Yes. Yes. Yes!
As a lawyer of 36 years with extensive experience in employment law and business contracts, I am often asked whether clients should enter into formal independent contractor agreements. I already answered the question, but here are the main reasons you should consult with an experienced attorney:
1. You are personally liable in absence of an independent contractor agreement.
Clients go to great lengths to form LLC’s or other entities to protect themselves from personal liability which is rampant in business. Once the entity is established, any claim filed by a customer or contractor is subject to potential payment by the company, not the principals. The problem arises when the relationship between the parties is unclear or ambiguous which always occurs when an independent contractor is engaged without an agreement. Assuming a dispute arises between the independent contractor and your business, count on the IC alleging that you are personally responsible and engaged him/her in the first instance. Happens all the time and it is typically your word vs. the IC. The outcome is always uncertain, and the legal resolution can be expensive. All of this could have been avoided by having an independent contractor agreement in place from the beginning which made clear that the company and not individual was retaining the IC.
2. Allocation of Risk.
The typical problem which occurs is that the IC has damaged a client in some way by performing negligent services. The best way to shield against this is to insert contract language which holds the IC personally liable for any damage which arises in the course of services rendered. Given that many IC’s have insufficient assets to payout on a potential damage claim, insist that they are bonded or have an insurance facility which you could tap should liability arise. Keep in mind that these clauses cannot prevent the client from suing the principal directly. However, with the proper language, the IC will serve as a source of indemnification of any damages incurred
3. Payment of Taxes.
The simple answer is that the principal never deducts taxes or any fees relating to the performance of the IC. That’s the one the key benefits of having an IC in the first place. They pay their own taxes. It is critical that proper language be utilized which makes clear that the IC is NOT an employee and responsible for the payment of his/her taxes upon the submission of a 1099. BTW – NEVER pay an IC in cash as it is a red flag that they are skirting the law. If you get such a request, send the IC packing!
4. Describe Scope of Services and Payment.
This is critical. Every detail must be included as to the services to be rendered and the fees applicable to same. If you are not specific, invariably the IC will either render unnecessary services or overcharge. Also make clear that any aberration from the scope of services would be akin to a change order and require written approval of the principal. Also, set forth the date and manner of payment with exacting detail.
5. Include a Merger Clause.
This is the heart of most agreements and provides that the written language is the entire agreement and cannot be modified by prior or contemporaneous oral modifications between the parties. This includes email exchanges but subject to the inclusion of the language in #6, below. What this does is obliterate the possibility that the IC will argue that the written contract was somehow orally modified.
6. Include provision for only written amendments.
This dovetails with the above and makes clear that only written modifications to the contract signed by both parties are legally valid.
7. Don’t defy the TWC – Texas Workforce Commission
This is critical. You cannot denote an IC to a worker who would otherwise qualify as an employee. This is a complex issue and best to consult with an employment lawyer.
