Independent Contractor Agreements

An independent contractor is an outside party who provides services to a business. The services can include consulting, IT, professional, sales, cleaning, etc. The rights and obligations of the parties should be set out in a written agreement, which is often called an independent contractor agreement, services agreement or consulting agreement (we'll just use "independent contractor agreement" here).

Independent Contractor vs. Employee

It is important to distinguish an independent contractor from an employee. The characterization of a worker as an employee or independent contractor has important implications in areas including both parties' tax obligations, the application of the Ontario Employment Standards Act, 2000 and the ability of the worker to deduct business expenses.

In many cases it is clear that the service provider is an independent contractor, such as where they have an established business that provides services to many customers. However, in some cases, such as where a single individual is providing full time services to a business, either directly or through a corporation, the characterization of a worker as independent contractor or employee is not clear.

In order to determine whether a worker is an employee or an independent contractor, the key question is "whether the person who has been engaged to perform the services is performing them as a person in business on his or her own account." This determination is made by considering all of the circumstances of the case, including the following non-exhaustive list of factors (671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983, 2001 SCC 59):

• the level of control the employer has over the worker’s activities (often the most important factor);
• whether the worker provides his or her own equipment;
• whether the worker hires his or her own helpers;
• the degree of financial risk taken by the worker;
• the degree of responsibility for investment and management held by the worker; and
• the worker’s opportunity for profit in the performance of his or her tasks.

It's important to note that it's the nature of the relationship of the parties that is determinative - not the way they characterize the relationship. So, if a business intends on engaging an independent contractor, it is not sufficient to simply include a provision in a contract which states the worker is a contractor (although such a provision does not hurt). Instead, the contract as a whole should be structured so that it is consistent with an independent contractor relationship.

Common Provisions

The following are some common provisions in independent contractor agreements:

• A description of services and deliverables
• Fees and payment terms
• Term and termination
• Intellectual property provisions confirming who will own any resulting intellectual property and related obligations of the parties
• Restrictive covenants such as confidentiality and non-solicitation provisions. Although non-competition provisions can be included in an independent contractor agreement, they can be inconsistent with the nature of the relationship and are generally not included or narrowly defined. For example, an independent contractor who is providing marketing services would not be prohibited from providing marketing services, but may be prohibited from providing marketing services to other online data storage companies.
• Representations and warranties in which each party confirms facts that are true, such as that each party will not breach any other agreement by entering into this agreement and the independent contractor's work product will be their original work and will not infringe on third party rights
• Indemnities where the parties allocate risk of loss between parties, for instance the parties can each bear the risk of loss for damages resulting from the other's breach of their representation and warranties

Benefits

Like all contracts, an independent contractor relationship is beneficial as it confirms the parties' rights and obligations and can anticipate and mitigate possible issues. For the recipient of the worker's services, an independent contractor agreement has the additional benefit of reducing the risk that the relationship will be characterized as an employment relationship (provided that the agreement is properly structured and the relationship is carried on in a manner that is consistent with the agreement). If all else fails, the worker can be required to provide an indemnity which says they will be financially responsible to the business hiring them if they are characterized as an employee.