How and Why to Use Independent Contractor Agreements
December 1, 2020
How and Why to Use Independent Contractor Agreements
Employment agreements are useful in many types of employment relationships for a variety of reasons. For example, they clarify the type of employment relationship in question and define the roles and responsibilities of the employer and employee. This lowers the risk of disputes that could result in litigation. When it comes to independent contractors, employment agreements (aka independent contractor agreements) are especially important because of the less formal relationship between an independent contractor and the company they do work for.
Another important reason to draft an independent contractor agreement is to clarify a worker’s status as an independent contractor rather than an employee. The worker’s status affects several areas, including their pay and benefits, how much they cost the employer, and state and federal tax withholding and reporting requirements. In addition, a company in Arizona can be subject to fines and penalties for misclassifying an employee as an independent contractor, including paying back payroll taxes.
Who Is An Independent Contractor In Arizona?
Each law and government agency has its own set of rules as to when someone is an independent contractor as opposed to when they are an employee. For example, the Department of Labor, the National Labor Relations Board, and the Internal Revenue Service all have their own unique set of definitions as to who should be classified as an employee versus an independent contractor. One test used to determine whether a person is an employee or not in Arizona is the “right to control” test. A.R.S. Section 23-902 looks at whether:
– The employer “procures work to be done for the employer by a contractor over whose work the employer retains supervision or control”; and
– The worker’s assigned tasks are “a part or process in the trade or business of the employer.”
If these elements are true of a working relationship, the person is an employee. By contrast, someone is an independent contractor for a business of they are “independent of the business in the execution of the work” and “not subject to the rule or control of the business for which the work is done.” An independent contractor is “engaged only in the performance of a definite job or piece of work, and is subordinate to [the] business only in effecting a result in accordance with that business design.” A.R.S. Section 23-902(C).
Courts interpreting this statute look to a variety of factors to determine independent contractor status. These include:
– How long the person has been employed and how they are paid;
– Who provides the equipment needed for the work;
– How much control the employer exercises over the work;
– Who has the right to hire or terminate the worker;
– Who pays for worker’s compensation insurance; and
– Whether the work is a part of the company’s regular course of business.
What Should An Independent Contractor Agreement Contain?
At a minimum, an independent contractor agreement should:
Clarify the Nature of the Employment Relationship.
An independent contractor agreement should clearly state that the person signing the agreement is in fact an independent contractor and not an employee. This should not be assumed or implied because of the legal and tax implications for both the company and the independent contractor that depend on his or her employment status.
It is also a good idea to state that the independent contractor has complete control over how, where, and when they perform the required work (as long as they meet stated deadlines), and that they will provide the tools necessary to do so.
Describe the Work to Be Completed.
This section of the agreement should describe in detail exactly what tasks the independent contractor is expected to perform. In addition, it should state how changes in the required work will be approved and how the parties will prevent extra work from being assigned to the independent contractor that is outside the scope of the agreement.
Describe the Responsibilities of Both Parties.
If the parties have other responsibilities required to complete the assigned work, this section should cover them. For example, it could list points of contact in relevant business units, how work is reviewed and approved (including specific approval criteria), and the best way to communicate with various stakeholders. If the independent contractor is required to purchase any type of insurance, this should also be spelled out.
Also specify that the independent contractor must hire any assistants needed to complete the work, that they are responsible for paying their own taxes, and that they will not be receiving benefits afforded by company employees. Finally, this section should provide a timeline for the completion of the project and specific milestone deadlines, if applicable. Include a description of what success looks like for each milestone so there is no misunderstanding.
Discuss Protection of Confidential Information.
If an independent contractor will be privy to confidential company information, this section should contain a confidentiality clause that spells out the contractor’s responsibility to protect that information.
State How the Independent Contractor Will Be Paid.
How, when, and how much the independent contractor will be paid should be clearly stated in this section. In addition, explain how and when the contractor should bill the company for completed work, including the desired invoice format.
State Rules for Contract Termination.
Explain exactly how, when, and why the parties can terminate the agreement.
Contact Counxel Legal Firm
The laws pertaining to independent contractor agreements can be complex and depend on the facts of a given situation. If you would like to talk to an attorney about drafting an independent contractor agreement, or whether you need one at all, contact Counxel Legal Firm at 480-536-6122 or at firstname.lastname@example.org.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact email@example.com or 480-536-6122 to request specific information for your situation.
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