Many people search the internet for examples of an Independent Contractor Agreement with the intention of simply copying and using the agreement. I would caution against this - you need to fully understand the implications of any contract you sign.
Introduction to this Tier 2 page
This tier 2 page and the associated tier three pages are quite lengthy since they deal with a fairly complex topic - the Independent Contractor Agreement.
Accordingly, I have broken them down in to number of sections - set out below is a summary of the structure of the pages to help you navigate and get the best understanding of the information presented:
1. Preamble and context
2. The importance of a consulting contract - why not just make a verbal 'Gentleman's agreement?'
3. Overview of the spectrum of possible relationships - from Employee through to Independent Consultant
4. The difference between a contractor and a consultant
5. The basic elements of an Independent Contractor agreement
6. Working through third parties i.e obtaining contracts via Agencies or Lead Consultants
7. Using Associates or sub-contractors to deliver assignments on your behalf
8. The importance of professional advice when preparing and finalising your Independent Contractor Agreement
9. What matters most is your relationship with your client - get this right and the consulting contract is of secondary importance
There is a lot of information to work through on this page; if you need a few minutes of light relief, check out my Best Consultant Jokes page; but I want to see you back here in five minutes!
1. Preamble and context
When working as an Independent Contractor the nature of the relationship between You and the End Client is fundamentally different to the relationship between an Employee and an Employer.
This Tier 2 page and the associated Tier 3 pages (refer to the various links below) summarise the key points about which you need to be aware. I have presented the information in a straightforward and simple manner, using plain English in an attempt to de-mystify the topic and avoid the potential for confusion that can be introduced when legal jargon is used.
Whilst we are focusing on legal issues, please note that the information presented on this site reflects my personal experience and understanding but does not constitute advice. You should of course seek advice from your own professional legal, financial and taxation advisers before making decisions and taking action.
Many people search the internet for examples of an Independent Contractor agreement with the intention of simply copying and using the agreement. I would caution against this - you need to fully understand the implications of any contract you sign. The whole topic of the Independent Contractor agreement can be complex, therefore you will need to take advice from a qualified professional.
2. The importance of a consulting contract - why not just make a verbal 'Gentlemen's agreement'?
It sounds obvious, but it still needs to be stated - no contractor should start work without a signed contract in place. However, many do, trusting to informal arrangements, handshakes and Gentlemen's agreements.
The contract / Independent Contractor Agreement is essential and serves a number of important purposes, including:
- Providing a written record of the agreement
- Formalising arrangements for the protection and benefit of all parties
- Defining the relationships between the parties
- Setting out the roles, responsibilities, accountabilities and rights of the parties
- Providing clarity and certainty as to the identity of the people or organisations (companies) that are party to the agreement
- Setting out clearly what needs to be done (the services or deliverables)
- Stating Who will do the work and within what period of time
- Setting out the quality standard(s) that the deliverables must meet
- Detailing the Fees payable for the assignment
It is critical to understand the difference between a contract and an agreement. The Oxford English dictionary defines a contract as 'a formal agreement'. The key point of distinction is the word 'formal' i.e. the agreement between the parties is formalized in law and can be enforced using the law should there be any subsequent disagreement between the parties.
However, as in many aspects of business there is a balance to be struck. Ideally the quality of the relationship between a professional consultant and his client will be such that there is predominantly a shared understanding and agreement between them.
In the event that there is any misunderstanding, the strength of the relationship will probably determine whether the matter can be resolved amicably and the relationship maintained thereafter. If matters deteriorate to the point that one or both parties need to rely on the contract and take legal action, then it is likely that the relationship will be irreparably damaged.
In the following pages I use the words Contract and Agreement interchangeably, acknowledging that in essence the two things are, or at least should be the same.
Similarly, I use the terms - Independent Contractor Agreement - and - Independent Consulting Agreement - interchangeably throughout the site.
The independent consulting agreement or contract serves two main purposes.
Firstly, the contract represents a legally binding agreement between two legal entities, setting out clearly the commercial nature of the relationship and the rights and responsibilities of each party. The very act of drafting, reviewing and signing a contract is a useful process in that it focuses the minds of both parties on what is intended. Often the process of documenting the intended relationship will identify a number of areas or points where clarification is required, and these can be discussed and resolved in advance. Clearly this is much more satisfactory compared with these issues surfacing part way through a consulting assignment when points of difference may be much more difficult to resolve.
Secondly, your use of an Independent Contractor Agreement sends a very clear message to the client that you are a professional who takes your assignments and engagements very seriously. The standard requirement of most professional bodies is that work for clients only takes place once a formal engagement letter is in place, in addition to a basic contract that is specific to that particular piece of work.
Furthermore, Professional Indemnity Insurance (PII) cover will be contingent upon there being a clear contract in place ahead of the start of a consulting assignment. In the case of an allegation by a client of professional negligence, the insurer will require sight of the consulting agreement / consulting contract in order for an assessment of the circumstances to be made, and a defence of the claim to be progressed.
One final important consideration is the length and complexity of the contract (the actual document) and the amount of time invested in drafting and refining it. It is important to be pragmatic and to acknowledge that no contract is perfect and that there will come a point where both parties need to move beyond the document and start to trust in the quality of the professional relationship.
3. Overview of the range of possible Contracting relationships - ranging from Employee to Independent Consultant
Each Consulting relationship will sit somewhere along the continuum or range that is summarised in this section and expanded upon on the pages that are linked below.
You need to be very clear on the nature of the commercial relationship between you and your client, and the balance of risk and reward between the parties that is associated with where you are oprating on this continuum.
Care is also required to ensure that the Independent Contractor Agreement that you are using fully reflects the commercial reality of the relationship.
It is not uncommon for there to be third party sat in between you and the end client acting as either an introducer / agent or as the Lead consultant / contractor.
A number of themes need to be explored before we look in detail at the key components of the independent contractor agreement.
The balance of Risk and Reward is best understood if we determine where on the following spectrum the relationship actually sits:
At this end of the spectrum (1) there is relatively Low Risk and Low Reward
1.Employee (permanent, typically salaried)
2.Employee (temporary - employed Direct by the employer)
3.Employee (temporary - through an Employment Agency)
4.Contractor (Contracting Indirectly with the end client - through an Agency)
5.Contractor (Contracting Indirectly with the end client - as an Associate of a Lead Contractor)
6.Contractor - (Contracting Direct with the Client - Time and Materials basis)
7.Contractor - (Contracting Direct with the Client - Clearly Defined Deliverables - typically Fixed Price basis)
8.Contractor - Consulting service (full accountability for business outcomes)
9.You as Lead Contractor - using subcontractors to gear up your delivery capacity and capability
At this end of the spectrum (9) there is relatively High Risk and High Reward.
The page linked immediately below presents each of the nine options in a common slide structure to aid comparison and to assist you in selecting an appropriate Independent Contractor Agreement. Each slide contains a:
- Diagram reflecting the nature of the relationship(s)
- Summary of the main features of the relationship, including the contractual relationships and the financial flows i.e. Who gets paid What!
- Summary of the advantages of operating in this way
- Summary of the disadvantages of operating in this way, focusing on the major risk areas
- Representation of where on the scale of Risk and potential Reward each relationship sits
Click here to understand where on the Spectrum of contractual relationships you are or will be operating...
4. The difference between a Contractor and a Consultant
The differences between a Consultant and a Contractor are quite subtle, hence there is plenty of potential for confusion with a risk of there being an element of ambiguity in the consulting agreement...
Check your understanding of the differences between a Contractor and a Consultant...
5. The basic components of an Independent contractor agreement
A basic Independent Contractor Agreement will cover, as a minimum, the following key areas:
- Definition of the parties to the contract;
- The term (duration) of the contract;
- Summary of the services to be provided;
- Summary of the fees to be paid including reference to sales tax or VAT as appropriate;
- The location in which the assignment is to take place;
- Arrangements for periodic update meetings between client and consultant;
- Reimbursement of expenses incurred by the consultant;
- Commissions, gifts benefits or other inducements;
- Arrangements for call out;
- Training; either training of the consultant or by the consultant;
- Site security requirements;
- Professional indemnity insurance;
- Ownership of intellectual property;
- Offers of employment;
- Absence of the consultant and rights of substitution;
- Force majeure;
- Waiver of remedies;
- Assignment of the agreement;
- Notices relating to the agreement;
- Compliance by employees or sub-contractors of the consultant;
- Law applicable and jurisdiction;
Typically the Independent Contractor Agreement will have one or more appendices that record and summarise the key components of the contract including for example: date of commencement and termination; a detailed definition of services and deliverables; details of fees, terms of business and the basis of payment; arrangements for the submission of invoices; key contact names and numbers.
A separate group of pages on this site provide examples of the contract terms that would typically be included in an Independent Contractor Agreement along with straightforward explanations of the meaning of the contract terms.
6. Working through third parties - Agents or Lead Consultants
The independent contractor agreement that you choose must fully reflect the commercial relationships between You, the Agent / Lead Consultant and the End Client:
Highly profitable consulting assignments can be secured through Agents or Lead Consultants
7. Using Associates to help you deliver assignments
Using Associates and a 1099 independent contractor agreement to help you deliver assignments to your clients
8. The importance of professional advice
From reviewing the content presented on this page it is clear that the commercial relationships between yourself, your clients and various third parties can be quite complex. Accordingly it is essential that you seek professional legal, accounting, taxation and insurance advice prior to committing to client assignments.
Professional advisors that you should consider and the nature of the assistance that each will be able to provide for you
9. What matters is the relationship
A final thought on the independent contractor agreement. as with so many things in life and in business what really matters is the quality of relationships. An open and trusting relationship in which there is clear, straightforward and meaningful communication is worth a truck full of lengthy contractual documents.
I intentionally do business with a very limited number of clients, lead consultants, agents and sub-contractors.
My view, which has been confirmed by experience, is that quality is much better than quantity. The individuals that I do business with know me very well at a professional level and know that I value the relationship above all else.
I have demonstrated this a number of times by making it explicitly clear that should there be any disagreement or misunderstanding then I would willingly waive any fees associated with the assignment in order to maintain and the strengthen the professional relationship. Fortunately I have never needed to deliver on this commitment, but I know that those I do business with value this approach greatly.
Agents and Lead Contractors can be a valuable source of new consulting assignments...