The common mistakes business owners make when they hire contractors (and what to do instead!)
With different business models and structures comes different forms of hiring. Determining whether you should hire an employee or a contractor is an important step that can come with repercussions should you get it wrong.
If you are unsure whether the person you need is an employee or a contractor, we have covered this in detail in a previous article (Employee or contractor – what’s the difference? And why you could be fined if you don’t do it the right way.) but right now let’s look at contractors.
What is a Contractor and an Independent Contractor Agreement?
Contractors are self-employed individuals who are engaged by a Principal (another business) to complete service-based tasks under a contract. Contractors earn their income by invoicing the Principal for the work they have completed.
A Contractor Agreement is a legal, written document that is read and signed by both the Principal and Contractor. The agreement documents both the commercial terms of the agreement (how much is paid, when it is paid, what is to be done etc) and what is to happen in terms of obligations to each other, how the agreement ends and other things like confidentiality and protection of Intellectual Property (IP).
It is common for businesses to hire contractors and not bother with signing a formal Contractor Agreement. Instead, the two parties agree upon the terms over email or even verbally. The danger here is that this can put both the Principal and the Contractor at risk. Because, as you know, things don’t always go as planned.
In this article, I share four reasons why you need a Contractor Agreement.
Avoid payment disputes
Disputes over payment commonly arise when parties do not have a clear agreement in place. This occurs particularly when the scope of a project varies or things do not go to plan. Payment disputes can easily be avoided by having a clear Contractor Agreement.
A contractor agreement should set out:
a really clear scope;
The price for each part of the scope with clear parameters; and
How and when payment will be made.
These three factors will minimise payment disputes from occurring and reduce unwanted stress and tension.
Confidentiality and access to systems
Something to be aware of when hiring a contractor is that often these people require access to your IT and systems. This often means that they will have access to confidential information. If things turn sour, there can be things you will want back such as equipment or to close off access that is accessed via a login and password.
There is also a risk that contractors can access and steal trade secrets or ideas from you. With the inclusion of a clause called Confidentiality and Ownership of Intellectual Property in our Contractor Agreement, this can help prevent this from occurring.
For example, if you are a copywriter and you use a contractor to manage your social media, as part of that handover, you give that contractor all of your passwords to your social media accounts. But then the relationship turns sour and I have heard of instances where the contractor uses the information they have, against them.
So for these reasons you must be extremely careful who you give access to those platforms and this information should always be documented in an agreement. Whoever has access to any systems or platforms, how they use them and their ‘obligations with access’ should all be documented. Also consider using a password protection system like “Last Pass” where it is easy to stop access or change passwords without sharing the actual password.
Also think about where a contractor needs to go within a principal’s business systems and tech platforms. It is in the best interests of both parties to agree what types of information they will have access to. From the Principal’s perspective, it offers security that the contractor won’t access sensitive information and from the Contractor’s perspective sometimes not having access to particular information can make the job easier and have less call for blame if information is leaked. By documenting this in an agreement it is then clear when a contractor is not permitted to access files outside of their specific tasks or take any information.
Having this written up in an agreement will also provide both parties with peace of mind by setting clear boundaries, intentions and expectations from the get-go. It shows the contractor that the Principal expects them to behave ethically when doing business and it formalises the relationship so that there are pathways available if things don’t go to plan with the contractor relationship.
Safeguard your client relationships
Contractor Agreements are also extremely useful when it comes to ‘restraint of trade’. For example, you might bring a contractor on and they may be required to work with a key client of yours directly. The risk here is that they could get on very well with the client and then try and take your client from you and work directly with the client instead, cutting the original business out of the picture.
For this reason it is wise to have a restraint to outline that when the project ends and the contractor finishes their work, they cannot approach that client or other members of the Principal’s team, within a certain time period, for example 12 months after the work finishes. This is known as a restraint period.
Restraint periods are particularly important if your contractor is in direct contact with the client or members of your team.
Ending the relationship Termination clause
Businesses who hire contractors without a contractor agreement can run into problems when they need to end the agreement.
Imagine this - you are a business owner and you hire a contractor. But a pandemic hits and you need to terminate your contractor early, before the initially intended scope of work is done. If you do not have an agreement, this can get tricky.
No agreement also means that contractors are more likely to leave you in the lurch with unfinished or substandard work because there is no formal agreement in place.
When a Principal wants to terminate a Contractor and they don’t have any formal agreement, it makes it unclear whether they might be left with a financial liability, if they are unable to terminate in the way they would like.
For example, if you need to terminate a Contractor immediately and no longer wish to pay them going forward, they could say that you have to give them notice. The Contractor could say that the notice period for their services is one month’s notice, and they then invoice you for a month’s fees. However, you wanted them to finish at the end of the week. What do you do with the extra 22 days of fees in dispute?
Usually this is the point where people come to me to seek legal advice. Although if there were an agreement in place with a termination clause, this entire situation could have been easily avoided. And believe me, I much prefer drafting a contractor agreement at the start rather than sorting out messy and expensive disputes.
How to hire an independent contractor: The essential ingredient
Employing a Casual Employee: What are their entitlements?
Need a contractor now? Your first steps.
Every business is unique. You may want to take a look at my low-cost Contractor Agreement template, or if you think your business has some complexities that need to be looked over, then I will happily discuss your needs with you.
It is important to note, the template uses legal information only whereas if you need a customised agreement because of the specific nature of your business, then please book a call and we can discuss your needs and provide you a quote for this.
If you buy the template and then realise that you will require some support to customise it, the average cost is under $500 and pricing will vary depending on how complex your agreement needs to be.