Independent Contractor Contract Versus Employee Contract

There are 3 common situations when an independent contractor contract becomes useful:

(a)  Engaging casual workers.

(b)  Engaging local talents to break into new overseas markets where the company is yet to have a registered or representative office.

(c)  Engaging outsourced service providers.

Misclassification of an individual as an independent contractor may have a number of costly legal consequences. If your independent contractor is discovered to meet the legal definition of an employee, you may be required to reimburse overtime payments and employee benefits; backpay and be penalized for personal income taxes, social security etc; pay for worker’s work injury compensation benefits. In addition, an employer is legally responsible for the negligence of his or her employees but not for negligence of an independent contractor.

Understanding the legal tests is important to the HR practitioner who has draft his own independent contractor contract without legal support.

LEGAL TESTS EXAMPLES OF CONTRACTUAL CLAUSES
Intention of the Parties Test

This test considers the intentions of each party to the agreement regarding the nature of the relationship. Important to note is that if actual circumstances point to an employment relationship, then simply labelling it an independent contract relationship will not modify the true position.

 

Independent contractors are not eligible for benefits the client makes available to its employees. The independent contractor is self-employed and therefore responsible for his or her own benefits.

Independent Contractor Status

(a)The Contractor is an independent contractor of the Company. Nothing contained in this Agreement shall be construed to create the relationship of employer and employee, principal and agent, partnership or joint venture or any other fiduciary relationship.

(b) The Contractor shall have no authority to act as agent for, or on behalf of the Company, or to represent the Company, or bind the Company in any manner.

(c) The Contractors shall not be entitled to any benefits accorded to the Company’s employees, including without limitation worker’s compensation, disability insurance, retirement insurance, vacation, sick pay or other benefits accorded to employees of the Company.

 

 

Control Test (Right of Control)

The employer have the right to exercise control over the employee (a) Employer has the right to hire and fire the employee. (b) Employer has the right to dictate both the means and the manner in which the employee performs the job. The company can only control the final results of the work done by the independent contractor.

 

Contractors can’t be fired in the same way as employees while they are working under contract. You may decide to have them stop working on a project, but you will be obliged to pay them

according to your contractual agreement unless you are able to renegotiate the contract or successfully sue them if you are unhappy with their work. The contract should have a termination clause.

Termination

This Agreement shall be terminated at the conclusion of the Scope of Work. The Company may terminate this Agreement at any time by 10 working days’ written notice to the Contractor.

 

In addition, if the Contractor is convicted of any crime or offense, fails or refuses to comply with the written policies or reasonable directive of the Company, is guilty of serious misconduct in connection with performance hereunder, or materially breaches provisions of this Agreement, the Company at any time may terminate the engagement of the Contractor immediately and without prior written notice to the Contractor.

 

Additionally, this Agreement shall automatically terminate upon Contractor’s death.  In such event, Company shall be obligated to pay Contractor’s estate or beneficiaries only the accrued but unpaid compensation and expenses due as of the date of death.

Independence Test

This is the inverse of the control test. An employer determines the employee’s work methods and evaluates the employee’s performance. The independent contractor is responsible to the employer for the end “product” but

determines his or her own work methods.

 

A high level of autonomy on the part of an employee or contractor is inconsistent with a high level of control by an employer or principal.

 

Examples of factors which indicate a

high level of independence include a person supplying their own equipment, working from their own premises, having direct responsibility for profits and risk of the business and being able to hire or fire who they wish to help them do the job.

 

 

Location, Tools, Equipment, Suggestions. Independent Contractor shall be responsible to the ownership and management of Company, but Independent Contractor will not be required to follow or establish a regular or daily work schedule.

 

The Company agrees that Contractor’s services need not be rendered at any specific location and may be rendered at any location selected by Contractor.

 

Independent Contractor shall supply all necessary equipment, materials and supplies. Independent Contractor will not rely solely on the equipment or offices of Company for completion of tasks and duties set forth pursuant to this Agreement. Any advice given to Independent Contractor regarding the Scope of Work shall be considered a suggestion only, not an instruction. Company retains the right to inspect, stop, or alter the work of Independent Contractor to assure its conformity with this Agreement and Company needs.

 

Insurance

 

The Contractor will carry general liability, automobile liability, workers’ compensation and employer’s liability insurance (specify amount if relevant). In the event the Consultant fails to carry such insurance he/she shall indemnify and

hold harmless(nonprofit), its agents and employees from and against any damages, claims, and expenses arising out of or

resulting from work conducted by Consultant and its agents or employees

 

Taxes

The Company shall not be responsible for withholding taxes with respect to the Contractor’s

compensation.The Contractor shall be liable for paying taxes solely from his or her personal income.

 

Independent Contractor hereby promises and agrees to indemnify the Company for any damages or expenses, including attorney’s fees, and legal expenses, incurred by the Company as a result of independent contractor’s failure to make such required payments. At the Company’s request, Independent Contractor shall provide proof of required tax payments.

 

Fundamental Test (Business Test or Economic Reality Test)

Is the person who is engaged to perform services performing them as a person in business on his own account?

 

An employment relationship involves being placed on the employer’s payroll. Employees will be paid either a pre-determined amount (on an hourly or salaried basis), on a commission basis (which means earning income based on a sales-based schedule), or some combination of base pay and commission. All income earned is subject to income taxes, where applicable, and the employer withholds those taxes from the employee’s payroll payment, where applicable. All income earned during the course of a calendar or tax

year is reported to the employee and to the government by the employer.

 

Independent contractors are self-employed. They are engage in a contracted agreement to provide services to a client in exchange for an agreed upon fee (lump sum, hourly, weekly, monthly, etc.), which may include some form of commission. If commission is involved, the agreement should indicate whether the contractor is paid on a commission-only basis, draw vs. commission, or combination of base fee plus commission. The agreement will also describe how and when payment will be made. The terms of each applicable pay structure should be spelled out clearly in writing and agreed to by all parties before work is performed. The agreement should also clearly explain how payment disputes are settled. Remedies are available to independent contractors should a dispute involving payment for services arise.

 

Independent contractors are not placed on an employer’s payroll; instead, the independent

contractor invoices the client for work performed and the client pays the independent contractor through Accounts Payable. The client does not withhold personal income taxes from the payment, and the independent contractor is responsible for satisfying all tax obligations.

Relationship

The Contractor may engage in other business activities provided, however, that the Contractor shall not during the term of this Agreement solicit the Company’s employees or accounts on behalf of the Contractor or another entity.

 

The Contractor is free to provide services to other clients, so long as such other clients are not in competition with the Company and so long as there is no interference with the Contractor’s contractual obligations to the Company.

 

Fees and Payment Terms

Subject to the provision of the Services in accordance with this Agreement, the Company shall pay to the Contractor a monthly fee of (currency) ($amount) including (consumption tax)  (Fee) in arrears subject to receipt of an invoice form the Contractor at least (number) days before the end of the respective month.

 

Integration Test

Is the person performing services part and parcel of the organization? Is their work necessary for the running of the business?

Contract/Project Duration

This agreement is for a fixed term commencing on (date) and ending (date) unless terminated earlier under termination clause (number)

 

Indemnification

(a)The Contractor agrees to indemnify and hold harmless the Company, its affiliates, and its respective officers, directors, agents and employees from any and all claims, demands, losses, causes of action, damage, lawsuits, judgments, including attorneys’ fees and costs, arising out of, or relating to, the Contractor’s services under this Agreement. This provision shall survive the duration of this Agreement.

(b)The Contractor agrees to defend against any and all claims, demands, causes of action, lawsuits, and/or judgments arising out of, or relating to, the Contractor’s services under this Agreement, unless expressly stated otherwise by the Company, in writing.

 

 

CHECKLIST

The following checklist was crafted by University of Hawaii, and adapted by the National Association of Colleges and Employment

TEST QUESTIONS

Employee

Independent Contractor

Is the worker required to follow specific instructions as to the means and manner of performing the work?

Yes

No

Is there a set amount of hours and days that the person must work each week?

Yes

No

Does the employer supply the office, equipment, and tools needed to accomplish the work?

Yes

No

Must the work be performed on the employer’s premises?

Yes

Sometimes

Is the worker trained by the employer to perform the assignments?

Yes

No

Is the assigned work a part of the regular business of the employer?

Yes

No

Has the relationship continue for a long time?

Yes

No

Can the employer assign additional projects to the worker?

Yes

No

Is the person paid in the same manner as employees?

Yes

Maybe

Can the worker hire assistants?

No

Yes

Does the worker provide services to more than one firm?

No

Yes

Does the worker make his or her service available to the general public?

No

Yes

Is there a written contract between the parties delineating their rights and responsibilities?

No

Yes

Can either the worker or the employer terminate the relationship at will?

Yes

No

Is the worker making any investment into facilities or equipment, and will the person realize a profit or risk of loss?

No

Yes

 

The NC State University Controller’s Office also offers a checklist-list of questions

http://www.fis.ncsu.edu/controller/tax/employee_vs_contracto.asp

The Labor Relations Institute Inc. suggested a Sample ABC Test for Independent Contractor status

http://www.lrims.com/pdf-files/Independent%20Contract%20Status.pdf

REFERENCES

10 Frequently Asked Questions about Independent Contracters

http://manoa.hawaii.edu/careercenter/files/Independent_Contractors.pdf

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