As an independent contractor, establishing a legal agreement with your client is your number one priority as you begin your consulting career. There are several steps involved in the preparation, drafting and execution of the contract, and legal protection of your overall work and compensation.
Preparing for the Contract
Preparation goes a long way, especially in business. It’s crucial to carefully and thoroughly prepare before drafting or signing any contracts. Below are some items that will help you get started
1. Determine Salary Worth – Before agreeing to any job terms, be sure to calculate your salary worth. As a starting point, you can research sites like Salary.com or Department of Labor to get your salary value in the current job market. MBO partners, an organization providing business solutions, recommend calculating a bill rate for your services through the following methods:
Cost-Based Rates – The cost-based rate is the most common, and sets an equivalent W2 value, including costs involved for your target income. This method may be the most used, but it doesn’t factor in the pricing of your competition or demand and scarcity of services.
Market Based Rates – The market-based rates focus on supply and demand, and what the market is currently valuing your services. It’s important to be as detailed as possible with a description of your services to be successful in this method. It’s important to research current market data, including data on what your competition charges.
Value Based Rates – This method relies on your contribution to the specific organization and their ROI. Although this can be the most lucrative of the methods, most experts recommend using it only if you’re an experienced contractor with indispensable services in order for clients to agree to your rate.
2. Verify Independent Consultant Status – When starting an independent contracting job, it is important to clearly establish the relationship prior to the drafting of the agreement. Misclassification of worker status can lead to tax fines for both the client and the worker. The Department of Labor’s discussion of independent contractor’s status clarifies the criteria evaluated for an independent contractor status under FLSA:
Type of work performed- DOL states that if the worker’s job is an essential part of the main business process or service, his or her status is more than likely that of an employee rather than a contractor. The analysis also states that a worker with his or her own equipment or facility, and an equal profitability or loss is indicative of an independent contractor status.
Worker’s skill and initiative – A worker must be in open market competition with others, and must exercise independent business judgment in order to be classified as an independent contractor or consultant status. In this case his or her work is economically independent from that of a client.
Degree of control during the job- An independent contractor will have meaningful control of his or her job details. This may include work schedule, processes, or day-to-day functions. Each contract is unique, and agreed upon work hours or location will not necessarily indicate an employee status. What is important is that terms are equally agreed upon, and the employer has low levels of control on the contractor’s job duties.
Permanence of relationship – An independent contractor will typically have a relationship or project termination date with the client rather than a continuous relationship. This may vary depending on the job and contract, but typically there will not be any restriction on whether or not the contractor may work with another client at the same time.
3. Know details of the project: It’s important to establish the scope of your project. These include specific project details, whether the project is short-term or long-term, and responsibilities or requirements from both parties. There are three important sections that all projects must cover:
Compensation Amount- Will you receive payment along the way or at the end of the completion of your project?
Goals or Milestones – Are there specific goals that need to be met? Will you need to access any data from the client in order to complete those goals or milestones?
Deadline and Time Involved – What are the deadlines for each stage of the project? How much time will be involved for the job you’ve agreed to?
Key Elements of the Agreement
It’s important to draft an agreement that outlines all of the important aspects of the project you’ve chosen to take on. Here is a sample template. Although each contract is unique, legal experts recommend that the following elements should be included in every agreement:
1. Scope of Work – This first section focuses on the type of project or service rendered, and any important For a short-term project, this includes having good understanding of the job or project you will be involved in, such as specific details, goals, and expectations on both sides. For a long-term project, it may also include listing specific responsibilities for both parties, and any requirements from the contractor’s side (i.e. working hours, equipment use, dedicated space).
2. Length of contract – Each contract should specify the total length of time involved for the project or time allocated to specific stages of the project. This may include deadlines for specific milestones or expected goals involved. At the end of the project, some clients may ask to extend the length of the project or contract. If this is the case, it’s a great opportunity for you as the contractor to re-negotiate the terms of the agreement based on how the project was realized. Be sure that any extensions have an updated termination date on the original agreement or have a new contract establish in its place.
3. Payment and expense terms – This section should contain information on pay rate, date of payment rendered, method of payment, as well as travel expenses that may be involved with your services.
4. Rights & responsibilities – Typically this section will discuss rights of ownership of product or service, responsibility for taxes and insurance, and any other responsibilities from the client’s end. Workers who are independent contractors will be responsible for their own taxes and insurance
5. Intellectual Property – An intellectual property section is an important section of the agreement. Most contractors will be creating content that will be used repeatedly by the client. Generally, the contractor owns his or her content, but this section will establish legalities for the use of that content. Some clients may include a Work for Hire Clause that establishes ownership to the client instead of the creator.
6. Termination clause – A termination clause will protect both the independent contractor and the client. It’s important to include a standard clause that allows the contractor and client the right to end the working relationship in writing within a 30-day period. If this clause is not included, the client may have the opportunity to opt out of the contract early without advanced notice. Another valuable clause also to includes one that states that the contract will terminate for cause if the client neglects to make payment within a 30-day period from the agreed payment date.
Problems to Avoid in Your Agreement
There are some issues that may be difficult to spot if you don’t review your agreement carefully. In an article written by Cliff Ennico, syndicated columnist for creation.com, he addresses some contract topics that may lead to potential issues for the duration of your project or service:
1. Timing of Payment – Details on payment schedules should be well establish in the contract, but what many contractors don’t realize is that some clients will insist on reviewing and approving an invoice before actually paying it. This may cause a delay in payment. It’s best for contractors to establish a clause ahead of time that states how long the client has to review invoices before paying them. If it exceeds the noted time period, you will have the right to stop the performance of your services per your contract.
2. Non-Compete and Non Solicitation Clauses – Both non-compete and non-solicitation clauses restrict an independent contractor’s ability to compete against the client or solicit business from the client’s customers. Most legal advisors recommend against including these clauses in agreements, since it makes the contractor and client relationship a bit hazy, and more like that of a W2 employee. If a client is insistent on including the restrictive clauses, you may recommend they hire you as a W2 employee at a hire rate where they would have more restrictive power, but will need to provide you with benefits and other employee perks. This may be enough to change their tune. Another possible option is to request extra payment for the inclusion of these clauses since it may limit your opportunities, and make it only valid for a short period of time.
3. Insurance – or other types of policies. Be sure you’re aware of all clauses in the fine line of the contract, and be sure that it doesn’t include a clause that states you are responsible for consequential damages that may occur after the completion of your service. This will not be covered under your errors and omissions policy.
4. Intellectual Property – Verify how intellectual property will be handled in the contract in order to avoid any legal ramifications. Options involve the intellectual property being licensed to the business, and you regaining ownership or you maintaining the ownership of the property only prior to working with the client, and therefore the client owns it going forward.
A career as an independent contractor is an exciting choice that offers great opportunities and success. Taking the appropriate steps to prepare and draft a legally sound and fair independent contractor agreement will make your work easier, and ultimately allow you to develop productive contractor and client relationships for years to come.