What is an Independent Contractor Agreement?
An independent contractor agreement is a contract between an independent contractor and a business or entity that is contracting with the independent contractor. Although it is not required for the parties to enter into such an agreement for the contractor to be considered an independent contractor, it is almost always advisable—both for the protection of the business and for the contractor—to do so. Entering into such an agreement is almost never harmful to a contractor (whereas working without a written agreement often is, see below). Energy efficiency contractors, which generally work as small business entities and typically rely on written agreements when entering into business relationships with other entities, should definitely rely on written independent contractor agreements with all of the entities with which they contract as independent contractors to perform they type of work that makes them eligible for incentive rebates. A written agreement between an energy efficiency contractor and an entity with which the contractor is contracting should identify all of the parties, the work to be performed, the compensation to be paid to the contractor, and the obligations of each of the parties to the agreement. It may also , but does not have to, address other topics, such as insurance coverage, warranties, indemnities, the procedures for making a claim for compensation, and so on. Without a written independent contractor agreement, potential issues that could have been addressed if both parties had entered into such a written agreement (for example, a dispute over the timeliness of performance or the timeliness of a claim for compensation) must simply be addressed after the fact, with no parameters to limit the arguments being made by representatives of either party. Where that dispute could be resolved quickly and easily through the voluntary cooperation of the parties (for example, when the contractor is simply seeking compensation for work that was not performed timely), it is usually possible to resolve the dispute through trial and error and compromise. More complicated issues or more egregious disputes can cost time and money. Taking some time at the outset to address all of the issues that might arise later—issues including liability for damages, claims of delayed performance, evaluation of performance, and conditions of termination—can prevent costly business litigation and legal fees down the road.
Illinois Required Contract Clauses
Independent Contractor Agreements in Illinois must comply with certain state-specific requirements. For example, Illinois law requires that all independent contractor agreements entered into after January 1, 2010 containing a non-competition provision must do all of the following:
- (1) be in writing;
- (2) state the consideration, adequate and independent from the employment relationship, that the employee received in exchange for signing the agreement;
- (3) be signed by both the employer and employee; and
- (4) be entered into at the time the offer of compensation is made to the employee or before the commencement of the employment, whichever of the two occurs first.
This means that if you are using a form that was drafted prior to 2010, you may need to revise that agreement to comply with Illinois law.
Contractor vs. Employee Differences
As mentioned above, Illinois has laws governing independent contractors, specifically regarding wage payment and wage deductions. Misclassifying a worker as an independent contractor to avoid paying minimum wage or overtime pay, not permitting him or her to join a union, requiring him or her to work in lieu of paid sick leave, etc., can create legal roadblocks, as the employer is still on the hook for any legitimate wage and hour-related claims.
However, misclassification isn’t as clear cut as it might at first appear. Disparities in how a worker is treated in relation to other employees already on staff, such as setting his or her pay rate, determining his or her job description, or evaluating said worker’s performance, could make a case for the argument that the employee is, in fact, a contractor. Classification issues are usually drawn against the scope of the contract with that worker (the fact that he or she has signed a contract with the employer, generally considered binding in Illinois) and whether or not the contract is legally enforceable.
In short, Illinois law still presupposes that a worker is an employee working for an employer unless considerable evidence proves otherwise. The burden of proof is on the employer to establish a legitimate contract with the employee-turned-contractor that is cost-effective for the employer and in the best interest of the employee, such as weeding out frivolous wage and hour claims.
There are several other areas of misclassification issues to consider, including how the employer-employee relationship is structured (such as in terms of the power over the employee, such as scheduling shifts, location, how the employee is paid, etc.) and whether or not the contractor is subject to rules and regulations normally reserved for employees. This doesn’t preclude the possibility of an individual operating as an independent contractor from behaving and being treated as an employee; Illinois just needs to determine the intent of the workers through various contract stipulations.
Finally, there are a number of other legal ramifications of misclassifying workers, according to the U.S. Department of Labor: the employer is on the hook for federal wage and hour law violations, including those relating to overtime and minimum wage; contracts with state employment agencies generally require background information about the employer’s organization, such as checking criminal records, etc.; employer liability for civil suits for breach of contract; sanctions for failing to pay unemployment insurance; the determination of liability for retaliatory acts against workers; and a multitude of IRS liabilities for unpaid taxes, both state and federal.
Essential Terms of a Successful Agreement
An effective independent contractor relationship requires a comprehensive and well-drafted agreement that should address the basic terms and conditions of the working relationship. An independent contractor agreement used in Illinois should, at a minimum, contain the following:
Name of the employee. The job description and responsibilities. The scope of work contained in the independent contractor agreement should be clearly defined and if the employer wishes to reserve the right to amend the scope of work, such language should be included in the contract. The payment terms under the agreement. An independent contractor agreement should detail how much will be paid, for what work, when payments are due and whether the employee will be eligible for bonuses, overtime or commission as payment for his or her independent contractor services. Confidentiality. A well-written independent contractor agreement will include a confidentiality clause which will require the independent contractor to keep secret any information related to the employer’s business, customers and trade secrets, as well as any confidential information the employee learns during the course of the relationship. Termination. A termination clause should outline the terms of termination for both the employer and the employee. For example, both parties should be given a set amount of time in which they can give notice to the other of termination. Also, a provision should be included that outlines the payment terms in the event the independent contractor relationship is terminated early.
Common Missteps and How to Avoid Them
Many businesses completely overlook whether the contractor is actually an independent contractor and don’t even think to have an agreement.
The most common pitfalls I see are business owners that think they know what they are doing and try to draft an "independent contractor agreement" on their own. This is a huge mistake, particularly in states like Illinois where the law can be quite complicated. Contractors are supposed to be people who are in business for themselves. The law states that they should be "rendering service in the course of an independent trade, business, profession or occupation." (820 ILCS 405/212-1). If you don’t have a written agreement , you can’t ensure it’s clear that they are in fact in business for themselves and this distinction may lead to large fines, taxes and, in some cases, imprisonment.
Some businesses also make the mistake of failing to have a written agreement at all and believe they can use email or just a few pieces of paper signed by both parties. You must have a detailed, signed independent contractor agreement. Just because the contractor is registered as an LLC before you hire him or her does not mean that you can just skip the paperwork. A good independent contractor agreement will help protect your business from falling prey to a Department of Labor audit or dispute over whether or not the relationship was an employer/employee relationship.
Contract Enforcement and Disagreement Resolution
When a substantial amount of money is involved, or when a dispute cannot otherwise be resolved, litigation may be inevitable. However, when parties to a contract include a mediation or arbitration requirement in their independent contractor agreement, the process is more manageable — and less costly.
Illinois courts routinely enforce these provisions. A recent ruling out of the U.S. District Court for the Northern District in Becker v. MBI Group, Inc. demonstrates that.
In Becker, a construction manager who held an assets purchase agreement with his former employer challenged an order that compelled him to arbitrate his claims against the company for breach of contract. The appellate court affirmed the order.
The Becker court held that the dispute was covered by a broad mediation provision, which read:
"Any controversy or claim arising out of or relating to this agreement … or the breach thereof shall be settled by mediation and shall not be settled by litigation."
The court held that the parties’ language "used the term ‘or’ as a conjunction between two alternative phrases, thereby broadening the scope of the mediation provision to include all disputes arising from the agreement between the parties, not just those regarding the agreement’s terms."
Similarly, in a 2017 case, the Illinois Second District held that an independent contractor agreement requiring "all controversies arising out of or relating to" the contract be submitted to mediation or arbitration was broad enough to encompass statutory claims under the Illinois Wage Payment and Collection Act. Emerald-Blacktop, Ltd. v. Stuckey, 2017 IL App (2d) 160516. Stuckey, an independent contractor who provided services to Emerald-blacktop for several years, sued Emerald-Blacktop under the IWPCA when he did not receive all of the wages due to him. The court held that the mandatory arbitration provision in Stuckey’s contract was broad enough to include his claims.
Although Becker and Stuckey arose in the context of employee-employer relationships, they are nevertheless instructive in showing how Courts in Illinois enforce broad and/or mandatory arbitration or mediation requirements in independent contractor agreements.
The Importance of Legal Guidance
As previously mentioned, the Illinois Independent Contractor Act. If you enter into an independent contractor agreement that does not meet state requirements, the contract is subject to the Illinois Wage Payment and Collection Act (IWPCA).
Contracts that fall within the IWPCA may expose your business to damages, including twice the amount of unpaid wages, plus a potential attorney fee award of up to a 100% of the amount at issue. Beyond damages under the IWPCA, there are also unique issues arising with respect to the Fair Labor Standards Act and, as outlined above, the Internal Revenue Service.
The Internal Revenue Code (IRC) provides stiff penalties for employers who intend to treat a worker as an independent contractor but inadvertently misclassify that worker . The penalty under the IRC for failing to properly classify employees is 1.5% of all wages paid to a misclassified worker.
Many times, businesses in Illinois are unaware of the difference between the applicable state law and the IWC statute. Instead, they simply look to the Internal Revenue Code for guidance. However, the IRC fails to address many important state law issues that may lead to liability in the state of Illinois. It is critical that employers consult with a local attorney experienced in employment matters and the independent contractor misclassification issues under both the IRC and the various state laws.