Hiring an independent contractor? Make sure to have a contract that will increase the defensibility of the independent contractor relationship—because if you can’t defend it, you will pay dearly.
Employers carry the burden of proving that a worker is not an employee for wage order purposes. Dynamex Operations W., Inc. v Superior Court (2018) 4 C5th 903. So draft an independent contractor agreement carefully with the following provisions (and never use the terms “employ,” “employment,” “employee,” or “employer”):
- Describe services to be performed by the contractor. Although you can include the description of services in the body of the contract, attaching it as an exhibit allows for more flexibility, encourages a more detailed description, and serves as the “specs” for the finished product. Don’t use a job description; rather, describe the desired end result. Under Dynamex’s “ABC” test, the nature of the work performed must be outside the usual course of hiring in the entity’s business.
- Give permission for the contractor to delegate duties. State that the contractor, at its own expense, may use employees or other subcontractors to perform the services. Allowing delegation is good because it’s incompatible with employee status, but it may not be appropriate when contracting for the special services of an individual.
- Set contractor compensation. Compensation can be flat rate or hourly rate. Using a flat rate renders the relationship more defensible, because the principal is buying an end result rather than the worker’s time. A schedule of “deliverables” with payment on delivery of each phase allows the principal to terminate if any phases isn’t completed properly.
- Set terms of payment. For flat rate compensation, set the schedule for payments or make payment after services are completed. If hourly rate, payment follows invoicing, e.g., each month.
- If a third-party is involved, use conditional payment language. If the contractor’s services are provided under a contract between the principal and a customer, state that the principal agrees to pay subject to payment by the customer. Having the contractor share the risk of nonpayment by the customer makes the relationship more defensible.
- Give contractor the responsibility for expenses. Give the contractor responsibility for expenses because an employee is more commonly reimbursed for expenses, and being out of pocket for expenses is a risk of loss that’s an indication of independent contractor status.
- Set start and end dates. State when the agreement will become effective and will terminate. Termination may be a specific date, on completion of services, or on notice. Also state that termination occurs on default.
- Describe status as an independent contractor. Use language to establish the independent contractor as a distinct business.
- Require contractor to pay income taxes. If the principal is audited, this provision may assist in obtaining abatement or offset of taxes.
- Make relationship nonexclusive. Provide that the contractor has the option to perform services for others. This underscores the contractor’s independence. Indeed, under Dynamex’s “ABC” test, the worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
- Set work location. If there’s a reason for the contractor to work at the principal’s location, specify that fact and state why. Otherwise, administrative agencies will infer that the contractor must work there so the principal can exert control.
- State the contractor’s representations and indemnities. For example, include representations by the contractor that it has the qualifications and ability to do the work without supervision, and that it will indemnify, defend, and hold harmless the principal.
- Specify that principal owns the intellectual property. For example, state that the contractor agrees that all inventions and designs arising out of the agreement are assigned to the principal as its property. Also get a warranty of title to any new developments.
- Protect the principal’s proprietary information and trade secrets. Define proprietary information broadly and require the contractor to maintain it in confidence.
- Add standard contract clauses. As with any contract, you’ll want to include, e.g., choice of law, survival, and force majeure clauses.
Get additional commentary and a sample agreement in CEB’s Working With Independent Contractors, Leased Workers, and Outsourcing (Action Guide). For guidance on standard contract clauses, consult CEB’s Drafting Business Contracts: Principles, Techniques & Forms, chaps 16-17.
Other CEBblog™ posts you may find useful:
- Big Changes for CA Companies Using “Independent Contractors”
- The Pros and Cons of Using Independent Contractors
- Yes, California Employers, It Really Is Time to Update Your NDAs
© The Regents of the University of California, 2019. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.