Independent Contractor Agreements

In the entrepreneurial and small business space, most of the people who work for you are independent contractors. For example, freelancers, designers, photographers and videographers, writers, consultants, and bookkeepers. Having a clear and comprehensive independent contractor agreement in place helps you navigate the legal nuances of this working relationship.

An independent contractor agreement (or service agreement) is a formal, written contract that establishes the terms and expectations between a business and an independent contractor. It outlines the scope of work, payment terms, and critical responsibilities of both parties.

A tailored independent contractor agreement is critical to formalizing your business relationships and establishing expectations. Having an independent contractor agreement ensures that your legal rights, obligations, and liabilities are clearly set out. Here are some benefits of having an independent contractor agreement in place:

Every independent contractor agreement should include these key components:

• Scope of Work: This section meticulously defines the specific services the contractor will provide. It should detail deliverables, milestones, and expected timelines.
• Payment Terms and Compensation: This section clearly outlines the payment schedule, including rates, milestones for partial payments, and the invoicing process.
• Term and Termination: This section specifies the duration of the agreement, outlining the process for termination by either party, with or without cause, and potential notice periods.
• Independent Contractor Status: This section explicitly clarifies that there is no employer-employee relationship and that the contractor is solely responsible for their own taxes and benefits. This strengthens the legal foundation for independent contractor classification in case of an audit by tax authorities.
• Confidentiality: This protects sensitive, proprietary information the contractor may access during the project, preventing unauthorized disclosure which could be extremely detrimental to your business interests.
• Intellectual Property Protections: This section specifies ownership of any intellectual property created during the project, such as software, inventions, or copyrighted materials. It should detail who owns the rights, how they can be used, and any licensing agreements.
• Dispute Resolution: This section outlines how you and the other person will settle any disagreements that may come up.

Many small businesses and entrepreneurs prefer hiring independent contractors over employees in order to reap the benefits of less overhead and greater flexibility. The law treats independent contractors very differently from employees. Here’s a breakdown of key factors that differentiate independent contractors from employees:

Misclassifying someone as an independent contractor can result in significant liability. Simply calling a person an independent contractor, even if the person verbally agrees, does not decide the issue. The federal government looks at these five factors to determine if an employment relationship exists:

• Control: How much control does the business have over the individuals’s work? For example, does the business oversee when, where, and how the individual performs the work? An employer exerts significant control over an employee, dictating work methods, schedules, and tools used. On the other hand, independent contractors have more autonomy in how they complete the work and can determine their own methods and schedules.
• Tools and Equipment: Does the business supply tools and equipment to the individual to perform the work? Employees are usually provided with most of the tools and equipment that they need from their employer. In contrast, independent contractors usually invest in their tools and equipment and retain the right over the use of these assets.
• Financial Risk: How much risk does the individual take on? In particular, what are their chances for profit and risk of loss? Independent contractors bear the financial risk for any business expenses they incur and project delays. They may even subcontract work, hire assistants, or have their own office space and liability insurance. In contrast, employees have limited business expenses and receive consistent pay from their employer regardless of project outcomes.
• Integration: How integrated are the individual’s activities and the company’s business? For example, is the work that the individual performs an integral part of the company’s business? Do they have the freedom to refuse work from the business and take on other clients? An employee exclusively provides services to one employer. In contrast, an independent contractor behaves as someone who is working for their own business.

Note that this is not an exhaustive list and the common law test is quite complex. It is best to consult with a lawyer if you are unsure about a particular situation.

Independent contractors should be mindful of their tax obligations. They are responsible for paying self-employment taxes, EI, and CPP. Additionally, they should factor in the cost of health insurance and other business-related expenses.

Fortunately, contractors can leverage tax deductions for legitimate business expenses, such as equipment, software subscriptions, and marketing costs.

The independent contractor agreement should outline the process for termination by either party, with or without cause, and the possibility of renewal terms.

• Termination for Cause: This would specify situations where either party can terminate the agreement due to a breach of contract, such as missed deadlines or poor quality work.
• Termination Without Cause: This outlines the notice period required by either party if the agreement is terminated without any specific breaches.
• Renewal Options: The agreement can include provisions for automatic renewal upon satisfactory completion of the project, or it can outline a process for negotiation and renewal terms.

A “one-size-fits-all” approach does not work for independent contractor agreements. Each agreement should be tailored to the specific project, the nature of the work performed, and the province where the work is being done, as laws can vary by jurisdiction. This is why it is a good idea to have a lawyer draft a custom independent contractor agreement for you.

An experienced lawyer can ensure your agreement is legally sound, adequately protects your business interests, and accurately reflects the intended purpose of independent contractor relationship. In addition, a lawyer can provide guidance to their client regarding how to reduce misclassification risk when hiring independent contractors. Misclassification can result in liability for unpaid wages and payroll taxes along with interest and penalties for failing to deduct and remit income tax and premiums in accordance with the Employment Standards Act.

By understanding the legalities and utilizing a well-drafted independent contractor agreement, businesses can confidently leverage the expertise of independent contractors while mitigating potential risks.