What is a Contractor Agreement: Build Your Own with Ownr

Small business owners often wear many hats as they grow their businesses. As a result, you may find yourself becoming a jack of all trades: writing copy, building websites, creating graphics, managing payroll and a whole slew of other tasks that running a small business requires.

However, chances are you will come across a project or task that you won’t have the skills, resources, or even time to take on. In these instances, you may want to consider outsourcing. Most of the time, you won’t need to hire a full-time employee as you scale your business. Instead, you can employ an independent contractor for a specific project ( if you’re not sure whether you should hire an independent contractor or an employee, you can learn the difference here).

If you decide to hire a contractor for a project, there are some things to know before beginning work. While you could enter into casual verbal agreement, that also leaves room for interpretation and potential for the deal to get messy if timelines aren’t met or the work isn’t completed to your expectations. To formalize the working relationship and provide legal protection for both parties, you’ll want to use an independent contractor agreement. Read on to learn all about this agreement and how it can benefit your business.

What is a contractor agreement?

A contractor agreement is a legally-binding document between the hiring client or company and the independent contractor that sets out the detailed provisions of their work arrangement. It includes the scope of work, deadlines, and payment details. It also affirms that the contractor is not being hired as an employee of the company, which is important to note both for tax purposes and because independent contractors have different rights than employees (and the business owner, in turn, has different obligations to each).

What is an independent contractor?

An independent contractor is a self-employed person or entity who is hired by a client or company as a non-employee. Independent contractors are typically hired for a set project.

Small business owners may hire independent contractors for a variety of reasons, including:

Consulting (business planning, IT, human resources and others)
Event planning
Construction
Creative services (writing, graphic design, video editing)
Website building (coding, SEO optimization, product writing)
Delivery or transportation

Independent contractors are often called freelancers; however, there is a slight distinction between the two terms. Indeed defines freelancers as having a business that focuses on providing their services to a variety of clients often through temporary work or gig work. Self-employed independent contractors tend to be more professionally focused and establish their companies for long-term growth.

Independent contractors are just one type of contractor and, like freelancers, the terms are sometimes used interchangeably. The most common types of contractors are:

Independent contractor: A self-employed individual or entity who provides their services to a company as a non-employee. As the name implies, independent contractors are the type of contractor that has the least to do with the company that hired them.

Dependent contractor: A self-employed individual or entity who provides their services (almost or completely) exclusively to a single client who they depend on as their source of income. They fall somewhere between a company employee and an independent contractor since they’re employed by one primary client, yet do not reap the benefits of full-time employment. As a business owner, the main thing to note is that you may be required to provide notice prior to termination for a dependent contractor.

Sub-contractor: A self-employed individual or entity who is hired by another independent contractor to complete a portion of the project the first contractor was hired for. An example of this is when a construction manager (general contractor) is hired by a company to renovate their office space. The general contractor may subcontract a portion of the job — for example, replacing the flooring — to another skilled specialist.

Who can use an independent contractor agreement?

First, it’s important to understand when to hire an independent contractor and when to hire an employee. Some advantages of hiring an independent contractor rather than an employee are that an independent contractor can provide more flexibility since that contractor can be engaged for a set project without committing to their employment long-term. The scope of that project can be defined by the client or company that they are hired by and it can be a one-off assignment like creating a company logo or a longer-term engagement like providing regular consulting services.

Any company that hires the services of an independent contractor can and should use an independent contractor agreement. It’s important to have an agreement in place before the contractor starts their work so that the expectations for both parties are clear. For the hiring company, it will set out the details about the scope of work including the deliverables and timelines. For the independent contractor, it defines the work that is expected of them and the payment they will receive.

Contractor agreements provide legal protection and benefits to both parties involved, so it’s in the best interest of both the hiring client or company and the contractor to sign an independent contractor agreement.

If it’s your first time hiring an independent contractor, Ownr is here to make the process easier. Check out Ownr’s legal agreement templates, including a customizable contractor agreement.

What to include in a contractor agreement

An independent contractor agreement can be customized to your specific needs. It should include as many details as necessary and the language should be clear and easy to understand. In general, an independent contractor agreement should include these sections:

Who are the client and contractor
What are the services being provided
What and when compensation will be provided
How and why the agreement can be terminated
What confidentiality needs to be maintained
What governing authority presides over the contract
Which party owns any intellectual property created

Advantages of a contractor agreement

A contractor agreement protects the client or company doing the hiring and the independent contractor completing the work.

It clearly outlines contractor duties: This is especially important because the client may have very little visibility into how the work is performed, so it’s essential to set out clear expectations.
It provides both parties clarity and certainty about the scope of work: By providing clear written details, the client and contractor will both be on the same page about the expectations and deliverables.
It provides legal protection if issues arise: Unlike a verbal agreement, both parties are better protected by a legally-binding written agreement.
It helps solve disputes: For both parties, having clear, written documentation can help stop legal disputes from arising.
It protects the client’s intellectual property: The employment agreement can clearly define what intellectual property is owned by the client versus the contractor.
It maintains the confidentiality of trade secrets: It may be essential for your independent contractors to access proprietary information about your business in order to complete their work. To protect this information from being shared, you can include details on what information is confidential and the consequences for breaching those terms.

Drawbacks of a contractor agreement

It’s important to be aware of the limitations of a contractor agreement. These include:

It may draw additional scrutiny from government agencies: Some companies misclassify employees as independent contractors to avoid providing employee benefits and deducting Canada Pension Plan (CPP) contributions, EI premiums, and income tax from remuneration. It’s important to ensure that you’ve correctly categorized anyone you hire to do work or your company could face audits.
It provides less stability and security: Unlike an employee-employer relationship, it is generally easier to terminate a contractor agreement without notice.
There may be tax complications: This is especially true for independent contractors as they are responsible for remitting their own employment taxes.
It may not provide an accurate scope of work: It’s possible that the work was estimated incorrectly or the scope of work may change over the course of the contract. The contract also likely won’t take into account time spent on administrative tasks for independent contractors.

Independent contractor vs. an employee

It’s important to classify workers’ employment status correctly. This can be difficult because there are subtle differences between how independent contractors and employees are defined, and it may differ by location (laws in Quebec differ from those in any other province or territory).

In order to answer if an independent worker is eligible for independent contractor status, as the business owner, you should answer this key question defined by the Canada Revenue Agency:
“Is the person engaged to carry out services as a person in business on their own account, or as an employee?”

Other determining factors are the level of control the client has over the contractor’s activities and whether the contractor used their own tools and equipment to complete the work.

If you are unsure whether a worker should be classified as an independent contractor or an employee, you may request a ruling with the CRA.

How to write a contractor agreement

We recommend starting with a contract agreement template and filling it to your needs. Ownr makes drafting important legal documents accessible with customizable templates that include an e-Signature option. If you need a second opinion, a contract lawyer can review your most complex agreements.

Final thoughts

As a business owner, it’s in the best interest of your enterprise to use a contractor agreement when you hire an independent contractor. It provides more legal protection than a verbal agreement and ensures that intellectual property is protected and confidentiality is maintained.