Cooley Protect

What Do You Absolutely Need in Your Contractor Agreements

Why Hire a Contractor?

Many companies hire contractors so they can have more hands on deck during busy times without the ongoing commitment of hiring employees.  Contractors also can provide specialized expertise that can be difficult to fill from the employee workforce.

Contractor Agreements are Key to Minimizing Liability and Protecting Your IP

When you hire a contractor, you must ensure that:

  1. You have protected your company's proprietary information,
  2. Your company owns any resulting work product, and
  3. You have taken steps to minimize the chance that a court or government agency may subsequently reclassify the contractor as an employee.

The best way to accomplish these objectives is by having each contractor sign an independent contractor agreement.

Note: You can generate a Form of Consulting Agreement (for use by US companies) or Form of Consultancy Agreement (for UK companies) using Cooley GO Docs.

"Must Have" Terms To Include in Your Contractor Agreements

At the minimum, your standard contractor agreement should include the following terms:

Nondisclosure Obligations.

Your company's competitive edge depends, in part, on its ability to protect its valuable proprietary information.  In order to protect your "secret sauce", or trade secrets, you must implement a trade secret protection program (see also Protecting Your Company's Intellectual Property).  One ingredient of such a program is including confidentiality obligations in your contractor agreements to prevent contractors from using or disclosing your company's confidential information.

Assignment of Ownership of Intellectual Property

Your company will not own the intellectual property ("IP") rights in work product created by your contractors unless they have signed a contractor agreement that includes a present assignment of IP. Without such an assignment, your contractors will be free to use, disclose, and even to sell or license the IP to third parties, including your competitors.  Even non-technical contractors may develop IP that should be assigned to your company, such as business plans and advertising copy.

Provisions to Minimize Risk that the Contractor will be Reclassified as an Employee

Even if your contactor agreement provides that the person is acting as a contractor, a court or government agency is free to reclassify the relationship as an employment relationship, based on a multi-factor analysis of the work actually provided by the contractor.  If your company hires someone as a contractor, and that person is later found to be an employee, the officers and directors personally, as well as the company, may be liable for:

  • Unpaid employment taxes (including the employee's portion)
  • Associated costs
  • Penalties, and
  • Benefits (such as insurance, vacation, and stock options) that she would have received if hired as an employee.

To minimize this outcome, the contractor agreement should include provisions that demonstrate the contractor has the right to control the way in which the work is performed, including (i) the right to set her own working hours, (ii) decide where the work will be performed, (iii) to control the manner in which the work is performed, and (iv) if possible, to provide for payment based on milestones, commissions, or by the job (not by the hour or by the week).