5 Things to Look Out for in a Contractor Agreement
Not sure what you need to know before signing a contractor agreement? Learn the 5 most important things to look for.
A contractor agreement is an agreement between a business and an independent contractor. The agreement allows the business to hire the independent contractor (or a freelancer or a consultant) to perform work for the business. In some situations, the contractor may have rights under the Independent Contractors Act 2006 (Cth). You can visit our guide “Independent Contractors Act – What You Need To Know” for more information.
A contractor agreement is very important for an independent contractor. The agreement determines the rights and responsibilities of the contractor. A contractor should carefully read and understand the agreement, prior to commencing work.
There are 5 important things that an independent contractor should look for in a contractor agreement.
1. Work Description and Schedule
The contractor agreement describes the work that the independent contractor must provide. The scope of the work should be specified in the agreement. This can include, for example, the construction or renovation of a house, designing a website, or advice on a business project. The individual aspects of the work will also be specified in the agreement. The work required to be completed may be divided up into stages or segments. Usually, this occurs in contractor agreements for the construction of a house. The agreement must also specify the duration or length of work. For example, this can involve a certain date when the contract comes to an end. Otherwise, the agreement may require a specific amount of work hours.
The agreement should describe the work in clear terms. The contractor must be clear on the expectations of the company prior to commencing work. This includes ensuring that the company’s special requirements relating to the work (such as the specific brand, style or colour of an item) are conveyed to the contractor. Importantly, both the contractor and the the company must be aware of the expected schedule. Parties can take the opportunity to negotiate a schedule based on their requirements. The contractor must be careful not to agree to something he cannot deliver, to a schedule he cannot meet, or to make guarantees he cannot keep.
The contractor agreement should specify the payment for the services. It should also specify the timeframe for the payment. The parties can negotiate the payment timeframe.The company may pay a lump sum at the end of the agreement or an hourly rate for the work. Usually, payments will be linked to each stage of the work. The contractor receives payment on the completion of each stage. The agreement must also specify the payment method. This involves specifying whether the payments are electronic or not, when an invoice should be sent, and what account should receive the payment. The contractor should ensure there is a fee for late payments.
The company may reimburse some of the contractor’s expenses such as travel expenses. The agreement should specify the conditions for reimbursement. The conditions can be that the contractor should pre-approve the expenses or provide an invoice. Some payments will explicitly not be reimbursable. This includes the contractor’s fees for licensing, corrections, and insurance premiums.
It is important that the contractor agreement specifies how both parties can terminate the agreement if needed. This will require specifying terms which can cause a breach of the agreement. Various breaches may be agreed upon. It will also involve specifying a notice requirement (30-day, 15-day) for a notice of termination ending the relationship. It might be necessary to set out the circumstances where the agreement can be terminated without any notice. This may be for serious breaches of the agreement. Both parties must choose a period of notice that they are satisfied with. The contractor agreement may also specify what must occur on termination such as returning the property used by the contractor. It might be necessary to place a clause about intellectual property that holds that the any work created by the contractor belongs to the company
Alternatively, the contractor agreement may set out an expiry date where the relationship will naturally come to an end. In light of this, it might be necessary to specify an option to renew the contract.
The company may restrain the contractor from specific actions. The restraints may apply while the agreement is active or when the agreement is completed. For example, the company may restrain the contractor from working anywhere else while working for the company. The agreement may also contain a non-solicitation clause. This can prevent a contractor from soliciting clients or employees of the company. The agreement may contain a non-compete clause. This can prevent a contractor from a opening a competing business. Alternatively, the clause may prevent a from working for another company that is competition with the hiring company.
Working with other employers while the agreement is active might be necessary to keep your business running. A contractor should negotiate to remove this restraint, if possible. Notably, courts only enforce ‘reasonable’ restraints. It is possible for a court to read down a restraint clause so that it is not unreasonable under the Restraint of Trade Act 1976 (NSW). Further, non-compete clauses are not effective where the contractor is working within his chosen field.
5. Dispute Resolution
It is possible that disputes can arise between contractors and the company. So, it is important that the contractor agreement sets out the procedure for how to resolve the dispute. It would be valuable for a contractor to ensure that alternatives to a court trial, like arbitration and mediation, are provided for in the agreement. Good faith negotiations prior to dispute resolution might also be valuable for a contractor.
Prior to commencing work, a contractor must understand the contractor agreement. This means checking: (1) the work description and schedule, (2) payment for services, (3) termination clause, (4) restraint clauses, and (5) dispute resolution clauses. Other than this, it might be valuable to check the confidentiality requirements in the agreement as well. The contractor agreement may specify the insurance requirements. Since contractors are not employees, companies will rarely cover the contractor in their liability insurance. But, a company may require that the contractor has his own general liability insurance coverage.
Meru is a legal tech intern at Lawpath and a Bachelor of Laws student at The University of Technology Sydney. He is interested in how technology can help bring the legal industry into the 21st century.