Best Practices for Independent Contractor Agreements

The gig economy is surging. According to a recent report, 38% of the American workforce, or about 64 million people, engaged in freelance work in 2023. Many companies are choosing to hire independent contractors rather than employees to perform one-off projects or fill gaps as needed. However, independent contracting is not without risk for both employers and independent contractors. Companies that plan to hire independent contractors or independent contractors seeking major engagements should thus work with a Richmond employment contract attorney to draft independent contractor agreements that can help mitigate some of those risks.

Why Independent Contractor Agreements Matter

Companies and independent contractors who go into business together without an independent contractor agreement in place (or with a poorly drafted or executed one) expose themselves to legal and financial risks. Worker misclassification is a serious concern and occurs when an employer wrongly labels an employee as an independent contractor to circumvent certain labor regulations, such as minimum wage and overtime requirements, workers’ compensation benefits, and other benefits. Both the Commonwealth of Virginia and the federal government take worker misclassification seriously, and being found liable for it can entail steep penalties.

Independent contractor agreements are particularly important in Virginia, as Virginia Code § 40.1-28.7:7 creates a legal presumption that any individual who performs services in exchange for remuneration is presumed to be an employee. Companies can overcome that presumption only by showing that the individual is an independent contractor as determined by the Internal Revenue Service’s guidelines. While an agreement between the parties alone is not dispositive of whether a worker is an independent contractor, it can provide strong evidence for or against that status.

What to Include (and NOT to Include) in Independent Contractor Agreements

A well-drafted independent contractor agreement generally should address at least the following provisions:

Scope of Work

The agreement should set out the scope of work, as specificity can prevent the type of “scope creep” that can inadvertently turn a principal-independent contractor relationship into an employer-employee relationship. The scope of work provisions should generally include a description of the deliverables, a list of tasks, and a timeline or expected completion date. Avoid going into too much detail about how or when the contractor will perform the work (beyond a due date), as the exercise of control over when and how work is performed is a key indicator of an employer-employee relationship. For more information about defining the scope of work in an independent contractor agreement, please speak to a Richmond employment contract attorney.

Payment Terms

Payment terms are particularly important for contractors, as Virginia’s statutory wage payment provisions generally apply only to employees. That means that independent contractors have much less recourse to resolve wage disputes through the Virginia Department of Labor and Industry. Instead, they generally must rely on contracts to seek remedies.

The agreement should contain a clear rate structure, including, as necessary:

Whether the contractor will be paid hourly, by project, or on retainer
How overages are to be billed
Whether the contractor’s travel is compensable
The minimum billing increments

The payment provisions may also address housekeeping matters, such as how invoices are to be submitted, how quickly invoices must be paid, and what payment methods are acceptable, among other issues.

Independent Contractor Status

As we’ve established, the existence of an independent contractor agreement is not the final word on whether a worker is, in fact, an independent contractor. Rather, courts examine the parties’ relationship to determine the worker’s proper classification. As such, the agreement should clearly establish the elements of a principal-independent contractor relationship based on the IRS’ guidelines. Such provisions should state that the contractor:

Controls how and when the work is to be performed
Provides their own tools and equipment
Pays their own taxes
May work with other clients simultaneously
Will not receive training
Will not receive employee benefits
May incur losses
Will maintain their own professional license or certification (if applicable)

In addition to serving as evidence of a principal-independent contractor relationship, explicitly stating these ground rules can help reduce misunderstandings that could escalate into legal disputes. For more information about the IRS’ independent contractor guidelines and how to ensure that your employment practices meet them, please consult a Richmond employment contract attorney.

Intellectual Property Ownership

Intellectual property (IP) ownership is a major issue for contractors in creative fields, such as photographers, graphic designers, copywriters, and others. The default rule on IP ownership is that IP rights in “work made for hire” — i.e., created in the course of employment — belong to the employer, not the employee. However, independent contractors are not employees, so the “work made for hire” rule generally does not apply to them. Thus, the parties should address IP ownership in the independent contractor agreement. One option is to include a “work made for hire” clause to ensure that the default rule applies notwithstanding the worker’s status as an independent contractor. In such a case, the contractor may negotiate for a non-exclusive license to use the works created.

Confidentiality and Data Privacy

Independent contractors often have access to sensitive information, proprietary data, and trade secrets that could damage the hiring party if leaked or misappropriated. Independent contractor agreements should thus address how such information is to be protected, including by reasonably defining what “confidential information” is, how it is to be accessed, to whom it may be disclosed, and whether there are any exceptions (e.g., publicly available information). Companies should be aware, however, that enforcing overly strict data privacy obligations or exercising excessive control over how a contractor can use information can undermine their independent contractor status.

Draft a Mutually Beneficial Independent Contractor Agreement With Help From a Richmond Employment Contract Attorney

If you’re considering hiring an independent contractor or pursuing gig work, you would be well-served by crafting an independent contractor agreement that preserves your legal rights. To get started, please contact a Richmond employment contract attorney at Pierce / Jewett by calling 804-502-2320 or using our online contact form.