As more states enact laws designed to prevent employee misclassification, especially in highly regulated industries such as transportation and delivery, more and more businesses are getting hit with stiff penalties for noncompliance, whether or not the misclassification was intentional. At the same time, many workers find themselves confused over their own status—are they independent contractors (ICs) or traditional employees?
Despite a company’s best intentions, research indicates that misclassification is a widespread challenge, occurring at 10-20% of businesses. If you run a company that uses ICs, it is critical to have a clear and detailed process in place for dealing with these relationships. And one of the best places to start, as we mentioned in our article on the broker–carrier model, is with your independent contractor agreement (ICA).
Why are ICAs so important?
When dealing with a contingent workforce, ICAs are a critical component in the contracting process. Here are two reasons why:
1. ICAs may help enhance compliance by defining the legal entities of both parties.
It’s true that ICAs cannot guarantee that a worker will be considered an independent contractor under the law; only a government agency, such as the IRS or the court system, can make that determination.
Nevertheless, an ICA can provide powerful evidence that a worker entered the contract with full acceptance of their status as an IC, and that the work performed was compliant with all of the legal requirements pertaining to a contingent workforce.
In basic terms, a good ICA sets the status of both entities, as well as helps you to set clear expectations and solidify your workforce model at the same time.
2. ICAs outline the responsibilities of both parties.
When you enter a business relationship with an independent contractor, it may be tempting to think that you both are on the same page from the beginning. However, the reality is that misunderstandings can easily arise if the terms of a contract are not set down in writing.
A clear and detailed ICA can avoid such misunderstandings at the beginning of a project. Once you and the contractor are both on the same page, everything else should fall into place much more smoothly.
What to include in your ICA
The next logical question is: What should you include? While each contract should be customized to your company’s specific needs, here are 10 sections that have proven to be beneficial when incorporated into almost any ICA:
- Statement of ICA and effective date. At the beginning of the contract, make it clear that this is an independent contractor agreement, rather than a standard employment contract. You should also specify the date when the contract goes into effect.
- Legal identities of each party. Both you and the contractor should put down your legal names or the legal names of your companies. In many cases, it’s a good idea to partner with ICs who are established as their own business, such as those who are established as an LLC or Incorporated. Having taken these steps usually indicates a high level of professionalism and may strengthen your defense against misclassification.
- Definition of agreement and parties. This is where you and the contractor clearly define the nature of this agreement—specifically, that the contractor is knowingly entering into the agreement as an IC, not an employee. Since this is one of the most crucial parts of the agreement, it’s important to get the legal terminology right, so having counsel review the ICA is highly recommended.
- Effective duration of contract and provisions for termination. This section describes the term of the contract, whether it is for a set period of time (such as three months) or until the specified project or scope of services is completed. You should also include details on how either party can terminate the contract before its completion.
- Scope of the contractor’s duties. In this section, you should clearly describe the services that the contractor is agreeing to perform. Be as detailed as possible, but make sure that this section stays results-oriented, since placing controls on how the contractor performs the work could suggest misclassification.
- Materials and labor. This section details which party is responsible for the cost of materials and labor. To avoid the impression of misclassification, the responsible party is generally the IC. For instance, if a company contracts a delivery driver, the driver would be responsible for their vehicle’s maintenance and fuel costs.
- Compensation. You should clearly define the amount of compensation due to the IC, and when it is due. We recommend not paying by the hour but ensuring it is obvious the contractor had an opportunity to negotiate rates, and the rates should be tied to completion of services, projects, or other agreed upon “jobs.”
- Definition of independent contractor status. This provision in the ICA can protect both parties, since it outlines that as an independent contractor, the working party does not have the rights of an employee. At the same time, the company has no control over the contractor’s schedule, materials or methods of completing the work.
- Confidentiality agreement. This section makes it clear the contractor should not disclose any confidential or proprietary information obtained while providing services.
- Indemnification. This says that the company is not responsible for anything bad that happens to or because of the contractor. For instance, a company that contracts with an IC delivery driver is not liable for any damages they may suffer in a car accident.
The right tools can help
ICAs are an important piece of the puzzle when it comes to working with ICs. And combining a detailed ICA with a streamlined signing and storage process helps protect you and your contracted workforce, while enabling successful business growth. A software solution can help optimize the contracting process through:
- Automation. Digital signing sidesteps much of the hassle associated with hard-copy ICAs and ensures the agreement is always distributed and signed as part of your contractor onboarding.
- Archiving and updating. Secure digital storage and a complete audit trail creates an accessible record of the formalized agreement and enables ICAs to easily be updated and re-signed as needed.
- Customization. Your business needs will determine the exact terms of your ICAs, but the right software solution enables you to customize your onboarding workflows to verify that each IC meets the requirements of the ICA.