As a result of downsizing in the computer industry, the interest in contract or consulting contracts has peaked. Many computer professionals have left their positions or been terminated and are in the process of offering their services via their own corporations.  But what are the benefits of such arrangements?  And what issues should you consider?  This paper discusses how to minimize risks, the benefits of these agreements and some of the issues that should be considered.

 

 

 

 

Minimize Risks:

 

In order to minimize risks, the Consultant should incorporate, buy appropriate insurance (including E& O) and have an agreement with a clear limitation of liability clause.  The Consultant should consider asset protection strategies to protect assets from claims and law suits.

 

Benefits of Independent Contractor Agreements:

 

The benefits of having an agreement in place include:

 

1.         Assists in Limiting liability

2.         It is a factor in being assessed as an independent contractor as opposed to an employee from the Canada Revenue Agency

3.         Definition of relationship and services reduces risks of mistakes and disputes

4.         Provides guidance upon termination

5.         Defines who owns the various types of intellectual property, and

6.         Defines non-competition and non-solicitation limitations

 

Types of Independent Contractor Agreements:

 

An independent contractor agreement can be a direct agreement whereby the Consultant works directly with the client or an indirect agreement whereby the Consultant may work through a staffing agency or another consulting company.  Such agreements can be referred to as sub-contractor agreements.  These agreements present a challenge for limiting liability because typically there is no agreement limiting liability between the Contractor and the client.

 

 Sub-contractor Agreements:

 

In a subcontractor agreement, there is usually an agreement between the Consultant and the main contractor and an agreement between the client and the main contractor; however, there may not be an agreement limiting liability between the Consultant and the client. The client may require the Consultant to sign other agreements such as a confidentiality agreement.  These agreements should be reviewed by counsel.  Also, because there is no agreement limiting liability between the client and the Consultant (subcontractor), the client or a third party may be able to sue the Consultant due to the legal concept of privity of contract.  If the contracts between the main contractor and the client and the main contractor and the Consultant do not provide for it, the Consultant may not have the benefit of a limitation of liability clause.  As a remedy these contracts should be reviewed by legal counsel.

 

Issues to be considered:

 

The following is a partial list of additional issues that the Consultant and Client should consider in an independent contractor agreement:

 

 

1. Tax Issues:   Independent Contractor Status
2. Definition of Consulting Services
3. Intellectual Property Rights of the Client & Consultant:
4. Moral Rights Clause
5. Non-solicitation, Non-competition clauses
6. Confidential Information
7. Rights of the Consultant to Gainful Employment
8. Insurance
9. Compensation
10. Term & Termination
11. Privacy & Security Clause:
12. Assignability of the Agreement by Consultant
13. Entire Agreement:

 

Let’s consider these issues in greater detail.

 

1.  Tax Issues:  Independent Contractor Status:

 

A written contract establishing the terms and conditions of an independent contractor relationship is of great importance as the courts have used it as a fifth factor indicating intent of the parties in the assessment  between an employee and an independent contractor.  This factor is important for many reasons including tax treatment and benefits such as WSIB. It is also important that the contract conform to the facts to obtain status as an independent contractor.  The other factors of (1) control over the work,(2) ownership of tools, (3) chance of profit and risk of loss  and (4) the business integration, association or entrepreneur criteria should be considered and adopted into the agreement. The agreement should make it clear that the parties intended that the Consultant be an independent contractor.  The Consultant is running a business and should be free to obtain other clients and to attend meetings to obtain other clients.  The Consultant should pay for its own expenses.  There should be no mention of employee or employer in an independent contractor agreement.  If the Client wishes to terminate the agreement due to poor services, it should be for breach of contract rather than for “cause” which has meaning in an employment arrangement.  The Independent Contractor should be required to pay its corporate income tax and not receive benefits normally given by the Client to its employees such as dental and health benefits.  The Independent Contractor would have to obtain those for its employees on its own.  From a tax issue point of view, the Consultant will want the contract to be for a fixed price and for a fixed job; however, the economic considerations may point in a different direction.  Shorter term agreements are better from a tax issue point of view and the Consultant should have more than one client. The Consultant should operate under its own name and trade-mark.  Training should not be provided by the Client

 

2.         Definition of Consulting Services:

 

The consulting services should be defined as specifically as possible to ensure there is no confusion as to whether or not the Consultant has performed the services to the standard required.

3.      Intellectual Property Rights of the Client & Consultant:

 

The contract should define who owns which rights to the pre-existing intellectual property of each of the parties and who own owns which rights to any work product developed.  Licensing of this intellectual property should be included where appropriate.

 

4.      Moral Rights of Individual Consultants:

 

The Canadian Copyright Act grants to the Consultant certain "moral rights" as the author of a software work product. These rights may include the right where reasonable under the circumstances to be associated with a work product as its author and to remain anonymous and/or to prohibit a work product from being distorted, mutilated or otherwise modified, or used in association with a product, service, cause or institution if any of these would prejudice the Consultant's "honour or reputation." It would therefore be reasonable for the Client to ask for a waiver of this right.

 

5.      Non-solicitation, Non-competition clauses:

 

The Client may ask for non-solicitation and non-competition clauses in appropriate circumstances; however, the Consultant will want to ensure that these clauses are not too broad and cut unduly into its business.

 

6.      Confidential Information:

 

Whether the Client's main business be in information technology or otherwise, the Consultant will likely have access to fairly important data and software. The Consultant should be asked by the Client to hold in confidence and safeguard this information. The Consultant should be willing to follow any steps that the Client has developed for its in house computer professionals to protect its trade secrets.  It is important, from the Consultant’s point of view, that the confidential information not be defined too broadly.

 

The Consultant may also request that its confidential information be protected.

 

7.      Rights of the Consultant to gainful employment

 

The Consultant should have the right to employment in his field and the intellectual property clauses should not prevent him from doing so.

 

8.      Insurance:

 

The Consultant will want to have appropriate insurance in place (E & O insurance as well as accidental insurance) and the parties should consider a waiver of subrogation.  The Client may require the Consultant to have insurance in place.

 

9.      Compensation:

 

The agreement should specify when the Consultant should deliver invoices and other required forms (which should be different than the ones an employee submits) and when payment is required.

 

10.  Term & Termination:

 

The agreement should specify when the agreement starts and ends and define when and under what circumstances the parties have the right to terminate the agreement.  It should define payment during the termination period.

 

 

11.  Privacy & Security Clause:

 

Consideration should be given to privacy legislation in Canada and the obligations of the Consultant in protecting privacy and providing appropriate levels of security.  The Client will want to ensure that all contractors and sub-contractors have appropriate clauses for any applicable privacy laws. 

 

General Clauses:

 

12.  Assignability of this Agreement by Consultant :

 

The Consultant may want the right to assign the agreement freely or to a corporation for tax purposes etc. with the reasonable consent of the Client; however, in that case the Client will want to ensure that the personnel performing the services have the requisite skills.

 

13.  Entire Agreement:

 

An entire agreement clause will exclude oral representations and hence it is important for the parties to put all important representations etc. into the agreement.

 

Summary:

 

In order to minimize risks, the Consultant should incorporate, buy appropriate insurance (including E& O) and have an agreement with a clear limitation of liability clause.  Other benefits of a well drafted independent contractor agreement are: it is a factor in being assessed as an independent contractor as opposed to an employee from Canada Revenue Agency, the agreement and the process of the definition of relationship and services reduces risks of mistake and disputes, it provides guidance upon termination, defines who owns the various types of intellectual property, and defines non-competition and non-solicitation limitations.  In subcontractor agreements, contracts should be reviewed to limit liability and other issues.

 

Disclaimer:

 

This information is provided as general information only and should not be considered legal advice.  You are advised to consult with a lawyer to consider your situation.

September 24, 2010

George C. Eyre,

B. Math., M. Eng., L.L.B.

George C. Eyre, Law Offices

36 Toronto Street, Suite 850

Toronto ON M5C 2C5

www.law4it.com

Law For Information Technology

Since 1988 

 

Independent Contractor Agreements

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© George C. Eyre 2010 All Rights Reserved

 

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