I’d like to report overuse of the “acting as independent contractor” provision.
Here’s the version that makes sense: The parties intend that the Consultant will be an independent contractor. It makes it clear that the parties intend that an individual who is providing services to a company won’t be an employee of the company. (It uses language of intention because whether someone is an employee or independent contractor can’t be set in stone when the contract is signed but instead depends on the relationship of the parties at any given time.)
But check out the version in orange below:
That contract is a transition services agreement between two entities, one of which is being spun off from the other. (Hi there, DTE Energy Company and DT Midstream, Inc.!) Saying that either party might somehow be acting as employee of the other is ridiculous.
The provision in blue is the one to use, if you really feel it necessary. After all, the contract says what it says, and if it in fact creates, for example, a relationship of principal and agent, then the provision in blue isn’t going to change that. But the worst you could accuse the provision of blue in being is unnecessary. It isn’t ridiculous.
So here’s how to remain sensible in how you use an “acting as independent contractor” provision:
- One of the parties is an individual; the other is someone (in business contracts, invariably an entity instead of an individual) that hypothetically could employ the individual.
- The provision isn’t mutual. Instead, it relates to the individual not being an employee of the other party.
I’m glad we had this chat.
In every legal context I’m aware of, the courts ignore how the parties classify their relationship in writing. Applying the law is the court’s job. So you can write “they’re an independent contractor” in your terms, but the judges will cite decisions, for the umpteenth time, to show they get to ignore you, as they do in many if not most misclassification opinions. They look at the facts, not at the terms, or so they say.
In every context I’m aware of—tax, insurance, labor, federal or state—the relevant test is a factor analysis. Some of the factors, like whether the type of service rendered is historically an independent profession, contract terms can’t touch. But others, like the degree of independence or supervision of the work process, might get tripped up by contract terms. It’s only bad for you. If your contract spells out employee-like supervision, employee-like payment, employee-like hours, and so on in contract, the court probably cites those terms as evidence of misclassification. If the same contract has an “independent contractor” clause, they’ll ignore that part.
Beyond just “ticking the box” by putting the phrase “independent contractor” in the agreement, I see two approaches with possible leverage on the outcome. You can add a rule of construction that tries to prevent any terms being read to flip factors toward employment. You can add affirmative language that, if followed, would create a situation flipping factors toward independent contracting. In my experience, the biggest trap, and biggest opportunity, is the nature of independence and supervision in work. That’s almost always a factor, however it’s phrased in the relevant factor test.
What you really want, as a lawyer, is to interview your client on each potential relationship, so you can spot all the aspects that point toward independent contracting, and paper them. But in practice, clients want is a single “independent contractor form” with all the customization in a statement of work, so they can hire without lawyer involvement. I’ve found this even on flat fees, when the only direct marginal cost of my advice is time delay.
Our current version of the Square One Standard Contractor Terms has affirmative language on independence of work, affirmative language about compliance consistent with independent contractor classification, and an indemnity for expenses in the event of misclassification. I have misgivings about the enforceability of that last in all cases of agreement with a single individual, especially in their personal capacity, serving just one client at a time. Indemnity for illegal acts is thin ice. But this is what we feel we can do in a general-purpose form for broad use without case-by-case lawyer attention.
The real answer to the conflict between what lawyers want and what clients what is more education about just how misclassification is, and its consequences. I don’t actually find clients very receptive to short courses on the factor tests, because I think they’re mostly right in writing them off as mealy-mouthed mumbo-jumbo. I do find clients open their ears when you start talking penalties, especially criminal penalties with jail terms, as have come down for managers here in Cali.
For contract nerds, the interesting theoretical contrast that comes to mind is to assignment and delegation rules. Stark and others recommend making explicitly clear that “breach [or delegation] in breach of these terms is void”. I tend to put this in plainer terms, like “Attempts to assign against the terms of this agreement will have no legal effect”. Point being to avoid legal hairsplitting about whether you’re stuck with an assigned contract and a breach claim.
When it comes to unilateral actions, like assignments or delegations, it’s clear who would potentially be in breach if the language were read as a covenant. It’s the party trying to take the unilateral action. In the case of independent-contractor misclassification, if that doesn’t turn out to be the case, who’s breaching language that both sides “shall act” like independent contractors? Not clear. Unless the contract spelled out a way of working the court would have approved, and one side or the other breached that term.
Agreed, but there might be value to using language of intention, as I suggest in MSCD: it signals to all concerned that whether someone is an independent contract or an employee depends on the circumstances, as opposed to being set in stone at signing.
Much food for thought in Kyle’s comments and his generously cited form language (I like the ‘flipping’ approach, but it’s scary. “Any purported supervision is void and does not bind the Consultant’?). I have just two unrelated comments on tense and agency:
(1) Tense. ‘The parties intend that the Consultant will be an independent contractor’. The contract ‘speaks’ as of the instant it takes effect, so the ‘will be’ is inapposite as meaning ‘at some unspecified future point or points’. It might be better to say ‘The parties intend that the Consultant be and at all times remain an independent contractor’. The present subjunctive is required by the verb ‘intend’. So to the extent, if any, that background law (read: a court) deems the parties’ intent a ‘factor’, you’ve got it covered.
(2) Agency. An agent can be an independent contractor (example: actors’ agents) and vice versa, so it’s probably wise not to build a Chinese Wall unthinkingly when it’s employee status you are really aiming at. –Wright
+1 for Kyle’s consideration of practical classification, in California this is all that matters. Although, while it may not be relevant in the case of large businesses, if you are contracting with de-facto loan outs (not always easy to tell) or personal services corporations, the idea of an entity being subject to treatment as an employee is possible, especially in the context of litigation where it’s all too easy for loan outs or PSCs to be set aside no matter how proper the classification. I’m all for reducing unneeded language but… food for thought.