written by khatabook | November 15, 2022

Why is Independent Contractor Agreement (ICA) Important?

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Table of Content


Small to medium and large business organisations and body corporates hire various full-time and part-time employees per the company's terms and conditions. A variety of segregated daily tasks are allocated to each employee across multiple departments such as finance, marketing, accounting, human resources, sales, purchase, IT, research and development, etc. 

However, specific business tasks and immediate or high-priority company projects call for professional individuals who possess expertise in a particular niche or multiple niches. These professional experts are independent contractors and enter into a contract with the company to accomplish a particular task for a fixed time interval. These contractors' scope of work might include working independently or in collaboration with certain company personnel as agreed in the independent contractor agreement (ICA). 

What is ICA, and why is ICA drafted while hiring independent contractors? What clauses does this ICA include, and should your business hire contractors?

Continue reading to solve these questions and get familiarised with the ICA topic in this blog. 

Did You Know? An independent contractor is different from a freelancer. Contractors and freelancers have different benefits and limitations working in the gig economy, and both parties enjoy flexibility and freedom. 

What Is an Independent Contractor Agreement? 

Companies hire independent contractors for on-demand work or for accomplishing specific priority tasks. These companies deliver the agreed business projects to the company clients with the help of contractors. The company and contractor relationship can be considered a master/servant and/or employer/employee relationship. Even when the company hires a single independent contractor, it is highly recommended to enter into a separate contractor agreement (ICA) or work with a contractor.  

ICA or agreement for contract work is entered by the contractor (performing party or service giver) and hire company or employer (service receiver). This agreement protects both the parties in the contract and their interests. ICA is entered to highlight the contract terms and conditions and avoid misunderstandings and conflicts in the future. ICA clearly explains the contractor’s scope of work, rights, duties, and obligations of both the contractor and the hiring company. 

While hiring an independent contractor, the independent contractor agreement or contractor work agreement is used for accomplishing the smooth functioning of the work. This agreement enables all the parties in the contract to complete the agreed work with few to no hassles. The nature of this agreement can vary in each scenario and contract. This agreement includes all the terms and conditions on which the contract will be executed, special terms of the work, payment structure, work duration, additional requirements and other miscellaneous contract terms.  

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Who Is an Independent Contractor, and Does Your Business Need One?

The independent contractor works independently on the specific task allocated on which the contractor has advanced knowledge or expertise. Rarely can the company direct the contractor to collaborate with the project teams or managers if the situation calls for it.

It should be noted that the same person cannot work as an employee and independent contractor simultaneously. The company hires contractors who can be of any niche/field and background. While the consulting firm can hire independent tax consultants, an IT expert might require for the software company. So, an independent contractor satisfies the given criteria below: 

  • Possesses expertise in desired field/niche where the company highly requires the contractor’s assistance 
  • When the person is hired for a limited time to accomplish a specific task
  • Does not affect the company’s rules and regulations
  • Is not liable for any other work from any field other than the work agreed upon 
  • Have the right to negotiate fees, payment methods, work duration, etc.  

If the company is juggling whether an independent contractor or a freelancer is suitable for business needs, technically, both are quite the same from the employment and tax view. However, whether to hire a contractor or freelancer depends on the specific company's needs. Small organisations can deliver work to their clients without needing independent contractors. Mainly, medium and large companies might require the services of contractors or freelancers. Again, this depends on the company's requirements. 

A company may hire an independent contractor if the below criteria match the company's needs such as: 

  • To gain a competitive edge or exclusivity over various other competitors 
  • To assign work that requires a level of confidentiality
  • To achieve a strategic direction that defines the work to be accomplished 
  • To hire someone who can work for a specific amount of duration, either part or full time 
  • To pay a fixed price/salary for a fixed scope of work
  • To secure someone who can serve in the desired area of departments such as HR, IT, operations, logistics, accounting and finance, etc

A company may hire a freelancer if the below criteria match the company's needs such as:

  • To hire someone with expertise in creative niches/areas such as copywriting, creative or graphic designing, content strategy, etc 
  • To stick to hourly basis payment as there will be fluctuation in workload from time to time 
  • Not sure how long the company needs services as it requires on-demand services 
  • The company does not prefer to sign a long-term contract and is fine with remote service providers like freelancers

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Significant Clauses and Provisions to be Included in the ICA

All the provisions in the contractor work agreement come together and provide a strong foundation and structure to the agreement. So, it is not prudent to classify some provisions as highly important and remaining as less crucial. Drafting a legitimate and legally binding independent contractor agreement is pivotal to the smooth functioning of the contract. It will be an added security if the notary public notarises the contractor contracts. 

To draft a legitimate contractor agreement, these below-mentioned standard clauses can be included in the agreement. 

Independent Contractor Relationship 

The contractor agreement letter should specify the service provider as an independent contractor, not an employee. The company should specify that contractor will not be eligible for employee benefits like health insurance. The contractors are also responsible for covering their taxes. This clause should specify that employment laws do not apply to the contractor. 

Type of Service and Scope of Service  

This clause is essential as it lays the foundation for the contractor's rights, duties and obligations of the company. The type of work should be explicitly mentioned for which the contractor is hired. This clause requires prudence and due diligence as the representations and warranties clause also depends on this provision. 

The scope of service is set by the company, where the deliverables from the contractor are outlined. The final deliverable can be divided into sub-projects when it is a complex contract. The scope of work is to be specified to the best understanding of the independent contractor.

Fees and Service Duration 

The payment clause includes the method and time of payment, whether hourly, weekly, or monthly. Or if the contractor is paid per project or contract. The independent contractor should submit an invoice or the expenditure list for providing the services. The invoice, payment mode, payment method, payment date, etc., must be specified clearly. 

The term of service and duration of the work hours should be highlighted along with the sub-projects deadlines if any. If the contract requires higher official evaluation, consider feedback and edits along the way. 

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IPR 

The intellectual property rights (IPR) clause or consideration clause highlights the access to IPR by the contractors. The company might allow contractors to use some of the trademarks and intellectual property without posing a copyright or trademark infringement threat. However, the company specifies that the ownership of IPR is still vested with the original creator and rights are returned to its rightful owner after contractor contract completion. 

Special Obligations Clause 

The company explicitly points out the special obligations a contractor should comply with. In this clause, the contractor can find any specific requirements the company is expecting from the contract. 

Representations and Warranties  

Here, the independent contractor represents and warrants that they are not restricted contractually and that the services will be performed as agreed upon. 

Liabilities, Disputes, And Remedies 

How the disputes should be handled and how to decrease them in the future should be specified. The contract parties should also decide whose liability it is to fix any issue. The following remedies for correcting the mistakes are also to be highlighted. 

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Confidentiality and Sensitive Business Information 

The company should specify the level of confidentiality with which the independent contractor should execute the business tasks. The company may also determine that the contractor should not disclose/reveal any sensitive business information, like trade secrets, especially to the competitors. In some scenarios, the contractor might take the company’s consent if the situation calls for revealing sensitive information—ways of Termination  

This can be done either in the oral or written way or through a contractor agreement. The grounds of termination, a notice of termination, termination format, etc., are specified in this clause. 

Conclusion

A company enters into independent contractor agreements to decrease the vagueness to the maximum and improve the smooth functioning of business tasks while hiring an independent contractor. These are some of the common contractor agreement clauses that are stated above. These clauses differ based on each state and the nature of the contract. One can easily download various contractor agreement templates online. These templates include easy-to-follow contractor agreement formats, which allow the business to create simple contractor agreements easily. 

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FAQs

Q: What are the significant clauses included in the independent contractor agreement?

Ans:

The essential clauses/provisions in the contractor agreement include scope, type and duration of service, payment method, contract terms and conditions, rights and duties, representations and warranties, etc.

Q: Who is an independent contractor?

Ans:

The independent contractor works independently and is hired by the company to accomplish specific business tasks for a limited duration. This contractor possesses expert knowledge in a particular field/niche.

Q: Why independent contractor agreement (ICA) is essential?

Ans:

The contractor work agreement or ICA is highly significant when companies hire contractors as it protects the interests of the parties involved in the contract. This agreement also decreases future conflicts and misunderstandings.

Q: What is an independent contractor agreement?

Ans:

While hiring independent contractors to complete specific business tasks, companies prepare contractor agreements to specify the terms and conditions of the contract, rights, duties, and obligations of the parties involved in the contract.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.