In our last two posts, we identified international legal implications of an independent-contractor relationship (Part One) and issues to consider before choosing an independent-contractor engagement (Part Two). In this, our third blog post in the Employee or Independent Contractor series, we will discuss key points for drafting an effective independent-contractor agreement for multinational organizations.
After making a well-informed decision to move forward on an independent-contractor agreement, the next step is preparing an effective document. In some cases, the company knows it will likely lose if the independent-contractor challenges his or her status in court, and therefore deterrence is a highly-important goal in the drafting process. However as companies can always expect courts and legal authorities to look beyond a document to evaluate a relationship that hints even slightly at employment, it is equally important to make sure that the document describes the reality of the parties’ relationship. Subject to applicable local law, below are some general guidelines.
- Include a robust provision explaining clearly that the parties intend the relationship to be that of an independent contractor as opposed to an employee. Explain that the contractor has the skills and expertise to perform the services without supervision and will not be provided supplies.
- Choose carefully which corporate entity enters into the contract and pays the contractor. If the contractor is deemed to be an employee, this is the entity that will likely be deemed his or her employer. This is also important for tax purposes—this entity might wind up filing a tax return in the foreign country and paying taxes on the contractor’s generated profits.
- If applicable, state that the contractor is registered as an independent service provider and include his or her local business registration number in the document—this is a requirement in some jurisdictions.
- Where there are some factors pointing toward an employment relationship (such as policies the company desires to apply to the contractor, or ongoing monitoring), there is a delicate balance to consider. On one hand, including such factors in the contract can offer some protection—individuals are generally free to contract on certain terms and conditions. On the other, though, the contract is the first thing that a court will see—and a contract that on its face looks like an employment relationship is a concern.
- Make explicit that the contractor is responsible for compliance with all laws (including any immigration laws in connection with any business travel or in the case that the contractor is an expatriate) and tax payments, as well as for obtaining applicable insurance. In some countries, it is helpful to mention specific statutes.
- Consider drafting bilingually, in the company’s home-country language and local-country language. Again, this is a requirement in some jurisdictions, and is especially advisable when the local language is the contractor’s native language.
- Structure payments on a per-project basis, and require the contractor to submit invoices. Avoid salary payments, hourly payments, or any guaranteed “retainer” that is not tracked to performance.
- Specify the conditions for termination of the relationship—and do not make the arrangement terminable at will. Ideally the contract should refer to one project. If the relationship is ongoing, the contract should reference statements of work that correspond to each separate project, which the contractor should be free to accept or reject.
- If possible, do not incorporate employment policies or employment benefits. For example, do not allow the contractor to participate in employee compensation plans or provide for vacation allowances. Consider carefully whether to include employee benefits like coverage under workers’ compensation insurance.
- Use terminology carefully. In drafting, differentiate independent contractors from employees wherever possible. Take care to avoid the illusion that the workers are company employees—badges, email addresses, and business cards should not be provided or should indicate clearly that they are not employees, for example, by displaying the word “contractor” prominently. Do not use the word “employee” in any documents applicable to contractors. Instead of “work,” use the term “services.” Instead of “supervisor,” use the term “liaison.” Instead of “discipline,” use the term “defect in performance.” However, note that it is always substance over form—these term changes need to reflect the reality of the situation in order to be of legal effect. Also note that the right terminology can change from country to country—for example, “hire” might hint at an employment relationship in some areas, but is statutorily defined to reflect a contractor arrangement elsewhere.
- Include indemnification and remedies provisions, such as where the contractor agrees to indemnify the company or pay a certain amount if the contractor ever claims to be the company’s employee. Legally, these are more effective in some jurisdictions than others, but may serve to deter legal actions regardless.
- Include a non-exclusivity provision. Exclusivity is a very strong indicator of employment status—if the company is considering an exclusive relationship, it should instead opt for a non-exclusive relationship but with a non-competition provision (which is still not ideal, as contractors should usually be permitted to compete). If the arrangement is expected to be full time or close to it, it is usually best to omit explicit mention of hours expectations.
- Include a provision stating that delegation is permissible—if open delegation is not possible, consider a provision that delegation is permissible but subject to approval. Either way, it is best to know to whom your contractor is delegating as it is possible that these subcontractors might also claim to be the company’s employees. If, on the other hand, personal services are a necessity, explain the legitimate business basis for this in the contract.
- Choose governing law carefully. The home-company’s headquarters is a frequent choice, but know that many jurisdictions will not give much weight to a choice of law clause. If the law chosen is somewhere other than where the bulk of the services were performed, the court may disregard it. Courts look at where the services are performed and the citizenship of the parties, and some countries have statutes prohibiting a choice of law other than what would be required under that country’s conflicts rules.
With these considerations in mind, the next step in developing an effective independent-contractor agreement is considering the laws of your particular jurisdiction. In the next installment of our four-part “Independent Contractor or Employee” series we will discuss some noteworthy jurisdiction-specific issues.