What Is an Independent Contractor Agreement?
In the state of Florida, Independent Contractor Agreements are designed to protect both parties to the agreement. Although an IC Agreement is not legally required, an IC Agreement is a written contract that will assist in clarifying the terms of the services to be performed by an independent contractor, and to protect the business should future disputes arise. Florida law does not have a specific statute that regulates Independent Contractor Agreements (unlike with Florida Employment Agreements). This means that, although they are not required by law, IC Agreements provide a way for the parties to agree on the scope of services to be performed, compensation, payments and other anticipated issues like ownership of work product, restrictive covenants, confidentiality, etc. In doing so , the parties to an Independent Contractor Agreement can avoid some of the most common points of contention in the future.
The U.S. Internal Revenue Service (IRS) defines an independent contractor as someone who performs services for a business but is not an employee of that business. The IRS has an 11-point test to determine whether an individual is an Independent Contractor or an employee, and the IRS will apply these factors if an individual challenges his or her classification. Florida, on the other hand, takes the position that "Independent Contractors are not given special protections or rights by state statute . . ." Instead, if there is an issue concerning employment status, the Florida courts evaluate a number of factors and then apply an "Economic Realities Test" "to determine whether a worker is an independent contractor or an employee."
Essential Elements of a Florida Contractor Agreement
The ideal Florida independent contractor agreement clearly defines the relationship that will exist between the parties. It should also accomplish the objectives for which it was written. The document will satisfy both of these aims by meeting the following criteria:
- The main contract should go beyond merely naming the contractor and describing the services to include a detailed scope of work. This section should explain in detail all of the work that the contractor must perform as part of the agreement. Without this, there can be confusion over whether specific work was included in the agreement. The scope of work section can even be used to detail who is responsible for providing the materials necessary for the completion of the project.
- The independent contractor agreement must clearly specify the payment arrangements. It should include how much the contractor will be paid, when he or she will be paid, and whether it will be done on an hourly basis or a flat fee for the project.
- A confidentiality clause is vital to the protection of the information that is shared between the employer and independent contractor. The odds of there being a theft of ideas or other sensitive information are in direct proportion to the number of non-employees with access to this information. A confidentiality agreement minimizes the risk to the employer’s property through the careful drafting and enactment of confidentiality provisions.
Legal Requirements for Contractor Status in Florida
It is important to understand that the classification of individuals as independent contractors rather than employees has fundamental legal consequences. Wages paid to independent contractors are not subject to payroll or income taxes, identity thieves cannot use their identifiers for fraudulent purposes and the broad anti-discrimination laws do not apply.
Both the Florida Unemployment Appeals Commission and the federal Department of Labor provide guidance concerning the criteria for defining independent contractor status as opposed to that of an employee. Florida considers a host of criteria when determining an individual’s status as an employee or independent contractor. All facts relevant to the degree of control and degree of independence must be considered. The determination is not based on any one criterion but rather on the totality of the circumstances.
The courts have previously defined the following ten factors as adequate metrics in the determination of independent contractor status:
The same factors are also used by the federal Department of Labor; however, these factors are not exclusive. Courts see most of the pertinent factors listed above as calling for a more flexible assessment of a multitude of other criteria. In Burks v. Warren, 118 So.2d 657, (Fla.1959), in reference to workers at track stables, the Florida Supreme Court set forth a list of factors other than a written contract that distinguished independent contractors from employees. In Sagrario v. Ceres Marine Terminals, Inc., 117 F.Supp.2d 1249 (M.D.Fla.2000), the District Court held that contractual agreements by a port security officer with a third-party security company did not constitute an independent contractor relationship as it was "merely a thinly veiled attempt to circumvent employment discrimination law."
Although there is no specific federal or state law that mandates written independent contractor agreements, having an independent contractor agreement is advisable. Typically, the agreement will set forth the services to be provided and the compensation and per diem to be paid, if any. It should be stated that the individual is an independent contractor and not an employee. The independent contractor should also agree to indemnify the company for any liability arising from violations of tax laws, workers’ compensation statutes or misclassification as an employee.
Advantages and Risks for Businesses
There are many benefits to hiring independent contractors rather than employees. First, the business does not need to withhold Social Security, Medicare, or income taxes from payments made to the contractor. Employees also have protections that independent contractors do not have, such as FMLA, family medical leave, sick pay, workmen’s compensation, unemployment compensation, and pension plans. Costs for employee health care benefits can also be quite high and can be avoided by hiring independent contractors. Hiring independent contractors may even reduce the risk of legal claims because employees generally work under different terms than independent contractors. If a business wishes to minimize liability, they should consider using a business entity rather than hiring employees, and use contractual terms that limit the owners’ personal liability. Corporations, like limited liability companies, shield the business owners from being personally liable for the debts of the company.
There are many risks if the IRS or Department of Labor (DOL) finds the independent contractors were actually employees. If there is a tax audit, the business must prove that all independent contractors were not employees. The IRS can audit you for up to three years after the payment was made, and sometimes more. If the IRS finds that the workers were employees the business would be liable for all federal employee withholding taxes for those workers. The business may also be held responsible for any employer taxes it had failed to pay, like Social Security and Medicare taxes. State tax authorities may also hold the business responsible for state employee withholding taxes, employer unemployment taxes, and other payroll taxes. If the IRS says the workers were employees, all state wage claims will automatically be won by the workers. In court, if the business does not have great evidence that the workers were independent contractors, it is very difficult to get that determination overturned. Once contractors lose, it is hard to get them back to being contractors. The business will then need to figure out what to do with the former contractors and their work. If the IRS believes the business misclassified its employees as independent contractors, and the business does not try to remedy the misclassification, the IRS can reclassify all employees hired in the last three years as misclassified. An employer who is aware of the problem but does nothing to fix it is known as a "willful employer" and can be found liable for all federal employee payroll taxes going back three years. If the business owes payroll taxes, and has been classified as "willful" by the IRS, the IRS can go after the business owners, corporate officers, and the employees who are responsible for handling and paying payroll taxes. These individuals can be personally responsible for the payroll taxes owed, plus additional penalties. Even if the employees are ex-employees, the IRS will go after them to collect the payroll taxes. In addition to seeking payroll taxes and other penalties, the IRS can assess interest on the amounts owed. To defeat many of these consequences and avoid liability for tax penalties, businesses should first work with a tax professional and an attorney to evaluate their independent contractor relationships. If the IRS is conducting a tax audit, businesses should cooperate and provide all information requested. Failing to provide all past 1099-MISC forms usually leads the IRS to believe there are more 1099-MISC forms that should have been issued.
Common Pitfalls
Mistakes can be expensive with the IRS and the FLSA. This is a common mistake: failing to be clear about the relationship between the independent contractor and the company can be the difference between an employee or an independent contractor. How do you avoid mistakes on your independent contractor agreement? Make your independent contractor agreement clear and unambiguous. The first terms to define in the independent contractor agreement should be the term "independent contractor" and the term "company." Many companies use their formal business name as the "Company" to remove any ambiguity about who owns the company, particularly for purposes of liens arising out of personal tax debts, etc. Sometimes, though, in a contracting situation, it is better for the company and the contractor to include the additional signatories or owners of the business as individuals. Regardless of how the agreement designates the company as a business entity or persons, just be clear about what you mean. Likewise, use one term throughout the agreement instead of two (or more terms). For example, if this is a mechanics lien independent contractor agreement, commonly used by contractors and subcontractors in the construction industry to pass liability for a mechanics lien up the chain, use the term "Company" for the company throughout the agreement. Don’t switch to "Employer" or "Principal" or "Company" at intervals throughout the agreement. And don’t use conjoined terms like "this Contract." Use one term – "Company" or "Contractor" or "Independent Contractor." But use only one term. If you do not consistently use one term , you can create ambiguity, and you leave the door open for potential liability for taxes as an employer rather than as a contractor. And that’s not what you want. No one wants to have the IRS as a daily business associate. At least I don’t. This is another common mistake: not including a detailed scope of work. You want to make sure the contractor knows what type of work he should expect, and that he does not get anything other than what he expects. Nothing spoils a new business relationship like a complicated dispute over whether something was supposed to be included in the company purchase agreement or not. The independent contractor should not be a blank check. The scope of work spells out in detail all the services and provisions of work and goods (if any) required for the independent contractor to perform in order to earn the fees payable in the general terms of the agreement. And finally, many companies fail to include a remedy provision. A remedy provision should describe, in detail, how any dispute will be resolved. Companies may want to consider including a dispute resolution provision such as mediation, arbitration, or court – or a combination of any of those. In the commercial world, if an agreement fails to include a dispute resolution provision, the courts might render a portion of the entire contract void. This can be costly for the parties. Additionally, Florida requires certain remedies for specific contract provisions. The Florida mechanics lien laws can be confused, and having an experienced Florida attorney help you with a mechanics lien independent contractor agreement can make a big difference in reducing any ambiguity when it comes to court time.
Enforcement and Termination of Contracts
The Florida Statutes contain a comprehensive body of laws governing the enforcement of contracts in Florida, including Florida Independent Contractor Agreements. When a party believes another has breached an Independent Contractor Agreement, Florida law provides a number of remedies. These remedies are provided in all lawsuits and include money damages, specific performance, reformation of contract, and rescission of contract. Each of these remedies is briefly described below.
Money Damages
Contract damages in Florida are generally described as those which will place the aggrieved party (i.e., the party not at fault) in the position he/she would have been in had the contract been performed. This can include lost profits, loss of use, loss of income, or other economic loss. In a Florida business dispute, such economic damages may be difficult to quantify and to ensure that enough evidence is presented to support a claim for breach of contract and damages.
Specific Performance
Specific performance is a remedy which requires the breaching party to perform its obligations under the contract. Specific relief is an equitable remedy and will only be granted when money damages are not an adequate remedy. Unlike other remedies, specific performance cannot be obtained merely to obtain an advantage over the breaching party. For example, an award of specific performance on a contract may not be granted if the contract was meant to enhance the breaching party’s reputation.
Reformation of Contract
Reformation of contract is an equitable remedy whereby a contract is changed or reformed. It may be ordered by a court if an agreement, such as an Independent Contractor Agreement, is imperfectly expressed. If reformation is merited, the reformed contract will provide parties with a fair reflection of their original intent.
Rescission of Contract
Rescission of contract is an equitable remedy which allows a contract to be cancelled or set aside so that the parties will be restored to their position prior to the contract’s formation. Rescission is typically used when a party has been fraudulently induced to enter into a contract, or when a contract was entered into based upon a mistake or misrepresentation.
In Florida, as in most jurisdictions, there are various issues which must be considered when it comes to the breach of an Independent Contractor Agreement. It is imperative that the person or entity seeking to enforce or terminate the contract speak to a lawyer to determine his/her rights and obligations.
Recent Developments and Case Law
As the gig economy continues to grow, the landscape of independent contractor relationships in Florida has seen significant legal changes. Recently, the joint-employer doctrine has been expanded under Florida law, which could have an impact on the treatment of independent contractors. The expansion of the doctrine will now include economic dependence to determine if a joint employer relationship existed between independent contractors and the company that contracts with them.
The case of Perez v. 1-800-PLUMBING raised debate within the state over whether a language training school was a "joint employer" of a restaurant employee, where a contract between the restaurant and the school stated that the school was intended to be a contractor. The Florida Supreme Court held that while the school was not jointly liable for all obligations of the restaurant under the language instruction contract, it possessed sufficient control of the employee to be found liable for the torts of the restaurant. As such, the Florida Supreme Court concluded that a more liberal application of economic dependence factors should be utilized in the evaluation of whether a joint employer relationship exists.
While this case provides guidance in evaluating the status of the independent contractor , an employer should not rely solely on the potential economic dependence of the worker – the nature of the relationship between the parties is of equal importance. It may be informative to analyze a hypothetical situation in which a contracted cleaning service did not provide its own tools or cleaning supplies, and instead utilized supplies provided by the customer. Arguably, these facts alone may not warrant a finding of a joint employment relationship. But when coupled with control over how a cleaning service employee conducts his or her work and the business aspects of the relationship, a court may determine that a joint employment relationship existed notwithstanding the contract specifying otherwise. In the end it will be up to the state courts to determine whether a joint employer relationship exists.
As independent contractors continue to serve as a cost-saving measure for Florida businesses, compliance with existing laws in drafting independent contractor agreements is essential in order to adequately protect the integrity of a business and limit exposure from independent contractors.