The Importance of a Contractor Agreement

Learn why a Contractor Agreement is important when working with someone outside of your company

Written by Jordan Casey
Updated over a week ago

At some point, all businesses will hire a contractor to provide services. A contractor is an independent worker outside of the company's employees and founders who will be providing services for the company. A Contractor Agreement contains all the terms regarding the services provided by the contractor, the contractor's compensation, any warranties, and other terms related to the contractor's work.

Employee or Contractor?

Before preparing a Contractor Agreement, it is important to consider whether the individual is providing services as an employee or a contractor. This is more complicated than it appears, as the distinction between employees and contractors is somewhat complex and there are important distinctions between the two. 

Any person who provides services to your company is broadly classified as a "worker". Workers then fall into two categories: employees and contractors.

Defining a contractor or an employee depends upon the nature of that individual’s engagement within an organization. Below are some of the key factors that will determine whether an individual is an employee or contractor. If it appears that your worker is an employee rather than a contractor, you should use the Employment Agreement. 

Duration of Engagement

For employees, the engagement is usually for an undefined duration. For contractors, the duration is set for a specific time period or related to specific goals. 

Time Commitment

Employees are expected to work exclusively for the company and for a specific number of hours per week. 

Contractors typically set their own schedules and can work for numerous companies at the same time.

Payment and Taxes

Employees will have their taxes and remittances deducted by their employer.

Contractor will receive a gross sum and be responsible for paying their own taxes and remittances.

When terminated, employees are usually entitled to notice of termination and/or termination pay. 

Contractors have no automatic right to termination pay or notice. Their compensation depends on what is in the Contractor Agreement.

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