What Is an Independent Contractor Agreement?
An independent contractor agreement is a legally binding document that defines the terms of a working relationship between a business and a contractor. Unlike employees, independent contractors are self-employed professionals who provide services under a contract rather than being integrated into the company’s workforce.
Definition and Purpose
An independent contractor agreement clarifies the terms of a project-based working relationship. It defines:
- Scope of work: Tasks and responsibilities the contractor will perform
- Payment terms: Compensation structure, invoicing schedule, and due dates
- Legal protections: Rights and obligations of both parties
- Intellectual property ownership: Who owns the work produced under the contract
- Confidentiality and non-compete terms: If applicable
Having a well-drafted contract helps prevent misunderstandings and ensures both parties are legally protected. A written agreement should be used whenever a business hires a contractor for any project or service.
Who Needs an Independent Contractor Agreement?
This type of contract is essential for:
- small business owners hiring freelancers or consultants for specialized work
- freelancers and independent contractors ensuring fair compensation and clear job expectations
- HR professionals managing contractor relationships and ensuring compliance
Using an independent contractor agreement helps define expectations, reducing disputes and potential legal risks for both parties.
Independent Contractor vs. Employee
Properly classifying workers is essential for tax, benefits, and liability purposes. The key difference? Control.
| Independent Contractors | Employees |
|---|---|
| Set their own schedules | Work on an employer’s set schedule |
| Use their own tools and equipment | Employer provides tools and training |
| Work on a project basis | Typically hired for ongoing work |
| Pay their own taxes | Employer withholds and pays taxes |
| No benefits (health, PTO, etc.) | Receive benefits from the employer |
Misclassification can result in fines, back taxes, and legal issues. If your worker functions like an employee, they must be classified as one. Learn more about employee classification from independent contractors vs. employees.
Understanding the 2024 Worker Classification Rule
In 2024, the US Department of Labor (DOL) revised worker classification rules, making it more challenging for businesses to classify workers as independent contractors. The updated rule aims to ensure workers receive fair wages, benefits, and legal protections while reducing misclassification.
Key Changes to Worker Classification
The DOL introduced a six-factor test to determine whether a worker is an employee or an independent contractor. This test evaluates control, financial independence, and the nature of the work relationship.
A worker is more likely to be classified as an employee if they:
- Lack control over profit or loss: The employer dictates their pay and workload
- Do not invest in their own business: The company provides all tools, training, and equipment
- Perform work that is essential to the company’s core business: For example, a cashier in a retail store or a driver for a logistics company
- Have an ongoing work relationship: Independent contractors typically work on a project basis
- Follow company procedures: Employees must comply with set processes rather than choosing their own methods
- Require employer-provided training: Contractors are expected to have their own expertise and training
If a worker depends on a company for their primary income and lacks control over their work, they should be classified as an employee rather than a contractor.
How This Affects Businesses
Misclassifying a worker as an independent contractor instead of an employee can lead to legal and financial consequences. Employers found in violation may face:
- IRS fines: Up to $50 per unfiled W-2 and up to 20% of wages for intentional misclassification.
- State penalties: Additional fines based on state-specific labor laws.
- Back wages and benefits: Employers may be required to pay unpaid wages, taxes, and benefits to misclassified workers.
To stay compliant, businesses should carefully assess worker roles and use a legally sound independent contractor agreement. If a worker’s responsibilities do not meet the legal criteria for an independent contractor, they must be classified as an employee instead.
Are Independent Contractor Agreements Different by State?
Yes, independent contractor agreements vary by state due to differences in labor laws and worker classification tests. Some states follow stricter standards, while others allow more flexibility in defining contractor relationships.
State-Specific Legal Considerations
Many states use their own tests to determine whether a worker is an independent contractor. One of the most common is the ABC Test, which classifies a worker as an independent contractor only if they meet all three conditions:
- A: The worker is free from the employer’s control while performing the job.
- B: The work is performed outside the company’s usual course of business.
- C: The worker is engaged in an independent trade, occupation, or business.
Some states apply different legal tests, offer industry-specific exemptions, or have stricter non-compete agreement regulations. Ensuring compliance with state laws is essential to protect both businesses and contractors from misclassification risks.
Use a State-Specific Independent Contractor Agreement
Ensure your independent contractor agreement complies with state-specific legal requirements by selecting the appropriate form. Our state-specific templates make it easy to create a legally valid agreement that aligns with local laws.
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Which Independent Contractor Agreement Do You Need?
Find the right independent contractor agreement for your specific needs. Whether you’re hiring a consultant, service provider, or trade professional, using the correct contract ensures clear expectations, legal protection, and compliance with state laws.
Agreements vary based on the type of work. For example, a consulting agreement may include different terms than a construction contract or personal services agreement. Choosing the right contract helps define work responsibilities, payment terms, and confidentiality protections while ensuring compliance.
Use our document editor to select the right independent contractor agreement and customize it to fit your needs.
What Should Be Included in an Independent Contractor Agreement?
A well-structured independent contractor agreement protects both the client and the contractor by defining key terms upfront. Using a contract tailored to your specific needs ensures clarity, legal protection, and compliance with state and federal laws.
When creating an independent contractor agreement, be sure to include:
- Party information: Names of the contractor and client.
- Identifying information: Taxpayer Identification Number (TIN) or Employer Identification Number (EIN), if applicable.
- Scope of work: A clear description of the tasks, responsibilities, and deliverables.
- Project deadlines: Key milestones, short-term deliverables, and final deadlines.
- Payment terms: Compensation details, invoicing schedule, and any upfront deposits.
- Intellectual property rights: Who owns the work created under the contract.
- Confidentiality & non-compete: Any independent contractor non-disclosure or non-compete clauses that apply.
- Liability & indemnification: Legal responsibilities and risk protection clauses.
- Termination clause: Conditions under which the contract can be ended.
- Governing law: The state laws that apply to the agreement.
- Independent contractor status: A statement confirming the worker is not an employee.
By outlining these terms in advance, both parties can avoid misunderstandings, reduce legal risks, and ensure a smooth working relationship.
How Do I Write an Independent Contractor Agreement?
To write a legally sound independent contractor agreement, you need to clearly define the scope of work, payment terms, legal rights, and responsibilities of both parties. A well-structured contract protects businesses and contractors by reducing misclassification risks and preventing disputes.
You don’t have to start from scratch—our independent contractor agreement template simplifies the process. With our document editor, you can quickly create a customized, legally compliant agreement that meets your needs.
Follow these key steps to ensure your contract is clear, enforceable, and compliant.
1. Gather Essential Details
Before drafting the agreement, collect all key information, including:
- Contractor name and client information (names, addresses, tax ID numbers)
- Scope of work (job description, deliverables, deadlines)
- Payment terms (rate, invoicing schedule, deposits)
Having these details ready ensures that both parties are aligned before drafting the agreement.
2. Choose the Right Format
Choose the right independent contractor template or format for your needs. Consider factors such as:
- Type of work performed: A consulting contract may differ from a freelance or trade agreement
- Contract duration: Short-term, project-based, or ongoing work
- State laws and requirements: Some states have additional legal requirements for independent contractors.
3. Draft the Independent Contractor Agreement Section by Section
If you’re using a template, take the time to ensure each section is clearly written and legally sound. Key areas include:
- Responsibilities and deliverables
- Payment and tax obligations
- Confidentiality and intellectual property rights
- Liability, indemnification, and termination clauses
A well-structured agreement minimizes the risk of misunderstandings.
4. Ensure Legal Compliance
Check all the important legal compliance elements of your agreement. Evaluate:
- State guidelines: To ensure the worker is correctly classified
- Industry-specific guidelines: Some professions have unique contract requirements
- Company policies: Align the contract with internal business practices
Ensuring legal compliance may include having your legal team review the independent contractor agreement or asking for an independent review from a lawyer.
5. Get Professional Input if Needed
If your contract is complex or involves sensitive business matters, seek legal guidance. You can:
- consult with an employment lawyer to confirm compliance
- use a legally vetted template that includes standard clauses
- request contract review before finalizing
This step ensures your agreement is legally enforceable and protects both parties.
6. Finalize and Sign the Independent Contractor Agreement
Before signing, both parties should thoroughly review the contract. Independent contractors may also want to seek legal advice, especially for long-term or high-value contracts. Once both parties are satisfied with the terms, sign it to implement the agreement.
Use our independent contractor agreement template to create a professional, legally sound contract in minutes.
Sample Independent Contractor Agreement
Below, you can view an independent contractor agreement. You can customize this template using our document editor and then download in PDF or Word format.
Create Your Independent Contractor Agreement
Utilizing an independent contractor template streamlines the creation of comprehensive contracts, ensuring all essential details are covered to protect both parties. Our document editor allows quick customization to your specific needs, including scope of work, deliverables, deadlines, and necessary clauses.
With Legal Templates, you can confidently craft agreements that comply with state and federal regulations, saving time and reducing legal expenses.
Frequently Asked Questions
How do I terminate an independent contractor agreement?
To terminate an independent contract agreement, review it for termination provisions. Then, provide written notice and work out any notice period required by the contract. Clearly state the reason for contract termination. If you are the contractor, return any company property.
Is there a termination fee for independent contractor agreements?
If you terminate an agreement with an independent contractor, they may include termination fees or kill fees. You may have to compensate the contractor for any work already performed. Any such fees will usually be determined by the scope of your independent contractor agreement.
Can an independent contractor agreement include a non-compete clause?
An independent contractor agreement can include a non-compete clause in some states. However, those can be difficult to enforce, especially if they are too broad.
How do I protect myself when hiring an independent contractor?
To protect yourself when hiring an independent contractor, make sure you are hiring a contractor, not an employee. Then, make sure you create a fair independent contractor agreement that lays out the scope of work and payment for that work.
