What is an independent contractor agreement?
An independent contractor agreement is a legally binding relationship between a client and a contractor.
The agreement covers every project area, from scope to payments, and spells it out in black and white. Not only does an agreement create a formal working relationship, it also describes other (sometimes overlooked) parts of working with independent contractors, like liabilities and termination processes.
These agreements are important for contractors, too. As independent contractors are not employees, it's crucial to have specifics like fees, payment dates, and expectations put into writing before a project kicks off.
Independent contractor agreements are a win-win—it makes the working relationship safer for both parties.
Situations like incomplete or unacceptable work, unfair dismissal, and overdue payments are all included, and tell both the client and independent contractor what their legal obligations are.
Note: Sign-up now to start creating your free independent contractor agreement. It has all the basic elements you’ll need to get going, and it’s been written and reviewed by top lawyers.
Why you need an independent contractor agreement
Employing an independent contractor can be a great way to (temporarily) have a highly skilled individual join your team.
For an employer, using freelance professionals can be a smart way to cover busy periods or bring in skills their regular team lacks. Yet, it's essential to have the same contractual obligations set in stone as you would with in-house employees if you are looking to hire outside your company.
It's crucial that the working agreement is thorough and explains that the independent contractor isn't a permanent employee of a business and will only remain working with the client until the terms of their work contract have been fulfilled.
If you are the independent contractor taking on a new job, specifics like payment dates and project scope should be set in stone before you start working so you don't end up doing more work than budgeted for.
That's why an independent contractor agreement plays an important role.
The agreement helps protect both parties involved, especially with areas like confidentiality agreements, liability insurance, losses, damages, or disagreements. And making sure an independent contractor agreement is signed before any work starts also allows both parties to avoid ambiguity with deadlines, key deliverables, and pay rates.
So, what exactly should you include in an independent contractor agreement to make it legally watertight?
What should be included in an independent contractor agreement?
Making sure that the entire agreement has everything it needs can seem overwhelming—here are the key clauses that any good contract should include:
Any legally binding independent contractor agreement should include standard details about the contractor and the client.
The client's name, business name, postal address, and contact information should be included in this part of the contract. The same information for the contract worker should also be added.
Scope of Contractor Services
The agreement should include a clear scope that outlines a working arrangement to avoid any miscommunication or understanding about what the project will produce.
Not only does a scope help reduce the chances of any party being unhappy with the final work product, but it should also include tasks such as sourcing and obtaining materials if necessary.
This is also the section where you should outline the job schedule, working hours, and delivery dates for each stage of the project and completion.
Remember, the more detailed your descriptions are, the less room there is for confusion.
Independent Contractor Status
As contractors are paid for specific services from a company, it's crucial to highlight that contractors are not employees.
The contract must state the independent contractor is not an employee and will only work with the client until the terms of their agreement (the scope) have been completed. If the contractor is eligible for any additional benefits—like expenses incurred or employing subcontractors to help with the project—it should be included here.
It's necessary to make sure both client and contractor know the payment terms and conditions before any work starts.
This part of the independent contractor agreement should outline all costs in detail, such as which party is responsible for covering expenses (e.g., travel or equipment) in addition to a final total of the project. And if the costs are estimated and subject to change, that should be made clear so that the client can adjust their budget if needed.
If the contractor requires the client to pay a deposit or make multiple payments towards expenses, the contract should highlight this and provide precise dates about when these payments need to be made.
This section is where a contractor should outline their conditions around late fees if a client doesn't pay their invoice on time, like so:
Finally, if there are any circumstances where a client is exempt from paying the contractor—like uncompleted work—this should also be included.
Intellectual Property (IP)
If the project produces something, like content or a website, this is called Intellectual Property (IP)—and you must outline how both parties can use it.
For example, if you are an independent contractor that works as a photographer, the contract should cover who has the rights to that intellectual property. This part of the contract needs to state which products belong to which parties—highlighting who can reproduce or use the content in the future under copyright laws to stop unauthorized use of creative work.
In this independent contractor agreement example, there are strict instructions about how IPs should be used in the project:
Pro-tip: If you're unsure whether this information applies to your company, you can always use contract templates to help you.
Indemnification clauses are a crucial part of any agreement as they protect both parties if there are disagreements during a project.
This section of the agreement outlines who is liable to pay compensation if contract terms are breached, like damages and losses as well as other provisions. Once again, getting the legal jargon right in this part of the contract is crucial as it covers both parties if a third party tries to sue, for example.
Here is what a typical indemnification clause looks like:
Pro-tip: If you're unsure how to include this information in your independent contractor agreement, then using a contractor agreement template can save you lots of headaches.
Finally, your independent contractor agreement needs to cover how and when the service agreement will come to an end.
Contract termination should outline when both parties are free from the obligations of the agreement. How you do this can vary from giving provisional termination dates or stating how long the contract is valid for (i.e., six months.)
It should also be explicit about how the contract needs to be terminated, like giving "X days" written notice and how far ahead the agreement needs to be ended before work officially stops.
Lastly, you should also outline certain circumstances in which both parties will be released from the agreement early, like if someone violates certain conditions like breaching a confidentiality agreement.
Sample independent contractor agreement template
Using an independent contractor agreement template is the best way to ensure that all T&Cs (like legal and financial obligations) are covered, and both parties will be protected.
Here's an independent contractor agreement template for you to steal.
What's the benefit of using Bonsai, instead of editing a template yourself?
If you've made it this far, one thing should be clear—independent contractor agreements are complex documents.
If the agreement isn't written correctly, both parties could be exposed to all types of risks, from IP violations to scope creep and payment disagreements. Or, you may have to go down the expensive route and ask a law firm to provide legal advice to fix any mistakes.
With Bonsai, companies can create independent contractor agreements and edit the T&Cs so that both parties agree and are on the same page. Then, the last step is having both parties sign the contractor agreement digitally.
Bonsai also walks you through the agreement when you are creating it, offering helpful tips to make the contract as fair as possible to both parties.
How to create an independent contractor agreement with Bonsai (without an attorney or law firm)
Writing an independent contractor agreement using Bonsai's generator means that your contract will be much more specific than the largely generic agreements a standard template will leave you with.
That's because many templates are rigid, difficult to edit and format, and use way too much jargon. On the other hand, Bonsai's templates allow you to tweak each aspect of an independent contractor agreement, from deposits to payment dates and late fees.
Once you input the basics (like project fees and expenses), Bonsai then allows you to edit specific parts of the agreement, like work product ownership and portfolio rights.
Bonsai’s contract generator has been vetted by experienced contract lawyers and thousands of expert freelancers, covering all of the important aspects of a contract we mentioned earlier.
And the best bit? Bonsai's contract generator is super easy to use. Take it for a test drive here.
Independent contractor agreement FAQs
What are my Internal Revenue Service (IRS) obligations if I hire an independent contractor
It's essential for companies who hire independent contractors to understand the differences between these contractors and employees.
The Internal Revenue Service (IRS) says anyone that is offering their services to the general public is usually considered an independent contractor. As such, they are responsible for their own obligations to the IRS, such as taxes.
You, the client hiring the independent contractor, are under no legal obligations. You don't have to withhold income taxes or pay social security or health insurance when you hire outside help.
What are my rights as an independent contractor?
Independent contractors should be aware that when they hire out their services to a company, they won't be given the same benefits as its employees.
They won't be entitled to vacation time or sick leave, and independent contractors are in charge of their legal obligations like taxes. But independent contractors also aren't given the same rights and protections given to regular employees like health insurance, withholding taxes, and benefits plans.