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Here is a book of agreements for use both by people who hire consultants and independent contractors and by people who work as such. This chapter explains what type of agreements the book contains and how to use them most efficiently.
If you need some legal background on hiring independent contractors, refer to Chapter 2. If you would like an introduction to the legalities of working as a consultant or independent contractor, refer to Chapter 3.
This book is intended to serve as a supplement to two books that provide detailed guidance on all the legal issues involved in hiring independent contractors or working as one. These are:
Both books were written by Stephen Fishman and published by Nolo.
At the back of this book, you will find a CD-ROM that contains all of the forms discussed in this book. In Appendix I of this book, you will find directions for using the CD-ROM.
Using written independent contractor or consulting agreements benefits the independent contractors (ICs) and consultants, as well as the clients who hire them. For the sake of simplicity, the terms "consultant" and "IC" are often used interchangeably in this book.
Subject to some important exceptions noted in the sidebar below, most contracts need never be written down to be legally valid. This means that if a dispute arises over an oral contract, the parties can take the matter to court and a judge will rule for one side or the other. But if a contract is invalid, a court won't enforce it at all.
For example, a client and an IC can enter into a contract over the phone or during a lunch meeting at a restaurant. No magic words need be spoken. They just have to agree that the IC will perform services for the client in exchange for something of value -- usually money. Theoretically, most oral agreements are as valid as a 50-page contract drafted by a high-powered law firm.
Example: Gary, a freelance translator, receives a phone call from a vice-president of Acme Oil Co. He asks Gary to translate some Russian oil industry documents for $2,000. Gary says he'll do the work for the price. Gary and Acme have a valid oral contract.
In the real world, however, using oral agreements is like driving without a seatbelt-there's no problem as long as you don't have an accident; but if you do have an accident, you'll wish you had buckled up. An oral IC agreement can work just fine provided that you and the other party remember the contract's terms in the same way and fulfill them as expected by the other party.
Unfortunately, things don't always work so perfectly. Courts are crowded with lawsuits filed by people who entered into oral agreements with each other. Costly misunderstandings can develop if an IC performs services without a clear written description of what he or she is supposed to do and what will happen if it isn't done. Such misunderstandings may be innocent -- you and the other party may have misinterpreted each other or failed to listen carefully. Or they may be purposeful -- without a written document to prove otherwise, the other side can claim that you orally agreed to anything.
A good written IC agreement is your legal lifeline. If properly drafted, it will help prevent disputes by making it clear exactly what's been agreed to. If problems develop, it will provide ways to solve them. If you and the other party end up in court, it will establish your legal duties to each other.
Written agreements do more for you than help to avoid misunderstandings or dishonest dealings. There are important practical reasons why you should always sign a written IC agreement before work begins.a. Defining projects
The process of deciding what to include in an agreement forces both the IC and the client to think carefully, perhaps for the first time, about exactly what the IC is supposed to do. Hazy or ill-defined ideas or expectations stand out when they're reduced to writing, spurring further discussion and negotiation until they are reduced to a concrete contract specification of the work that the IC will perform. This gives both sides a yardstick by which to measure the IC's performance and is the best way to avoid later disputes about whether the IC has performed adequately.b. Establishing IC status
A well-drafted IC agreement will also help establish that the worker is an IC, not the client's employee. This is vital both for the client and the IC. (See Chapter 2, Section B, for a detailed discussion of the importance of distinguishing employees from independent workers.) However, a written IC agreement is not a magic legal bullet. It will never by itself turn an employee into an IC. What really counts is the substance of how the worker is treated, not a formality like signing an agreement. Still, a written agreement can weigh in favor of IC status.c. Assuring Payment Terms
If you're an IC, a written agreement clearly setting out your fees will help ward off disputes about how much the client agreed to pay you. If a client fails to pay and you have to sue for your fee, the written agreement will be proof of how much you're owed. Relying on an oral agreement with a client can make it very difficult for you to get paid in full or at all. Conversely, clients will want a clear fee understanding to avoid claims of underpayment.Agreements Contained in This Book
This book contains a number of consultant and independent contractor (IC) agreements you can adapt to fit your needs. It includes:
You'll find two different agreements for most of the above categories -- one for use by the hiring firm and another for use by the IC. This was done so that each agreement could best protect the interests of the person or firm using it. However, none of the agreements is unduly harsh or one-sided.
Each chapter contains a detailed description of all the provisions in the agreement it covers.
Many of the provisions contain alternatives you may choose from, such as whether the IC will be paid by the hour or a fixed fee. Or they may require you to provide additional information, such as an address. Be sure to read the instructions carefully as you complete your agreement.
All of the agreements are included on the CD-ROM in the back of the book. (See Appendix I for a discussion of how to use the CD-ROM.) If you do not have access to a computer, you can use the tear-out sample forms in Appendix II (forms for use by the hiring firm) or Appendix III (forms for use by the independent contractor). You may wish to photocopy the original and save it for next time.Putting Your Agreement Together
Make sure your agreement is properly signed and put together. If it isn't, it might not be legally valid. This is not difficult if you know what to do. This section provides all the instructions you need to get it right.1. Signatures
It's best for both parties to sign the agreement and to do it in ink. The two of you need not be together when you sign, and it isn't necessary to sign at the same time. There's no legal requirement that the signatures be located in any specific place in a business contract, but they are customarily placed at the end of the agreement that helps signify that both parties have read and agreed to the entire document.
It's very important that both parties sign the agreement properly. Failure to do so can have drastic consequences. How to sign depends on the legal form of the business of the person signing.
A person is a sole proprietor if he or she is running a one-person business and hasn't incorporated or formed a limited liability company. The vast majority of ICs and consultants are sole proprietors, as are many clients.
If you or the other party are sole proprietors, you can each simply sign your own names and nothing more. That's because a sole proprietorship, unlike a corporation or partnership, is not a separate legal entity. For example, if Susie Davis runs custom shopping tours for wealthy tourists, her agreements with her clients can be signed "Susie Davis."
However, if you use a fictitious business name, it's best for you to sign on behalf of your business. This will help show you're an IC, not an employee.
Example: Chris Kraft is an IC sole proprietor who runs a marketing research business. Instead of using his own name for the business, he calls it AAA Marketing Research. He should sign his contracts like this:
AAA Marketing Research
If either you or the other party is a partnership, the agreement must be signed on behalf of the partnership, which means that the partnership must be identified in the signature block. Identifying the partnership is very important: If a partner signs only his or her name without mentioning the partnership, the partnership is not bound to the agreement -- only the individual partner will be bound. This means that if you are the other party to the contract, you couldn't go after the partnership's money or assets if the signing partner breaches the agreement and you win a judgment against him or her. Instead, you could obtain only the signing partner's assets.
Conversely, if you're a partner in a partnership and mistakenly sign an agreement as an individual, you're setting yourself up as the legal target if something goes wrong and the other side decides to sue. Since the other side won't be able to sue the partnership, it will look solely to you for legal recourse.
Which partner should sign? If the partnership is a "general" partnership (every partner invests and participates in managing the business), any partner can sign. But some partnerships are "limited partnerships," which means that there is at least one general partner, but also some partners who invest in but don't participate in the business. Limited partners should never sign agreements. That's because by law they have no authority to bind the partnership. The agreement should always be signed by a general partner.
Only one partner needs to sign. The signature block for the partnership should state the partnership's name and the name and title of the person signing on the partnership's behalf.
Example: The Argus Partnership contracts with Sam for marketing research. Randy Argus is one of the general partners. He signs the contract on the partnership's behalf like this:
The Argus Partnership
A Michigan Partnership
Randy Argus, a General Partner
It's possible for a person who is not a partner to legally sign on behalf of the partnership. The signature should be accompanied by a partnership resolution stating that the person signing the agreement has the authority to do so. The partnership resolution is a document signed by one or more of the general partners stating that the person named has the authority to sign contracts on the partnership's behalf. Attach the resolution to the end of the agreement.c. Corporations
If either you or the other party is a corporation, the agreement must be signed by someone who has authority to sign contracts on the corporation's behalf. The corporation's president or chief executive officer (CEO) is presumed to have this authority.
If someone other than the president of an incorporated client signs -- for example, the vice-president, treasurer or other corporate officer -- ask to see a board of directors' resolution or corporate bylaws authorizing him or her to sign. If the person signing doesn't have authority, the corporation won't be legally bound by the contract. Attach the resolution to the end of the agreement.
Keep in mind that if you sign personally instead of on your corporation's behalf, you'll be personally liable for the contract. It's likely that the main reason you've gone to the trouble to form a corporation is to avoid such liability. So signing improperly is self-defeating.
The signature block for a corporation should state the name of the corporation and the name and title of the person signing on the corporation's behalf.
d. Limited liability companies
Example: Susan Ericson is the president of Kiddie Krafts, Inc. Since she is the president, any contracts signed by her need not be accompanied by a corporate resolution showing she has authority to bind the corporation. The signature block for contracts she signs should look like this:
Kiddie Krafts, Inc.
A California Corporation
Susan Ericson, President
The owners of limited liability companies are called members. Members may hire others to run their company for them, who are called managers. An agreement with a limited liability company should be signed by a member or manager.
Example: AcmeSoft LLC, a limited liability company, hires Sally to perform freelance programming services. The contract is signed on AcmeSoft's behalf by Edward Smith, the company's manager. The signature block should appear in the contract like this:
A California Limited Liability Company
Edward Smith, Manager
When you sign an agreement, include the date and make sure the other party does, too. You can simply put a date line next to the place where each person signs for example:
You and the other party don't have to sign on the same day. Indeed, you can sign weeks apart. However, note that unless the agreement provides a specific starting date, it begins on the date it's signed. If the parties sign on different dates, the agreement begins on the date the last person signed. Until the agreement is signed by both parties, they're not bound by it.3. Attachments or Exhibits
An easy way to keep an agreement focused on the essential aspects of your arrangement is to use attachments, also called exhibits, to list lengthy details such as performance specifications. (You can also use attachments when someone who normally wouldn't have authority to sign has been given that power by the partnership or corporation, as explained above.) Putting practical details in a separate but attached document makes the main body of the contract shorter and easier to read.
If you have more than one attachment or exhibit, they should be numbered or lettered for example, Attachment 1 or Exhibit A. The attachments don't have to be dated or signed. Be sure that the main body of the agreement mentions that the attachments or exhibits are included as part of the contract.4. Altering the Agreement
Sometimes it's necessary to make last-minute changes to a contract just before it's signed. If you use a computer to prepare the agreement, it's best to make the changes on CD-ROM and print out a new agreement.
However, it's not legally necessary to prepare a new contract. Instead, the changes may be handwritten or typed onto all existing copies of the agreement. If you use this approach, be sure that all those signing the agreement also sign their initials as close as possible to the place where the change is made. If both people who sign the entire document don't also initial each change, questions might arise as to whether the change was part of the agreement.5. Copies of the Agreement
Prepare at least two copies of your agreement. Make sure that each copy contains all the needed exhibits and attachments. Both you and the other party should sign both copies and each should keep your signed original.
Be sure to keep your copy of the agreement in a safe place. If you're hiring an IC, set up a separate vendor file for the IC. Keep in this file the IC agreement, the IC's invoices, copies of IRS Form 1099 and any other information that shows the worker is operating an independent business. This may include the independent contractor's business card and stationery, and evidence that the independent contractor has workers' compensation insurance coverage for his or her employees. Don't keep independent contractor records with your employee personnel records.6. Faxing and E-Mailing Agreements
It has become very common for people doing business with each other to communicate by fax machine or e-mail. Especially when you are hashing out the details of contract clauses, it is very convenient to fax or e-mail drafts back and forth. However, there are some potential problems with using faxes and e-mail.a. Preserving confidentiality
One problem is preserving confidentiality. You never know who might end up receiving or reading a fax or e-mail message. For this reason, it's wise to place a confidentiality legend such as the following on your faxes or e-mails:
The messages and documents transmitted with this notice contain confidential information belonging to the sender.
If you are not the intended recipient of this information, you are hereby notified that any disclosure, copying, distribution or use of the information is strictly prohibited. If you have received this transmission in error, please notify the sender immediately.
This legend can be placed on a fax cover sheet or at the beginning of an e-mail message.
If your negotiations are particularly sensitive, you may wish to encrypt your e-mail messages so others can't read them. Inexpensive encryption programs such as PGP (Pretty Good Privacy) are readily available. To learn how to obtain both free and commercial versions of PGP, you can write or call Network Associates, Inc., 2121 S. El Camino Real, Suite 902, San Mateo, CA 94403; (415) 572-0430. You can also log onto the following website: http://cryptography.org/getpgp.htm.b. Signing the finished agreement
When a final agreement is reached, you'll both need to sign the contract. One approach is for one party to sign the contract and fax it to the other, who signs it, makes a photocopy and faxes it back. This way, you each have a copy of the agreement signed by both sides.
A faxed signature is probably legally sufficient if neither party disputes that it is a fax of an original signature. However, if the other party claims that a faxed signature was forged, it could be difficult or impossible to prove it's genuine, since it is very easy to forge a faxed signature with modern computer technology. Forgery claims are rare, however, so this is usually not a problem. Even so, it's a good practice for you and the other party to follow up the fax with signed originals exchanged by mail or air express.
If both you and the other party are advanced computer users, you can "sign" the contract digitally and send it by e-mail. This involves using encryption technology to create a digital signature. This is a technically complex subject beyond the scope of this book. You can find a good deal of material on digital signatures on the Internet. A good place to search is the Digital Information Resource Center at www.perkinscoie.com/resource/ecomm/digsig/digsig.htm. There is also a comprehensive book on digital signature law called The Law of Electronic Commerce, by Benjamin Wright (Aspen Law & Business).Changing the Agreement After It's Signed
No contract is engraved in stone. You and the other party can always modify or amend your contract if circumstances change and you both agree to the changes. You can even agree to call the whole thing off and cancel your agreement.
The key to changing a contract is cooperation. Neither party is ever obligated to accept a proposed modification to a contract. Either of you can always say no to the proposed change and accept the consequences-for example, the other side may go ahead with a unilateral change or stop performing altogether. Either way, you may end up with a court battle over breaking the original contract. You're usually better off reaching some sort of accommodation with the other side, unless he or she is totally unreasonable.
Unless your contract is one that must be in writing to be legally valid -- for example, an agreement that can't be performed in less than one year -- it can usually be modified by an oral agreement. In other words, you need not write down the changes.
Example: Art signs a contract with Zeno, who will build an addition to his house. Halfway through the project, Art decides that he wants Zeno to do some extra work not covered by their original agreement. Art and Zeno have a telephone conversation in which Zeno agrees to do the extra work for extra money. Although nothing is put in writing, their change to their original agreement is legally enforceable.
ICs and their clients change their contracts all the time and never write down the changes. The flexibility afforded by such an informal approach to contract amendments might be just what you want. However, misunderstandings and disputes often arise from this approach. It's always best to have some sort of writing showing what you've agreed to do. You can do this informally. For example, you can simply send a confirming letter following a telephone call with the other party summarizing the changes you both agreed to make. If the other side doesn't correct your letter in writing, the existence of the letter creates a legal presumption that your version of the contract change is correct. This will be very helpful if the other side later claims he or she never agreed to the change or that the change is set forth incorrectly in the letter. Be sure to keep a copy of the letter for your files.
Example: Janet, a much sought-after editor, agrees to perform editing services for Steve. Her written agreement with Steve provides that her work will be completed by April 1. However, Janet finds the project more time-consuming than she anticipated, and needs more time. She calls Steve and asks him for an extension. Steve agrees to give Janet until May 1 to complete the work. But in return, Janet agrees to a 5% reduction in her fee for the work. Janet sends Steve the following confirming letter setting forth this contract change:
If an amendment involves a contract provision that is very important, it's wise to insist on a written amendment signed by you and the other party. The amendment should set forth all the changes and state that the amendment takes precedence over the original contract provision. For example, an amendment specifying that payment will be by the piece instead of by the hour should state that the new arrangement removes and is in place of the original understanding.
A tear-out form for a contract amendment is contained in Appendices II and III and on the CD-ROM under the file name AMEND.
Posted March 8, 2003
Great book and very easy to understand, spoken in plain English. The CDROM contains about 20 contracts which can be utilized very easily, encompassing just about every type of contract you can think of. I've learned the hard way that if you don't have a written contract before you start work, a verbal contract isn't hardly worth squat. A must-have for small business owners.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.