Using independent contractors to assist with your day-to-day business functions is becoming increasingly popular. Before you look to hire contractors, it is important to understand what should be included in the contractual agreement. This helps keep your business safe from legal trouble in the future.
Unlike employees who are told the parameters of their daily tasks, 1099 independent contractors set their own work parameters. Employers do not have the same “right of control” for independent contractors that they do for employees.
The contract gives employers the opportunity to provide clear communication for expectations regarding the work 1099s will be performing. It provides information, sets boundaries, and allows for additional flexibility. Ensuring all areas are covered when creating your contractor agreement the 1099 independent contractor you want to work with is the best place to start.
So, what should you include in your agreement?
Verification of 1099 Status
Before hiring a 1099 independent contractor, make sure they are able to be classified as such. EDD will perform misclassification audits if they are flagged that you have incorrectly classified an employee as an independent contractor. Read more on our top EDD audit triggers here.
The verification process should include:
- 1099 business verification of the legitimacy of the company/ business
- Confirmation that the EIN number is legitimate and belongs to the contractor
- Website and social media research that the business has an online and active presence
- Business entity status where you review the history of a registered business and business license number to determine if it is operating legally
- Tax license check to confirm the contractor is registered to do business in your city
Terms
Begin with the parties involved. This portion of the agreement will include the names and company names of all parties involved, the location of the job, and more details about requirements and expectations for the job performed.
Scope of Work
This section outlines responsibilities, deliverables, and timelines expected. Employers should detail service is expected – an art piece, home appliance, etc. This provides clear communication between both you and the independent contractor on what is expected from the services under this agreement.
Creating a timeline also occurs in this section of the agreement. Mapping out when the project should be completed, including updates when milestones are reached to make sure the project stays on track.
If you hire an independent contractor to build a fence, this section should include something along the lines of “build a fence bordering property with cedarwood until the project is completed. The estimated timeframe is about 3 days contingent on material availability and sufficient resources.”
This section should clearly explain roles and responsibilities to reduce confusion about the end result.
Payment Details
Create clear expectations on payment methods. The independent contractor you work with should know how much the project will cost when factoring in the materials needed and the value of the labor performed. Take all of that into account when procuring the payment amount.
In this clause, explain how payments will be made. There can be room to allow payments on installments, payment completely upfront, or paying a percentage of the total amount at first, and then the final payment after the service is completed.
In the fence example, you could ask for 50% upfront and 50% after the fence is built.
Expenses Incurred
Sometimes, unexpected costs arise. An added expenses incurred clause can be added in case something arises during the project requiring more time or materials than expected outlined in the terms of agreement section.
Using the example of the fence scenario, let’s say the client wants you to upgrade the side door and the material they would like to use. This clause explains that any upgrades or additions will incur an “X” amount of additional cost.
Confidentiality
A confidentiality section is not a requirement for all contracts. However, it can be helpful for businesses seeking additional discretion from their independent contractors. This clause is an added security measure to make sure your information is protected and safe.
If you require a more detailed confidentiality agreement, consider using a non-compete agreement instead. This will be a separate document that gives more details on confidential information and restrictions on the parameters of the contractor when working with your business competition.
Contract Termination
A contract termination clause is an important section of the agreement in case either party decides to terminate the agreement prior to its completion. It protects you and the contractor from being left with unfinished work or payment.
Essentially, you outline the acceptable terms and conditions needed to terminate the contract.
Choice of Law
This section is extremely important for both parties. Choice of law dictates which state laws you will adhere to. Typically, it is the state where the job is being performed. Carefully review this section along with the other state laws you may have to abide by.
Liability and Insurance
Independent contracts need a certain level of liability or liability insurance coverage. This protects the worker and your business in case something happens on the job, or something happens to the project.
Additional items
If you feel there are additional items that should be added to the contract, include them. the provisions of this agreement should be unique to your business. Additional items can cover health and safety, damage, minimum time requirements, or anything tailored to your specific line of work.
Having a detailed contract between you and your independent contractors helps you communicate clear expectations while also aiding in avoiding triggering an EDD audit.
For more information on the right way to hire an independent contractor, read our article here.
