Business Contracts

Employees & Independent Contractors

Many business owners are under the mistaken impression that by simply calling their workers independent contractors, they can avoid paying employment taxes. This is not true. The IRS uses a 160-page manual to train its examiners how to differentiate an employee from an independent contractor, which suggests the determination is not a simple one. Whether a worker is an independent contractor or employee depends on the degree of control the employer has over the worker versus the degree of independence the worker enjoys. Though the IRS does not offer a simple method of distinguishing the two, it has published Form SS-8 to help you with the determination.

When in doubt, it is better to consider the worker an employee and pay the proper taxes than misclassify them as an independent contractor and risk paying back taxes, along with penalties and interest down the road.

Whether your workers are employees or independent contractors, it is important to use an employment agreement that sets forth the obligations of the worker along with those of the employer. It is also important to outline policies and procedures for wages, time off, disciplinary procedures, and grounds for termination. As a benefit to employers, employment agreements can also include confidentiality agreements to protect trade secrets, assignments of rights to give the employer rights to any work produced for the company, non-solicitation provisions to prevent the worker from taking clients when they leave, and non-compete clauses to prevent the worker from opening a competing company using the knowledge they gained from their previous employer.

Contracts Among Business Owners

Owners’ agreements can include buy/sell agreements, shareholder agreements, operating agreements, and partnership agreements. These contracts can outline the responsibilities of each owner, their relative contributions to the business, what will happen if an owner dies, how to value the business in the event of a sale, and protecting intellectual property rights. Buy/sell agreements operate to ensure the business can continue in spite of losing an owner and can include additional provisions for stock transfers and succession planning with funding from a life insurance policy.

Many business owners find themselves starting a company with family or friends. I often hear, “We don’t need contracts; we’re family!” I would argue that doing business with friends or family just increases the importance of written contracts. In my experience, soured business deals between family and friends are among the most contentious.

Contract Review

Before you put your signature on a contract, you should have it reviewed by an attorney. Even if it “sounds okay,” we are trained to read between the lines and interpret the underlying intentions for each clause. Our expertise is in the nuance. It is much cheaper to pay a lawyer to review a contract than to litigate a dispute down the road.

Keep in mind that reviewing a contract is not rewriting a contract. Don’t expect the lawyer to fix all that’s wrong with the contract you present. Instead, take notes on what you learn about the contract and challenge those clauses that trouble you.

Contract Drafting

Do you practice DIY law? If you use business contracts you found online, you are practicing DIY law. Why is this dangerous? Because none of those free legal documents on the internet is specific to YOUR business. You may have found a wealth of information about the general business category – hair salons, personal training studios, bakeries – but you didn’t find anything that addresses the legal needs of your own unique company. This is why it is important to hire a lawyer to draft your contracts. We know all that boilerplate stuff you find online. The devil is in the details. A lawyer will tailor the contract so that it meets the needs of you as the business owner, your employees, your contractors, your suppliers, and your customers.