As businesses grow, it's common (and prudent) to bring on more support. That support can commonly come in the form of hiring a contractor or freelancer, also known as a 1099, in the US.
Hiring independent contractors and freelancers can be a great way to help us scale a business. There are positives, like the speed of hiring, the ease of termination, and the cost-saving benefit of only paying for hours worked.
But with these positives comes unique considerations like the tax implications, a strong confidentiality clause and/or non disclosure agreement that are really important when you have employees that might be working with multiple clients beyond yourself.
Let's first cover the differences between an independent contractor and a full-time employee, and when you might want to hire one over the other. The IRS views the difference between the two employee relationships as "the nature of the work" and the "degree of control over the work".
1099s/Independent contractors are...
- Paid for a specific project or assignment
- Responsible for paying their own taxes (provided a tax form)
- Responsible for obtaining their own health insurance
- Are not eligible for benefits like paid time off
W2/Full-time employees are...
- Hired for ongoing and integral work for the business
- Provided with employee benefits like health insurance, paid time off, and retirement contributions
- Provided with tax withholding and filing from their employer
Once you've confident on the type of employee you're looking to hire for your business, let's get into what you need to include in your contract template for independent contractors to keep all parties protected. This contract template is one piece of an entire checklist that we have.
We also worked with our lawyers to create a free independent contractor agreement template that you can download at the end of this article.
What to include in your agreement template:
Engagement and Term
This will outline that the nature of the relationship between the employee and the employer, and how long it will be for.
This will outline the type of work that has been agreed upon, and any details pertaining to how the services will be delivered.
This will outline what payment term will be, when it will be paid, and how it will be paid.
Intellectual property and confidentiality
This will outline any privacy clauses, ownership of IP and process around the business' systems and handling confidential information. If you choose to have a non disclosure agreement (NDA), this can be the section for it as well.
This will outline the specifics on how the relationship of employer and contractor can/will end. Including how much notice and how to process remaining payments. A termination clause is critical, be sure to include it. A termination letter will also be needed if this section is enacted.
Indemnification, no reps and limitation of liability
This will allocate risks and limit liability between the parties involved. This includes any damages that might happen throughout the course of the relationship.
This is a catch all section to include specific parameters that might not be easily bucketed into one of the above sections.
If you've decided that you will need to hire independent contractors (as defined by the IRS), to help you scale your business, we hope this lawyer-approved contract template is a helpful starting point.