You may be eager to get started with a new freelancer, but there are a few housekeeping tasks that must be done first. Namely, signing a contractor agreement.
Contractor agreements not only protect your company and the worker, but they also help both parties align on conditions and expectations. Essentially, they keep everyone safe while setting the foundation for a productive, mutually beneficial work relationship.
And that’s all any of us really wants, right?
In this guide, we’ll dive deeper into what makes formal contracts with freelancers and independent contractors so important, as well as what kinds of terms and additional agreements should be included.
What is a contractor agreement?
A contractor agreement is a binding legal contract that defines the relationship between an independent contractor or freelancer and a company.
It includes information regarding the type of work to be performed, the project scope, compensation, deadlines, and other conditions of the work relationship.
It’s worth noting that an independent contractor agreement is different from an employee agreement.
While employee contracts also cover aspects like the role, nature of work to be performed, and compensation, employee contracts are generally far more comprehensive. This is because there are many more legal implications to hiring someone as an employee versus on a freelance basis.
For example, employers must provide employees health insurance, worker’s compensation, unemployment insurance, family and medical leave, and pay Medicare and Social Security contributions. In addition, many companies offer some amount of paid time off, holidays, and retirement plans. All of these benefits would be described in the employee contract.
Since employers aren’t obligated to provide these benefits to freelancers (and most don’t), independent contractor’s agreement focuses more on defining the working relationship, and establishing expectations, which includes deliverables, timelines, and compensation.
Why you shouldn’t forego contracts
Freelancers and contractors can be invaluable assets to your business. However, without establishing freelancer terms and conditions, you risk exposing your organization to legal trouble, data breaches, wasting important resources, and other consequences.
Imagine you just connected with a new freelancer and they seem super responsible and on top of their work, so you skip the contract and launch your much-anticipated project. You’ve agreed to pay them $80 per hour and the first $500 upfront. However, after you send the $500, the freelancer is suddenly very hard to get a hold of. Not only are they not communicative, but the quality of their work is poor. Eventually, they stop answering you altogether, even though the project isn’t finished.
Without a contract, you have no legal standing to require them to finish the job or meet your standards. This is just one example of how not having a contract can blow up in your face.
You should also take into consideration that it is illegal to work with freelancers and independent contractors in some countries without a signed contract. However, it is up to the company to ensure all the legal requirements appear in the contract.
Here’s why contractor agreements are so important
Having a contract ensures both parties understand their end of the deal so that the working relationship goes as smoothly and satisfactory as possible. Here are four main benefits of having one.
1. Get on the same page. When both parties have the chance to clearly outline their expectations and requirements, there will be no confusion about what the work engagement should entail. This helps you avoid unpleasant misunderstandings that can sour the working relationship or cause one side to be frustrated.
2. Get protected. Once signed, a contractor agreement is a legally binding document, which means you can use it in court if one party breaches its terms. From the company’s perspective, a contract keeps you protected if the freelancer doesn’t deliver the work, violates your privacy agreement, etc. Contracts also help ensure companies don’t try to avoid paying their freelancers.
3. Demonstrate that you work “by the book.” Contracts show external stakeholders (like investors and auditors) that you work with contractors in a legal and orderly manner. This is especially important if your company has any plans of pursuing a strategic partnership, merger, acquisition, or IPO.
4. Comply with labor laws. In many US states and countries, working with a freelancer without signing acontractor agreement is actually illegal. Laws like New York’s Freelancing isn’t Free Act of 2016 or the Philippines’s freelance protection law exist to protect workers from being exploited or unpaid. Keep in mind that laws related to freelance labor change from country to country and even between states, so it’s important to tailor your contracts accordingly.
What should the contract include?
Your contractor agreement should be adapted to the needs of your company, the requests of the freelancer, and any specifications that are relevant to the job. However, there are certain components all freelance contracts should include.
Here’s a list of 11 must-haves. For more details on each of these, check out our blog post, How to Write a Freelance Contract: The Dos and Don’ts.
- Contractor and company contact information and tax ID numbers
- Project purpose and scope
- Reimbursement protocols for equipment and expenses
- Description of deliverables
- Payment terms, amount, currency, and schedule
- Timeline and deadlines
- Ownership and copyright terms
- Description of legal obligations, terms, and conditions
- Early termination and kill fee if the work relationship should end sooner than planned
- Dispute reconciliation, in the event of a claim of a breach of contract
- Signatures to make the agreement a valid legal contract.
What else should you cover in a contractor agreement?
In addition to the general clauses outlined above, there are several other important documents to include alongside your contractor’s agreement.
- Non-disclosure agreement: An NDA, also referred to as a confidentiality agreement, is a contract that establishes a confidential relationship between your company and the freelancer. It prohibits the freelancer from sharing sensitive information they may obtain on the job with others.
- Intellectual property (IP) agreement: This agreement specifies when ownership of intellectual property will be transferred from one party to another. When working with freelancers, IP agreements usually refer to the transfer of intellectual property from the freelancer to the company.
- Data protection agreement: A data protection agreement stipulates the rules and methods for dealing with sensitive company data in order to keep it safe and secure.
- Non-compete: Signing a non-compete agreement prevents a freelancer from working with companies that are considered your competitors for a specified period of time after the work relationship ends. These agreements also prohibit the worker from revealing proprietary information or company secrets to anyone outside of the hiring company. These are much less common when working with freelancers, but can still be relevant in some cases.
Contractor agreement make working with freelancers easier
Even though contractor agreements might seem like burdensome admin work, they are actually extremely important and beneficial to both your company and the freelancer. With a comprehensive contract, you’ll build a solid foundation for a great long-term relationship with top talent.