Contractors can be a real lifesaver for a busy IT small business owner or sole proprietor. You can bring them on as needed to help you finish larger projects or to take some work off your hands.
But be warned: hiring contractors can increase your risks if you're not proactive with your contracts. Let's take a look at five things your contract should do to create the right rapport with your contractors and to limit your liability.
1. Be Clear on Deliverables and Terms
An effective contract with a contractor outlines exactly what type of work you want them to deliver, when it is due, and how and when they will be paid.
“I suggest you be very clear with the project details, such as deliverables, milestones, quality standards, and so on,” says
Alexander Grosu (@AlexanderGrosu),
project manager at the pre-employment testing company
Once you’ve addressed the scope of work and the expected timetable, indicate the payment terms:
- Will it be hourly or by project?
- Are you requiring contractors to submit invoices?
- When and how will they be paid?
Andrew Choco (@fourchoco),
vice president of marketing at
(@DirectiveAgency), says he and his team believe in always asking a contractor to provide an hourly rate, even if you are hiring them for a project.
“We think it’s incredibly important to ask for an hourly rate, or research what the average hourly salary for that position is,” says Choco. “We’ve seen people really get burned because they’ll pay $2,000 for a month-long project, which sounds great, but if they charge $200 an hour, you’re only getting 10 hours of work in that month.”
2. Tell Your Contractors to Keep It on the Down Low
Consider including a confidentiality agreement in your contract, especially if you are hiring a contractor to work on client computer systems where they may have access to sensitive information, such as…
- Employee Social Security numbers.
- Patient medical records.
- Proprietary industry-specific information.
A confidentially agreement can also protect your business. If the contractor moves on to a project with a competitor, you certainly don’t want them revealing your client list.
3. Make Sure They Know When Intellectual Property Is Yours
If you’re hiring a contractor to create work for you, such as an app, piece of software, or technical manual, make sure the contract specifies that you and your business retain the ownership of any work the contractor creates on behalf of your company. So if you hire them to create an app and it becomes the next Pokémon Go, you own the rights.
“Intellectual property is always a hot-button issue. You would not want to develop a fantastic program only to find out that you don't actually own it, your contractor does,” says
Peri Berger, an
attorney at the law firm
Harris Beach PLLC
4. Spell Out Which Insurance Policies They Need
To limit your liability, consider requiring your contractors to carry their own contractor insurance. For example, you may ask them to have…
“When it comes to the liability insurance contractors should carry, it is advisable that you make sure you are on the safe side,” says Grosu. “This is for their own good and for your own good as well.”
Berger mentions that it may also be good idea to include Cyber Liability Insurance on this checklist, or at least include a detailed plan in the contract that makes it clear who would be held liable, and for what, if a data breach happened.
“Breaches continue to occur at an alarming rate, so you need to have in place a plan for how to handle a potential breach if you are handling client data,” says Berger. “At the same time, you also want a contractor to have a plan in place, and to have that plan be part of the contract if they will handle or access your data or client data.”
Berger also recommends including a limitation of liability clause in any contracts to cap the amount you might owe your contractor.
“The reason for that is fairly complex, but what it comes down to is that a breach of contract can result in the breaching party owing the other party so-called ‘consequential’ damages, which can include lost profits, amounts paid to rectify the breach, etc.,” says Berger.
For more on independent contractors and insurance, read “What Insurance Do Your Independent Contractors Need?”
5. Include a Get-Out-of-Jail-Free Clause
Don’t forget to give yourself an “out” in the contract in case things don’t work out with the contractor. Make sure you are clear about what happens if your contractor doesn’t live up to their end of the agreement.
“We think it’s also important to include a 30-day notice to get out of the contract if their work isn’t up to your standard,” says Choco. “Most of the time, good freelancers will be fine with this because they know their work is good enough to keep the contract.”
Finally, it’s a good idea to have your business attorney create or review any contracts you use when working with contractors. They can ensure you covered all your bases and that the contract is likely to hold up in court if a lawsuit arises.
About the Contributors
Peri Berger is an associate of Harris Beach PLLC. He serves on the medical and life sciences industry team and practices with the business and commercial litigation practice group and the cybersecurity team. Mr. Berger’s background includes extensive experience in complex commercial litigation and the defense of products liability cases in New York, New Jersey, and the federal courts. Mr. Berger’s varied background gives him a perspective that benefits his clients in a variety of contexts.
Andrew Choco is the VP of marketing at Directive Consulting, a digital agency. Directive Consulting is a Google, Bing, Moz, and Unbounce partner that specializes in PPC, SEO, content marketing, and social advertising. It actively publishes thought leadership in Moz, Ahrefs, SitePoint, Marin, Kissmetrics, Wordstream, Convince and Convert, and many more. Andrew is a creative and innovative marketing enthusiast who specializes in social media marketing, SEO, and content creation. When he isn’t driving website conversions, he loves going to concerts, complaining about the Seattle Mariners, and traveling.
Alexander Grosu is a project manager at TestUP, a company providing pre-employment tests to business owners and HR professionals who want to make sure they make the best decision when it comes to hiring candidates. With a keen passion for helping his clients and team, Alexander will always be the first one to share tips and knowhow in his fields of expertise.