IT Employment

Guidelines on establishing your relationship with a subcontractor

In a subcontractor's contract, you need to include anything that he or she needs to know to be a credit to you and your company. Here are the points you should cover in the contract.

If you've decided to work with a subcontractor and you've found the right person, you need to establish as clear an understanding with the subcontractor as you have with your clients. You must write up a contract that protects both you and your client, and you should also make sure the subcontractor understands your expectations about how to interact with both you and with the client.

In this blog, I'll show you how to clearly define your relationship with the subcontractor. I'll cover what you should always place in your contract, as well as the verbal understandings that need to be reached before work begins.

Note: This article originally published on TechRepublic on June 21, 2001.

Writing up the contract

For obvious reasons, you should never let anyone do any work for you without a contract. This doesn't have to be anything complex; in fact, you can probably modify the contract you use for working with your clients. Just make sure it covers all the points outlined below.

Terms of employment

Specify the terms of the subcontractor's employment with you. If you bring him or her on as a temporary employee, the person will have W-2 status; you will have to withhold taxes and pay them yourself. Overall, it's simpler to set up the arrangement as an independent contractor. You don't withhold taxes, and you simply complete a 1099-Misc form next year to report the person's income to the IRS. Either an accountant or some good business software can keep track of the paperwork for you.

Noncompete

You need to include a noncompete clause, stating that the subcontractor cannot work for your client within a certain period of time following completion of your project. You can also specify the terms of the employment he or she could seek. For example, you could prohibit contract employment for a longer period than you do full-time employment. As an independent contractor, the larger threat is that the subcontractor would end up working directly for your client as an independent-putting him or her in competition with you.

Indemnification/liability

State clearly what liability you assume as the prime contractor and what the subcontractor assumes. Draw a distinction between liability for technical accuracy and for actual damages. As the prime contractor, you should assume liability for the accuracy of the work you submit to your client, although it's reasonable to expect subcontractors to ensure that their work is complete to the best of their knowledge. On the other hand, the subcontractor should remain liable for negligent or willful acts resulting in bodily injury or personal property damage.

Payment

Of course, you need to set out the payment terms. Will you pay the subcontractor by the hour or by the project? If by the project, specify the deliverable milestones. Will you pay within a certain period after receiving the subcontractor's work or after the client pays you? The former is the fair way to do business, but be careful that you don't get into trouble by commissioning more work than you can afford.

Scope of work

Just as you do with your clients, make sure that the scope of work is as clearly detailed as possible and that your subcontractor clearly understands it. The longer the better-if necessary, attach it as a separate document and make sure you both sign it.

Work for hire

Include the standard work-for-hire clause, noting that all the subcontractor's work is deemed a work made-for-hire and will become your property. If your contract with your client also includes this phrase, the work will then become the client's property.

Assumptions

While not essential, it may be helpful to include an assumptions clause. Use it to spell out your expectations of the subcontractor, such as a minimum or maximum number of hours or whether the subcontractor will be available to work overtime or weekends if necessary. The month before your deadline is not the time to find out your subcontractor can work only 10 hours a week! On the other hand, when paying by the hour, you may want to keep a lid on your expenses by specifying that you must approve in writing any hours worked over a certain number in a week.

Last, before you present the contract, compare it to your contract with the client to make sure that nothing in your subcontracting agreement conflicts with your contract with your client.

Make your expectations clear

Your contract exists to spell out the important stuff. If your subcontractor will have any contact with your client, you should also reach an understanding on the subcontractor's relationship with the client versus his or her relationship with you. These kinds of issues are just as important as those in the contract, but they don't necessarily need to be written into the contract.

Here are some of the issues to address informally; your client or project may necessitate additional fine points:

  • Clearly spell out when it's appropriate for the subcontractor to contact the client or the client's staff with problems, questions, and concerns. Depending on the nature of the work to be done and your relationship with your client, you may want most questions to come to you, even if it takes a bit more time.
  • Discuss what kind of relationship you expect the subcontractor to have with your client. Especially if you don't know the subcontractor well, you may want him or her to minimize contact with your client's staff.
  • Similarly, address any dress codes or other expectations that your client has for contractors and that you have for anyone working for you.

The bottom line here is that your subcontractor is representing you. Cover anything that he or she needs to know to be a credit to you and your company, and you'll have healthy relationships with both your subcontractor and your client.

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