The following are five common mistakes companies make in structuring consulting or independent contractor agreements.
- At-Will Termination. Companies often enter into consulting agreements for fixed terms and include an early termination right only upon a default. It is often hard to prove a default, and often companies are simply not happy with the service being provided where no actual default has occurred. Include a right to terminate the relationship at any time, and for any reason, with the obligation only to pay for services provided through the date of termination.
- Intellectual Property Ownership. I have seen several entities engage consultants to create technology, source code, or other intellectual property, without the proper contractual protections. In certain states, including, California, without a specific provision assigning ownership of all “works” to the Company, the third party may have an equal right and claim of ownership to the intellectual property they create, even if they are paid to create it. Therefore, include appropriate work product assignment provisions in any consulting agreements where the consultant will be producing work products for the company.
- Independent Contractor Language. If an individual does not meet the requirements of an independent contractor, he or she will be classified as an employee, and thereby be entitled to all of the rights of an employee under state and federal labor laws. The actual relationship rather than the words of the contract will govern the determination, however, proper language in the contract will help define the relationship and create a basis for an argument that the individual is an independent contractor.
- Non-Disclosure. Always include a non-disclosure provision in any third-party consulting agreement, that includes equitable remedies in case of default.
- Non-Disparagement/Non-Solicitation. Include non-disparagement and non-solicitation provisions in consulting agreements, which prevent the consultant from defaming the company or soliciting the company’s employees or customers after the relationship ends.
The information contained in this article is strictly for educational purposes and is not intended to be legal or tax advice or to be relied upon by anyone without doing their own research, and consulting with legal and tax advisors.