, pregnancy, lactation, religious observances or status as victims of domestic violence, sexual offenses or stalking.
Employers with at least 15 employees also must provide annual sexual harassment training to independent contractors if the contractor works more than 80 hours in a calendar year and for at least 90 days, which do not have to be consecutive.
There are exceptions in the law for certain sales representatives, lawyers, doctors and government contract workers.
What Should Be Included in an Independent Contractor Agreement?
As with any business contract, there are certain essential terms that should be detailed in an independent contract agreement. Outside of New York City, an agreement should include the following:
- Statement of Relationship. This specifies that the parties are agreeing to an independent contractor relationship.
- Project Description. This outlines the services to be performed, deliverables and term of the project.
- Payment and Billing Terms. This describes how and when payment will be made.
- Responsibilities of Each Party. These should be detailed and include items such as who will provide materials, pay expenses and approve work, among other obligations.
- Independent Contractor Representations. The contractor should represent that it has all legal permits, licenses, insurance coverage and anything else required to do the work.
- Taxes. This should state that the independent contractor will pay state and federal income tax.
- Employee Benefits. The independent contractor should acknowledge that they are not entitled to any employee benefits.
- Project Timeline and Deadlines. The agreement should outline deadlines for deliverables or provide an estimated timeline and metrics for measuring progress.
- Termination Conditions. The parties must state when there is a right to terminate as well as any conditions that must be met, such as giving written notice and an opportunity to cure.
- Nondisclosure Terms/Confidentiality. Independent contractors should agree to keep proprietary business information confidential.
- Dispute Resolution. This can include provisions for alternative dispute resolution (i.e., arbitration or mediation) as well as choice of venue and law for litigation.
In New York City, FIFA requires that written contracts include these terms at a minimum:
- Name and mailing address of both the hiring party and freelancer;
- List of services the independent contractor will provide;
- Value of the services;
- Rate and method of compensation for the services; and
- Date on which the hiring party must pay the independent contractor for the services.
This is the bare minimum, and in the absence of some of these terms, the law will provide a default. For example, payment will be due within 30 days of the job’s completion unless specified otherwise.
Independent contractors can be great for a business, but to avoid potential problems, talk to an attorney. A well-drafted agreement can help keep you out of trouble, with respect to labor laws, as well as protect your interests in the event of a dispute.
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