A well-written contract helps establish your credibility with a client. It can also be a selling point—you are able to provide a document that shields you both from risk.
In the first part of this series on contracts for the self-employed or freelancer, I outlined how a contract should address scope of work and method of payment. This second article presents additional clauses that should be a standard part of the contract as well.
Independent contractor status
Clearly state your independent status. This clause should simply come out and say something along the lines of, “Contractor is an independent contractor and is not an employee of Client.”
Beyond that, here are the other salient items that establish you as an independent. You can bullet these under the “independent status” clause or list them separately, if a project requires greater detail on any particular point.
- Control: Contractor has sole discretion to determine how, when, and where to perform services required to achieve the final result specified in the Scope of Work clause.
- Non-exclusive: Contractor has right to perform services for other clients during the term of the contract.
- Assignment: Contractor has the right to use employees or subcontractors to perform some or all of the duties required. (Your client has a right to know who will be performing the work, so this may raise eyebrows. If so, address it in a separate clause that retains your right of assignment but also notes that the Client has the right to approve subcontractors or employees who perform significant services.)
- Taxes: Client will not withhold any income or FICA taxes from any payments to Contractor. Contractor is responsible for paying all applicable state, federal, and local income taxes.
- Insurance: Client does not provide workman’s compensation or unemployment insurance for Contractor.
- Benefits: As an independent contractor, Contractor is not eligible for and has no claim to medical benefits, profit sharing, vacation pay, sick pay, or other benefits offered by Client to employees.
- Expenses: Contractor is responsible for expenses and materials necessary to perform services required in Scope of Work. (If you anticipate large expenses, such as travel or expensive software, you should factor these into your bid and make sure you’ll charge enough to cover them. However, if you meet most other independent status conditions, you could stipulate that the client will reimburse you for certain large expenses.)
- Training: Client will not provide training to Contractor or employees or subcontractors of Contractor.
Why independent status is so critical
As you can see, the independent status concept largely serves to establish to the IRS that you are not an employee of the company. If the IRS decides that the relationship is employee/employer instead of contractor/hirer, you’ll both suffer.
For starters, the hiring firm will be hit with back taxes and penalties. As the contractor, you’ll have to re-file your tax returns for the period covered by the contract. You won’t pay additional taxes, but you’ll lose the right to deduct your business expenses for that period. In addition, your client is unlikely to want to continue working with you, given the hassle.
In addition to clarifying matters for the IRS, these stipulations also spell out your status as an independent to any company that may not be used to working with contractors. Especially on longer contracts, a more management-prone client may begin treating you as an employee. Your contract establishes your expectations up front and can serve as a gentle reminder if necessary.
Term of contract and termination
When does the contract begin and end? Under what circumstances can either party terminate the contract before that end date? What, if any, obligation does the terminating party owe to the other? Unlike declaring your independent status, there’s no set formula for addressing these questions.
Instead, the scope of the project should dictate the term. Don’t make the term extremely long—it leans toward an employee relationship. For a long project, you could specify a six-month term with the option to renew. (This also can provide a window for either side to renegotiate certain terms of the contract if desired.)
Generally, termination of a contract is for cause—there’s a reason for ending it before the end date. It otherwise can look more like an employee relationship (yes, contractors have more rights than employees). However, you can specify the reason:
- Breach of contract: If either party does not fulfill their obligations under contract, the other party should be able to terminate immediately without further obligation.
- Nonpayment: If the client doesn’t pay you within a specified period of time, you should be able to terminate the agreement.
- Any business reason: For greatest flexibility, you can specify that either party can terminate the contract for business-related reasons, which essentially means any reason. Specify a minimum 30-day period of notice to avoid looking like an employee.
If you’re working on a project for a set fee, you may want to stipulate a “kill fee” for early termination. For example, if the client terminates the agreement in the third month of a six-month project, the client will pay you 50 percent of your total compensation minus any payments you may have already received.
This may be unnecessary if you’ve set up an incremental payment schedule, such as 20 percent up front and 10 percent monthly. This shouldn’t be a punitive clause. Instead, you simply want to avoid a situation in which a client can cancel a project toward the end and pay you almost nothing for the work you’ve completed.
Standard legal stuff
The following points should be included in any contract as standard legal fodder. These clauses are the ones that are least likely to change from project to project. Your best source for their wording is to find a standard contract and lift them as necessary.
- Exclusive agreement: This is the complete and only agreement between Contractor and Client. (You may want to stipulate that any modifications to the contract must be in writing, signed by both parties, and attached to the original agreement.)
- Liability: What are the limits of liability for you and the client? A full discussion of this clause is beyond the scope of this article, but try to limit your total liability to no more than your compensation for the project.
- Resolving differences: Specify resolution of disputes. You may want to specify that mediation is to be pursued prior to litigation. You may also want to consider who pays legal expenses.
- Applicable law: What state’s law will govern the agreement? Usually, this is simply the state where you and the client do business. If you’re doing some work out of state or you and the client are located in different states, pick one or the other state, preferably your home state.
- Confidentiality: The client has a right to expect that you will keep private information confidential. It makes you look more professional if you include this clause up front.
- Work-for-hire: As above, you should use this clause to assure the client that the client will own the work you do for them. You do this by defining the work you produce under the agreement—whether it’s a database, a manual, or a set of training materials—as a work-for-hire: The client will retain title and rights to the work you create for client.
- No partnership: State that neither party has the authority to enter into agreements on behalf of the other party.
- Notices: Are notices to be delivered in person (to whom?), in the mail, via e-mail, or so on? Basically, what constitutes a notice as being delivered?
- Enforceability: State that if any one clause of the contract is found to be unenforceable, all other clauses remain binding as they are.
This contract belongs to both you and your client. If you believe your project warrants clauses that I haven’t discussed, go for it.
However, some clauses may not be legally enforceable, even if you both agree. For example, you might stipulate a late fee if your client doesn’t pay an invoice within a certain amount of time. You won’t be able to collect, however, if this rate is considered excessive (the legal term is “usurious”) in your state. Check your state usury laws, or simply keep this rate close to what banks charge for loans. For example, 1 percent monthly interest annualizes to 12 percent, which is generally reasonable.
Now that you know the important clauses to include, you can make your own contracts from scratch, if you like. For those of you who would rather work from a generic contract, my final article will list resources you can adapt for your needs.
Meredith Little has worn many hats under the broad term of freelance writer, including technical writer, documentation specialist, trainer, business analyst, photographer, and travel writer.To comment on this article, please post a comment below or write to Meredith.