Why You Need a Written Consulting Agreement
When engaging independent contractors, it can be tempting to review the work you need done, come to an understanding, and get started as quickly as possible. However, oral agreements can be dangerous and lead to legal headaches for both your company and the independent contractor you are working with.
Taking the time to create a written agreement will ensure both you and the independent contractor agree on project details and it will give you the opportunity to establish a strong relationship from the outset. Here are three key reasons why you should consider using a written agreement in your next independent contractor engagement.
1. Project Details Need to be Defined
When crafting a written agreement, take time to discuss the scope of work in detail. Include a description of the work to be completed as well as specific deliverables, what the final product will entail, and a timeline. Putting details in writing will help prevent missed deadlines and incomplete work. It’s also important to agree to and include a process to follow in the event of unforeseen changes that are outside of the original scope of work. Having a process in place for addressing scope creep can help you avoid difficult interactions and conversations down the road.
You’ll also want to include the agreed-upon bill rate along with payment terms such as how and when you will pay the independent contractor, and how and when they will invoice you. Ensure that payment is interwoven with concrete deliverables and discuss any potential additional costs or expenses that may arise.
Lastly, you’ll want to include termination conditions—the rights of both parties to cancel a contract. In the event of a worst-case scenario such as a breach of contract or nonpayment, this will be an important section to reference.
2. Your Company and the Consultant Need Legal Protection
A written contract is particularly important because it provides legal protection both for your company and for the independent contractor. In this regard, there are a few specific topics you’ll want to consider.
Independent contractors are responsible for providing their own insurance, but it is still smart to safeguard against the potential financial burden of a lawsuit. Depending on the type of service the independent contractor is providing, you may consider requiring general business liability insurance or additional insurances as needed.
You’ll also want to discuss and include rules around ownership of intellectual property, and confidential information such as financial data, business plans, and trade secrets, if applicable to your business.
Lastly, an indemnity clause can help manage potential risk. Mutual indemnification will commit both you and the independent contractor to compensating each other for any harm, liability, or loss that may arise out of the contract.
3. Classification Status Needs to be Established
One of the biggest risks of engaging independent contractors is misclassification. However, a written agreement is a great way to help establish independent contractor status.
Include a statement in the contract that says you and the independent contractor agree to an independent contractor relationship. The independent contractor should acknowledge that they are not entitled to any benefits provided to your employees, and that they are responsible for paying their own taxes. Along with a written agreement, it’s a good idea to keep anything on file that can be used as proof of self-employment such as a business or professional license, proof of insurance, or business cards.
Remember, you are establishing a business-to-business relationship—independent contractors are free to determine how, when, and where they work among other factors. A contract is a great way to establish project scope, communication, and management, but at the end of the day an independent contractor is not your employee and cannot be treated as such.
With a detailed agreement in hand, you can feel confident moving forward with engaging independent contractors. If have trouble coming to an agreement on certain terms, or if you are unsure whether or not to include a specific clause, have a lawyer look over the contract. This is particularly advisable especially when working on a complex agreement.
For further advice and information in drafting an independent contractor agreement, contact us today.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.