Independent Contractor Agreement: What to Watch For Before You Sign

The independent contractor agreement is the foundation of every freelance or consulting relationship. It defines your work, your pay, and — critically — your status. Get it wrong, and you could find yourself treated as an employee without any of the benefits, or locked into restrictions that undermine the very independence that makes contracting appealing.

Whether you're a developer, designer, consultant, or any other independent professional, here's what to look for before you sign.

The Classification Problem: Why It Matters

The distinction between "independent contractor" and "employee" isn't just a label — it determines your tax obligations, your rights, and the company's legal exposure. If a company treats you like an employee but classifies you as a contractor, both of you could face serious consequences.

The IRS and state agencies look at the reality of the relationship, not what the contract says. Even if your agreement says "independent contractor" in bold, you could be reclassified as an employee based on how the work actually functions. When that happens, the company owes back taxes and benefits, and your tax situation gets complicated.

This means the contract itself needs to reflect genuine independence — not just claim it.

Key Clauses to Examine

1. Control and Autonomy

The single biggest factor in contractor vs. employee classification is control. Your contract should make clear that you control how the work is done, not just what the deliverables are.

Red flags that suggest employee treatment:

• Required work hours or schedules ("Contractor shall be available 9 AM–5 PM")
• Mandatory attendance at regular team meetings
• Required use of company tools, equipment, or software exclusively
• Detailed instructions on methods and processes
• Requirement to work on-site at the company's office

A well-structured contractor agreement specifies deliverables and deadlines but leaves the how, when, and where up to you. If the contract reads like an employee handbook, that's a problem — for both classification purposes and your actual independence.

2. Exclusivity Clauses

One of the defining characteristics of an independent contractor is the ability to work with multiple clients. An exclusivity clause that prevents you from working with other clients — or requires the company's permission to do so — is a strong indicator of an employment relationship.

Some contracts are subtle about this: "Contractor agrees to devote sufficient time and attention to ensure timely delivery" sounds reasonable, but paired with a heavy workload, it can become de facto exclusivity.

What to negotiate: Remove exclusivity requirements entirely, or narrow them to a prohibition on working for named direct competitors during the engagement. Ensure you retain the explicit right to maintain other client relationships.

3. Termination Terms

Employee relationships typically involve notice periods, severance, and protections against wrongful termination. Contractor relationships are simpler — but the terms still matter enormously.

Things to check:

• Notice period: Can either party terminate with reasonable notice (14–30 days is typical)?
• Payment for completed work: If the contract is terminated early, are you paid for work already done?
• Kill fee: For fixed-price projects, is there compensation if the client cancels mid-project?
• Symmetry: Can both parties terminate under the same conditions, or is it one-sided?

A contract that allows the company to terminate you instantly without paying for completed work is a major red flag. You should always be compensated for value already delivered.

4. Intellectual Property Assignment

IP clauses in contractor agreements deserve special attention because the default rules differ from employment. In most jurisdictions, work created by an independent contractor belongs to the contractor unless the contract specifically assigns it. Companies know this, which is why every contractor agreement includes an IP assignment clause.

The question isn't whether to assign IP — it's how broadly. A reasonable clause assigns IP in the specific deliverables created for the project. An overbroad clause assigns everything you create, think of, or develop during the engagement — including work for other clients and personal projects.

Key protections to include:

• A specific list of what IP is being assigned (tied to deliverables)
• A carve-out for pre-existing IP you bring to the project
• A license-back provision for any of your pre-existing IP incorporated in deliverables
• Explicit exclusion of work done for other clients

5. Benefits and Expenses

As a contractor, you're responsible for your own taxes, insurance, equipment, and benefits. The contract should state this clearly — but watch for clauses that create contradictions.

If the contract says you're a contractor but also requires you to use company-provided equipment, follow company HR policies, or participate in company benefit programs, it's creating evidence of an employment relationship. This isn't just a theoretical risk — it's exactly what the IRS looks for in audits.

What to negotiate: If you incur project-specific expenses (travel, software licenses, materials), the contract should specify how these are reimbursed. Standard practice is either a separate expense budget or inclusion in your rate.

6. Liability and Insurance

Many contractor agreements require you to carry professional liability insurance (errors & omissions) and general liability insurance. This is reasonable for larger engagements but can be expensive for solo freelancers on small projects.

More concerning is unlimited liability. If your contract doesn't cap your liability, a mistake on a $5,000 project could theoretically expose you to millions in damages. Always negotiate a liability cap — typically equal to the total contract value, or the fees paid in the last 12 months for ongoing relationships.

The "Contractor in Name Only" Test

After reviewing the contract, ask yourself: Does this agreement describe someone who runs their own business, or someone who works for this company? If the answer is the latter, the contract needs revision — regardless of what the title says.

True contractor agreements should reflect:

• Control over how work is performed
• Freedom to work with other clients
• Responsibility for your own tools and expenses
• Project-based (not ongoing, indefinite) engagement
• Deliverable-focused scope, not role-based responsibilities

If you're unsure whether your contractor agreement has hidden problems, run it through FlagClause for an instant analysis. It'll flag classification risks, overbroad IP clauses, and one-sided terms in seconds.

Related reading: 7 Red Flags in Freelance Contracts · 5 Vendor Contract Mistakes Every Startup Makes