Independent Contractor Agreements: What to Include, What to Avoid, and How to Make One

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If you’ve been struggling to attract and retain the best talent, you may be interested in widening your hiring pool. Hiring internationally based independent contractors is a great way to do just that. 

But when you welcome global team members, there are a host of other things to consider, too. Compliance and legality are the name of the game.

An airtight, detailed, well-structured, independent contractor agreement will ensure that you remain compliant, minimize the time and effort that goes into admin, and simplify team management. It protects both contract workers and companies, potentially saving both parties from lengthy and costly legal disputes.

If you’ve never dealt with an independent contractor agreement before, this guide will teach you what to include, what to avoid, and how you can make one yourself.

Here’s what we’ll cover in this guide:

What is an independent contractor agreement?

An independent contractor agreement is a legally binding agreement between an individual contractor or 1099 worker and a company. It details things like the scope and nature of the contractor’s role, payment rates and schedules, intellectual property ownership, confidentiality, and rules regarding contract termination. It should also cover details (when applicable), such as travel compensation, warranties, and standard benefits that don’t apply to independent contractors.

Independent contractors make up the largest percentage of alternative workers in the US. This work arrangement gives workers a lot of freedom and allows companies to access top talent without needing to invest in full-time employees. 

Having a standard independent contractor agreement in place protects both the contractors themself and the company, though misclassifying workers can result in heavy fines or lawsuits. 

There are two broad categories of independent contractor agreements that involve a slightly different set of considerations. Employers should pay special attention when drafting independent contractor agreements for a) contractors within the same country as the organization and b) international contractors.

Independent contractors located in your country

Hiring contractors from within the same country is generally simpler than hiring international candidates. However, states differ widely in how they define workers versus contractors. 

For a company to prove that they hire independent contractors (and not workers), they must pass state-mandated and federal tests, such as the ABC Test or the economic realities test.

A contractor only needs to meet one of the following conditions to be considered local:

The clauses defining the scope of work, payment, schedules, ownership, confidentiality, and termination should remain consistent whether a contractor is local or international.

Independent contractors located outside your country

Hiring independent contractors from outside the country often promises businesses the greatest value-add advantage. Superstar contractors in countries with a lower cost of living can deliver the same quality of work at a reduced cost.

A contractor must meet all of the following conditions to be considered foreign:

  • They are a non-US citizen
  • They reside outside of the US
  • They perform most of the work outside of the US

The IRS sets rules that govern which international workers can be defined as independent contractors. Certain agreements provide tax incentives for companies to hire independent contractors from within a special economic zone or region.

Hiring global independent contractors

Value addition, flexibility, and access to a wider pool of applicants are only a few of the many advantages of hiring an independent contractor internationally. International contractors might be specialists within their area or located in a time zone that allows for around-the-clock service and workflow to give your business an edge over the competition.

When deciding whether hiring international employees or independent contractors makes the most sense, it’s important to weigh the benefits against the potential costs. Aside from interviewing and hiring, the legal processes related to compliance with local laws and employee classification are more complex for international contractors.

Compliance matters

HR compliance requires an understanding of both local labor laws and those of the independent contractor’s country. It’s the employer’s responsibility to demonstrate compliance in managing their international contractors. Failure to comply with local labor laws could result in legal action in foreign countries.

Keeping pace with overseas compliance developments can be a burden without specialized knowledge in foreign recruitment, hiring, and contractor management. Local laws vary from country to country and can affect a company’s bottom line when that company is looking for talent abroad.

For these reasons, many US businesses find that using a contractor management platform for compliant hiring and payments simplifies the process and protects the business from being blindsided by hidden liabilities.

Employee classification matters, too

Independent contractor classification is essential. If you treat a contractor like an employee, regulators will start to notice and penalize your business. 

Misclassification can result in regulatory fines and other penalties — both in the US and internationally.

The IRS can levy fines per misclassified W2 to compensate for unpaid Federal Insurance Contributions Act (FICA) taxes from both employers and employees, and states can issue bans on businesses operating within their borders. Australia punishes “sham contracting,” with fines of up to AUD $93,900 for corporations that misclassify their contracted workers.

What sets independent contractors and employees apart?

  • Work schedule: employees typically have a set schedule, while contractors set their own hours.
  • Equipment and resources: the employer provides equipment for employees to complete the required work, whereas contractors are responsible for procuring their own.
  • Pay: employees receive regular paychecks from which taxes are levied by state and national governments. Contractors receive tax-free payments and are responsible for filing their own taxes.
  • Length of the relationship: an independent contractor agreement is finite. A contractor with an indefinite contract could be seen as a misclassified employee by a local state government.
  • Benefits: employees are entitled to paid time off and other benefits, whereas independent contractors typically aren’t.

7 must-have clauses for an airtight independent contractor agreement

There’s no one-size-fits-all agreement for hiring independent contractors, as a standard contractor agreement depends on the nature of the business and any local laws that apply to a global workforce.

With that said, addressing the following areas will be essential for creating a contractor agreement that can scale alongside your business needs.

An independent contractor agreement should clearly state the beginning and end of the contract, the date of the agreement, and the identities of the two parties involved. Without a finite clause to define the contract as temporary, the agreement opens itself up to interpretation as a misclassified employment agreement.

The employer’s legal identity should include the business name, the registration number, the tax identification number, and the jurisdiction under which the client will oversee the contract. The contractor’s location matters as well, as it determines the local laws for compliance.

Most importantly, this section should define the legal relationship between the two parties, explicitly mentioning that all work will be carried out by an independent contractor and not a company employee.

2. The contractor’s obligations

The heart of the agreement will be defined by the scope of work required from the contractor. Before drafting this section, you should consider the following:

  • Does the scope of work include anything besides material deliverables (i.e., services)?
  • Will you require the contractor to obtain a special license or permit to do the work?
  • Do you expect the contractor to do something with what they’ve produced (like uploading graphics or copy to a website), or do they just need to provide you with the deliverables?

This section will require more customization than the others, as it should be as specific as possible to each contractor’s function. Highly specific deliverable requirements leave little room for interpretation from the contractor’s side, though more open-ended items allow for a wider range of creative freedom.

Highly specific example:

The independent contractor will upload a three-minute animation promoting ABC Corporation’s USP to the company’s YouTube channel, incorporating the agreed-upon messaging points and brand standards.

Open-ended example:

The independent contractor will generate a creative concept and graphic materials to promote ABC Corporation’s new line of financial services to the 35–50-year-old audience via social media channels.

3. Payment terms, expenses, and reimbursement policies

The agreement should clearly state the terms and conditions of payment, including the following:

  • Pay structure (hourly or flat fee)
  • Frequency of payment
  • Method of payment (bank transfer or other)
  • Payment stipulations (e.g., banning payments to accounts in certain countries)
  • Procedure for invoicing

The agreement should account for how a contractor will be reimbursed for any business or travel expenses incurred when performing the required services. 

This section should also address how the contractor should document and submit these expenses — i.e., via a contractor-generated invoice or through the hiring company’s internal accounting system.

For services that require bidding on the contractor’s part (for instance, media buys for PPC ad campaigns), the independent contractor agreement should also detail how the contractor should approach the bidding process. A company might give each contractor an allowance to spend as they see fit or require that the contractor pre-approve all bid amounts.

4. Confidentiality, NDAs, and exclusivity

The purpose of the confidentiality clause is to protect your trade secrets and intellectual property. Protecting yourself against infringement — especially when you have contractors working in different countries — can help avoid long and costly legal battles in a foreign court.

This section should also state any exclusivity arrangements between the parties, such as restrictions on the contractor working with other parties during the contract period.

Other confidentiality terms might include the following:

  • Limitations providing services to other parties during the term of the agreement and/or for a certain period after the agreement is terminated
  • Restrictions or limitations on the independent contractor’s ability to use any confidential information or intellectual property developed during the contract term in other projects or for other clients
  • Conditions that protect a company’s trademark, trade secrets, or business processes

Exclusivity clauses should be used with caution, as they could be considered restrictive covenants and may be unenforceable if they are deemed to be in violation of antitrust laws.

5. Ownership of work product

The ownership clause will outline the rights and responsibilities of both parties regarding any intellectual property created during the project, including any patents, trademarks, copyrights, and trade secrets.

It should define the following:

  • Who owns the rights to any intellectual property created by the independent contractor during the project
  • Whether the independent contractor will have the right to use the intellectual property after the agreement is terminated
  • Any obligations the independent contractor may have to protect and register the hiring party’s intellectual property created during the contract
  • Obligations the independent contractor may have regarding pre-existing intellectual property that the independent contractor may bring to the project

This section of the agreement should state that the contractor, as a non-employee, is responsible for their own taxes, insurance, and equipment. This is important for ensuring compliance with tax and labor laws.

If the contractor’s services involve some level of risk, requiring proof of liability insurance can help shield the company from lawsuits due to injury on the job or intellectual property infringement claims pertaining to the contractor’s delivered product.

The agreement should clearly state any liability that the hiring party won’t be held responsible for, such as any damages or losses that result from the independent contractor’s actions or omissions. This can include liability for things like property damage, personal injury, or third-party claims.

7. Termination of the agreement

Ideally, a contract ends with the successful delivery of goods or services from the contractor to the hiring party. Unfortunately, however, that doesn’t always happen.

The termination clause defines the conditions and procedure for ending a contract early, as well as the parties’ obligations toward each other upon termination.

The termination clause should include the following:

  • A detailed description of the conditions under which the agreement can be terminated by either party (e.g., breach of contract or non-performance)
  • Notice requirements that must be met before the agreement can be terminated, such as a 30-day notice or a specific notice period
  • Obligations that the parties will be required to fulfill upon termination, such as returning supplies, destroying confidential information, or submitting a final report
  • Provisions for resolving disputes or addressing any outstanding issues that may arise upon termination

Start contracting with your bases covered

If you plan on hiring an independent contractor (or a full-fledged team), you must put an independent contractor agreement in place. This agreement has to be robust enough to remain compliant in your home country as well as that of your contractor, as this will help you avoid legal issues.