Independent Contractor Agreement
Advantages to the Employer or Contractor
Entering into an independent contractor agreement with a worker can be financially beneficial to your business.
An independent contractor or freelancer knows their livelihood depends on delivering quality work, unlike an employee who might rely on the "security" of a permanent position
whilst not performing to his/her full potential.
Sidebar: If you are employing an independent contractor to perform services such as building, remodeling or painting etc.
for your home, please refer to our general contractor page. We have a variety of free forms and agreements specifically drafted for these.
You can use our free independent contractor agreement as a template to compile your document but do
consider the guidelines to legally distinguish between a Contractor vs Employee before classifying a worker, and review the "Work-for-Hire" guidelines.
Visit our main
Independent Contractor page for links to guidelines and more free legal forms.
Advantages of Hiring an Independent Contractor:
- The company can tailor their workforce according to the workload. During slow periods the company will not have the expense of employees being under utilized or idle.
- The cost of training employees to do certain tasks can be drastically reduced by hiring specialized contractors to do the work.
- There is no cost to the company for lost hours due to sick leave, compassionate or annual leave.
- A big consideration is the contribution of the company towards unemployment- and medical insurance of employees, which is not applicable to independent contractors.
The employer must confirm though that the contractor has insurance in place.
- There is no minimum wage nor overtime payable as governed by law.
- Reducing a workforce is easy when employing independent contractors and paying retrenchment packages, outstanding leave etc. does not come into play.
The free independent contractor agreement supplied on our site outlines the scope or period of the work for an agreed upon amount. Should the contractor not perform or
deliver to the satisfaction of the company, it is relatively easy to terminate the agreement.
Disadvantages of Entering into an Independent Contractor Agreement
Almost all the above listed advantages to the employer, can be a disadvantage to an independant contractor. However there are advantages too!
- During slow periods there may be a scarcity of work at one company, but because an independent contractor is not bound to work for only one business, he/she can contract to other companies.
- There is no minimum wage or overtime. But a skilled contractor typically earns a higher rate per hour (compared to an employee) and can set his/her own hours of work and can increase earnings.
- The contractor bears the cost to up-skill, supply tools and equipment, provide for unemployment and health insurance etc. but many of these expenses are tax deductible.
- A big disadvantage is that there is no paid leave/time off for a contractor that sells his own skills per hour or gets paid per job. For example, if a graphic designer takes a holiday, there could be zero income during that time.
- A designer may even be reluctant to take time away from the studio lest a client needs work done urgently.
There may be a concern that the client would use another artist and switch their business over.
- Working as an independent contractor can be very stressful. There are feast (an overload of work coming in) or famine (total lack of work) times and both can be stressful.
There are many advantages but one big advantage and probably the main reason for setting up an own business, is that a contractor can set his own working hours.
Using the same graphic artist as example, he can take time out to watch a child's tennis game, and make up the working time later. Priceless!
Employers Must Classify Workers Correctly as Either Employees or Independent Contractors!
An employer should not classify workers as independent contractors simply to take advantage as outlined above or to deprive employees of their rights.
If found guilty of misclassification, an employer may be liable for:
- Payment of taxes, even if such taxes have already been paid by the "independent contractor".
- Retroactive payment of employee benefits and applicable wages.
- Fines imposed by the government.
- Legal expenses of an employee who successfully sues the employer.
Take a look at these IRS Guidelines to further assist you in determining the status of an employee or independent contractor.
Should You Sign an Independent Contractor Agreement? (Also known as a 1099 Agreement)
An employee who feels that he was coerced into signing an independent contractor agreement (whereas he should have had employee status and benefits) can report an employer
to the relevant government agency and sue the employer for damages. Follow the IRS link above for more information - look out for form 8919.
The harsh reality though is that most often employees are reluctant to do this because they need the income and fear possible retaliation (dismissal) by the company.
For Employers: An Independent Contractor Agreement is Especially Important to:
- State that the company owns the work - e.g. all photographs produced by a photographer, literary work, computer programming etc. - that were produced during the scope
of an assignment for the company.
Specific provision must be made for the assignment (not licensing) of copyright in any such work to the company.
- Show that the relationship between the company and contractor is not that of an employer/employee - provided of course that the classification fulfills
the legal requirements.
- Clearly outline on what basis the contractor will be paid e.g. hourly / daily or whether it will be an agreed amount for a specific project.
Your contractor agreement should have clauses which may not come into play, rather than omitting important ones.
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