Confidentiality, Non-Circumvention and Non-Disclosure Agreements

Before a party enters into negotiations or preliminary discussions regarding any potential business transaction, idea or product care must be taken by both sides so that the communications are covered by a thorough agreement which will permit the full disclosure of potentially unique, profitable or secret information without fear of the other side appropriating and using it for its own benefit. If no such agreement exists the potential for litigation rises significantly if in the future one of the parties publically reveals some product or idea which bears a resemblance to that which was discussed previously, even if that product or idea was created without any use whatsoever of any of the information obtained during those prior communications. The disclosing party may reasonably sue and recover damages stemming from the theft of the information with only having to prove that the information was previously provided and thereafter a commercial activity was undertaken by the recipient of that information which created a profit. Therefore confidentiality, non-circumvention, and non-disclosure agreements are highly significant in todays litigious business climate. Don’t make the mistake of discussing any business ideas without a thorough and professionally created contract which will protect both sides.

What should such an agreement include? Of primary importance to the agreement is a clear statement on the topic of discussions in as much detail as possible. Something like “the sale of manufacture, sale and distribution rights to a product which is intended to facilitate the coffee brewing process. The product consists of a plastic base with a metallic cap and two handles (illustrative sketches of proposed product attached in Exhibit A)” is far better than “a new type of coffee brewer.” The product or idea should be identified with as much specificity as possible, this is to protect both parties from any misunderstandings. Variations on the original idea should also be protected from disclosure, so that the recipient cannot claim that the mere modification of the original information will allow it the full rights to market and profit from information it legally owes compensation for.

Another provision of significance is to include a exceptions to the use and disclosure of information previously known, obtained from independent sources or publically disclosed at any time by the provider of the information. This will provide a powerful defense to the recipient if sued, in that showing that the information was already publically disclosed in any manner by the provider or that it was obtained through other independent channels or previously known by the recipient will allow the mitigation or full avoidance of potential damage awards. Another exception should include information whose disclosure is compelled by some governmental or administrative body.

Finally, some specific term to the confidentiality, non-circumvention or non-disclosure agreement should be expressly stated. This puts a mutually agreed upon time frame from which the provider of the information may profit from the idea from any source. A time limit may be any number, from one year to permanent duration as agreed by the parties. It is also advisable to consider limiting the agreement’s application to a certain geographical location, such as a state, a nation or even a continent. This is subject to negotiation and obviously the recipient will want as small a location as possible, while the provider will want the agreement’s geographical application to be unlimited or world wide.

Obviously boilerplate provisions should be included, such as alternative dispute resolution, applicable law, assignability, succession, notices, waiver of any provisions, and the like. These agreements must be reasonable in scope, and are also governed by case law within most states. Please consult competent contract drafting legal counsel for the appropriate conformity to state law and for the creation of a lawfully binding non-disclosure, confidentiality, and non-circumvention agreement.

Parol Evidence Rule and the Merger Clause

The parol evidence rule is a substantive rule of contracts which prohibits the introduction of contradictory extraneous prior or contemporaneous agreements to a written, signed document. This type of rule is essential to the certainty provided by signed contracts, and business could hardly continue to function if any party was free to claim additional terms and seek modification at any time after the contract is signed. This rule means that a party that signed that contract cannot later claim that there exist prior oral, written, electronic or any other type of agreements or statements, which go against the written agreement in some way, and which were not memorialized into the writing. This rule, however, does not prohibit the introduction of evidence which is not inconsistent with the written contract, and does not contradict its terms. This simply means that evidence to show what a particular provision was actually intended to do/mean will be permitted, including statements, writings, etc.

Most agreements will contain what is known as a “merger” or “integration clause” which simply expressly states that no outside agreements, promises, or statements have been made other than what is memorialized within the four corners of the document. If an agreement does not contain a merger clause this will make it more difficult to prove merger of all prior agreements into the written contract, however, the presumption of merger exists upon signing, is made stronger by the existence of a merger/integration clause and a few other clauses, and in the final analysis a court will review the surrounding circumstances of the creation of the contract in determining whether or not an agreement is merged/integrated and to what extent.

Basically, the less relevant the existence of contradictory evidence is to the subject matter of the agreement, and if the subject was not addressed in the contract, the easier a time the court will have finding that the parol evidence rule prohibits the introduction of such extraneous contradictory evidence. If the evidence pertains to a highly relevant matter in the agreement, and is not addressed in the contract, or is incompletely/ambiguously addressed, chances are such evidence may be permitted to modify the contract. If the topic is fully and unambiguously addressed then it is likely that parol evidence rule will bar the introduction of extraneous evidence. Point of fact, all agreements drafted by this office will have a merger clause, and it is paramount that it be properly drafted and all encompassing.

There are a few exceptions to this rule, which will actually permit the introduction of evidence showing extraneous agreements: when a writing is incomplete or ambiguous; these are two sides of one coin. As previously mentioned, if there is an important point highly relevant to the subject matter of the agreement and it is not addressed in the agreement, or it is addressed but not fully covered as in the interpretation could go either way, chances are good that parol evidence will be permitted. Fraud, accident of mistake will also permit introduction of outside agreements because proving fraud simply will void any agreement. An accident or mutual mistake need to be proven and the standards are quite high, however, if proven to the requisite standard, a contract will be permitted to be modified. Mistake can be shown in that all parties had no meeting of the minds regarding some provision(s), or that an important provision was left out. If an agreement was subsequently modified or may have been illegal, evidence to show the reasons for modification or illegality may be permitted. Finally, if there is use of customary terms or trade terms which are words of art, meaning they mean specific things in some specific industry, outside of what most people accept their meaning to be, then evidence may be permitted to show what the terms are actually accepted to mean in that industry or what their customary usage is.

Boilerplate General Contract Provisions

The “boilerplate” contract provisions typically form the last section of an agreement, and they are typically dismissed as “housekeeping” of secondary importance. These provisions address issues such as amendments, governing law, waiver of trial, alternative dispute resolution, succession/assignment, notices, counterparts, severability, authority and merger. Dismissing these provisions as irrelevant or unimportant is a serious mistake, and as much attention should be paid to each word of these provisions as to any other portion of the document. Ignoring these sections may result in dire repercussions for one or all parties, for example when one discovers that a dispute must be litigated in another state, or that no litigation may occur until various alternative dispute resolution measures are implemented.

Amendments should only be permitted with mutual approval of all parties, in signed writing, and appended to the original agreement. Non-mutual amendments are commonly used by scam artists, individuals or companies, who intend on using that provision to unilaterally change the terms of an agreement and then attempt to bind the other signer to the changes. Although such provisions are difficult to enforce in court, and it is usually unlikely one will be sued over this type of dispute, it is possible that the threat of suit, and/or an ongoing relationship with the entity or person, will necessitate a greater expenditure as demanded. The fraudster may be counting on the need for the completion of a project or may attempt to intimidate the other side into paying more.

Governing law provisions are relatively simple, and should usually state that state where the agreement was signed, although the parties may agree to use any state’s law to govern the agreement’s terms. If one suspects the agreement may end up in court, that party would do well to demand the governing law to be of his/her own state. If a company or person has reached out to the buyer of goods or services, then certainly the application of the buyer’s state law should govern, and this should be expressed in such a provision.

Typically, severability provisions state that the agreement will survive any state/federal law changes or circumstances nullifying any provision by a governing entity, and remain in force, although without any of the invalid provisions. These provisions are probably in every agreement, and so should be. The only way an agreement can be voided in whole is if the subject matter of the agreement is made illegal or it becomes impossible to complete the performances required under the agreement not due to the fault of a party.

Alternative dispute resolution is becoming commonplace. Nobody wants to spend (tens of) thousands of dollars and wait years to resolve a dispute, but the legal system is a mess, and justice is not even remotely assured. Arbitration, or even better, mediation provides a quick, relatively inexpensive, and less stressful resolution mechanism which places the resolution into the hands of the parties, and should be considered and implemented prior to any litigation being commenced. Although in mediation compromise will result in none of the parties being fully satisfied with the resolution, in litigation, this satisfaction with the resolution will be far less.

Most agreements are not assignable, although this depends on the personal nature of the agreement. If a different and competent party can perform the same or similar class of services or provide the same goods then assignment should be permitted under the right terms, because if a party cannot perform, it should be allowed to attempt to save the contract and satisfy the other party.

Each party should list a good address of record that will be deemed to be the proper location for any important notices given to the other. Notice issues come up occasionally, and providing a valid address can put any disputes as to notices to rest quickly. Each party should have the requisite authority to enter into the agreement, and such an attestation may bind the signer personally if he/she does not in fact have the authority. Although, at times this personal binding of the signer is useless because they may not be able to perform or pay under the agreement as required.

Merger is a topic that has had many dissertations and articles written about it. To sum up, it is a provision which negates any oral statements, promises and agreements, and incorporates or merges them into the final agreement. Therefore, if such promises or statement were not included into the agreement in writing, then they never happened. This is called the “parol evidence rule.” This rule prohibits a party from presenting evidence of promises or agreements contrary or in addition to what is in the written document, unless the agreement is ambiguous or a few other exceptions apply, such as defects in the formation of a valid contract. In short, the moral is: be sure to include all oral promises into the final written document, because more than likely 99.9% of all contracts will contain this provision.

LegalZoom and the Online Legal Services Scam

In centuries past, the legal profession was highly selective about the individuals who were permitted to dispense legal advice. Attorneys were generally regarded as highly competent and generally ethical in providing legal services. This began to change a few decades ago when law schools began to proliferate as lawyer mills and with little interest other than making as much money as possible from naïve college grads who would happily take out hundreds of thousands of dollars worth of loans from the government and private agencies for the promise of a lucrative, exciting, and important profession. In the past few years the legal industry has sunk to a new low when some factions within it began to convince the public that law practice is nothing more than filling in the blanks on forms, and the public bought it; as it did so many other epic con jobs perpetrated by private and government entities.

The proliferation of online discount self-serve legal providers has convinced the public that they are qualified to draft highly significant and specialized legal documentation which could have severe repercussions down the road if not drafted properly and according to the specific situation of the client. Now, anyone with zero legal education could purchase a standard form by filling in the blanks and paying the fee, remain convinced they are protected in a variety of personal and business transactions. For instance, wills, trusts, and business entity formation documents are just a few of those routinely peddled to the unsuspecting masses using a blitzkrieg of marketing hype and empty promises. A simple search of reviews for any of these services will reveal a throng of dissatisfied and angry customers who found their documentation was long delayed, filled with errors, or not produced at all. But this is just the beginning of the potential pitfalls of acting as one’s own legal counsel.

The main consequence of doing one’s own legal work without understanding what a customized legal document must include and exclude is the threat of very significant repercussions long down the road, when Legalzoom or any other online legal services provides no longer have any responsibility for their product. For instance, wills and trusts commonly fail because they are filled with errors and omissions, such as neglecting to list some important piece of property, failing to properly specify an independent executor who is to serve without bond, or a contingent beneficiary/executor, failing to list proper addresses where various parties may be found, and failing to include necessary provisions regarding past relationships. There are also many issues which may arise from improper execution of a will or trust. Trusts fail and are sued regularly, and the creation and maintenance of a trust simply cannot be entrusted to someone who has had a trust created by Legalzoom which then provided a two page instruction sheet on how to manage it. A trust offers no liability protection, and it must only be used for specific situations.

The formation of a business entity is a highly specialized process which requires the understanding of multiple state codes, and it cannot be properly performed by a dilettante who believes the mere registration of the entity with the state will provide all the liability shield protection needed to safely conduct business without risking the owner’s personal assets. This misunderstanding is perpetuated by such online discount services, and it inures to the extreme detriment of their customers. As a final word of caution, if you choose to use such a service to provide you with legal documentation you are doing so at your own peril. This, and many other offices will charge you full fees for fixing, correcting, redrafting or restructuring such documents, as if they are being created from scratch, when they fail to meet your needs and expectations, the discovery of which may come too late to fix the problem. Save yourself the time, stress, and expense and retain a qualified licensed attorney who not only understands the pertinent law, will customize documents to your needs, and be there after the fact to guide you in their application and use.

Escrow Agreements

Escrow agreements are used to safeguard money or property with a neural third party while a transaction is completed. The escrow agent is the neutral party that will hold the property until the transaction is completed or fails and will act according to the terms set forth in the escrow agreement. To be more specific, the escrow agreement will detail the circumstances under which the agent will take and retain the property and whether anything will be done with it while it is stored. The agreement states how the property will be distributed, and finally, the agent’s fees, release from any liability while storing the property, and possibly an indemnification provision for any losses arising out of the storage of the property.

Typically, escrow agents require joint written instructions from the parties, because they agree as to the terms, otherwise a court order may be required, or some sort of neutral dispute resolution procedure. Sometimes, an agent will be permitted to resign if the parties cannot agree to the terms of the escrow agreement. In either case, an agent will be permitted to bring a legal action seeking declaratory relief as to the disposition of any property. Pertaining to the purchase of real estate, the escrow deposit takes place at the simultaneous signing of the contract and escrow agreement, wherein the purchaser deposits the earnest money with the agent until the deal is closed or a certain period of time passes without closing, or the buyer is at fault for the failure to close on the property and the funds are then remitted to the seller. Otherwise, the deal may fail to close through no fault of buyer or seller and the funds or a portion thereof are returned to the buyer. Problems in escrow agreement drafting occur when the terms of the storage, transfer or return of the funds are not made clear to one of the parties, or when certain expenses that the agent expects to have reimbursed, have not been explicitly listed, and the agent is permitted to deduct those expenses from the stored property, and even hold the property as security until the fees are paid.

There are also quasi-criminal escrow services that operate with relative frequency which possess the intent of creating ambiguous escrow agreements and count on the failure of the parties to retain legal counsel to review them. As a result there are various fees tacked on to the agent’s expressly stated fees, which were not expressly disclosed. Sometimes the terms of the agreement permit the agent to sell or otherwise dispose of the held property if it unclaimed for a specified period, or to pay off the fees. In Texas, escrow officers are required to be licensed by the state, prior to which they must be sponsored by another agent, post bond, and undergo a criminal background investigation. The parties should be certain to investigate the license and the commercial status of any escrow company they are planning to deal with, and get the escrow agreement reviewed by a knowledgeable professional.

Conditions, Declarations, and Discretionary Authority

The final types of provisions which make up most properly constructed agreements are conditions, discretionary authority, and declarations. We will begin with declarations because they are the simplest to understand. Simply put a declaration is a statement of fact as to which the parties agree. It is simple to understand because no rights or remedies are associated with declarations; their breach may not be sued upon. To give an example, all definitions in a contract are declarations; they have no substantive effect on their own. No party promises to do or not do something, and no representation or warranty was made. All declarations will have legal effect in that in the above example, a definition is binding on the contract in question. The definitions were agreed upon, and are to be used in interpretation of the agreement. Some declarations have legal and substantive effect; such as a declaration which states the agreement’s choice of law, i.e. The laws of Texas are to govern the entire contract. Although there are no rights or remedies with a breach of such a provision, it has substantive effect because it establishes a policy which governs the agreement itself.

A condition is a state of facts which must exist before a party is obligated to perform. To be a condition, the event which triggers the performance must not be certain to occur. Therefore, passage of time cannot be a condition. A condition may be created before a right is exercised, or a covenant must be performed. The typical form that conditions take is the “if… then” grammatical structure. For example, “if the inspection is performed within one week of the execution of this agreement, and the results are satisfactory, then the buyer shall purchase the vehicle.” This provision combines a condition with a covenant. Conditions may be ongoing, meaning that a certain state of affairs must exist throughout the duration of the agreement for one party to be required to perform. If the condition is not satisfied at any time, the performing party may choose whether to perform, waiving the condition, or terminate the agreement, or seek any other remedy outlined in the agreement. Some conditions may be worded so that their breach does not terminate the entire agreement, but only cancels one party’s duty to perform some action, and the agreement will otherwise continue.

Discretionary authority grants the holder the choice or permission to act. The holder is not required to exercise the authority granted. Commonly, discretionary authority is granted with a condition preceding it. So, a state of facts must exist before a party may exercise its discretionary authority. For example, in every loan agreement conditions exist which will allow a bank to accelerate its loan such as default, unauthorized assignment of the loan, transfer of title, failure to maintain insurance, pay taxes, etc. In such events, the bank may, but is not required to accelerate its loan. Conditions serve to allocate risk, meaning that discretionary authority should usually not be unlimited and unrestrained in an agreement. Discretionary authority is not the same as a right, because in a right, there is a right to receive some performance and a duty to perform. In discretionary authority there is no right to receive performance, only one party has the authority to act if it so chooses.

Rights and Covenants in Contracts Drafting

These contract drafting terms both essentially mean the same thing, albeit from differing viewpoints. A covenant is simply a promise or an obligation to do or not do something. A contract right is the obligation of the other party to do or not something for the party that holds the right. If there is a duty or obligation to perform then there must a correlative right to receive that performance. A covenant is drafted from the viewpoint of the actor, which a right is drafted from the viewpoint of the recipient. Covenants are correctly drafted using the word “shall” as in “X shall do so and so”, and rights are delineated by various words such as “entitled, is to be, shall receive, etc.” Rights use more passive language and contain inherent ambiguities, thus they are generally to be avoided in drafting. For instance, if one inserts a right into a contract without naming the obligor of that right, then an ambiguity may exist as to which party must perform that obligation.

The remedies for breach of a right or a covenant are essentially the same. The non-breaching party may sue and in some cases seek specific performance, which is an order by a court that a party must perform the obligation specified in the agreement. The measure of damages is the benefit of the bargain, meaning that the aggrieved party is entitled from the party who breached the contract to everything that he would have received, including profits, if the breach had not occurred. If the breach cannot be cured, then the aggrieved party may have the right to void and rescind the agreement.

A breach of a covenant legal action does not require a breach of any representation or warranty, because these are determined to have been breached or not at the time they were made, therefore, if the representations and warranties were true at the time they were made, and a covenant or right was breached at any point in the future then only an action for breach of a covenant or right would exist. To give an example, when selling a vehicle, the seller represents and warrants that the vehicle is pink, which is in fact the case, and furthermore the seller covenants not to change the color of the vehicle before the transfer, while actually painting it blue before delivering it to the buyer, there would only lie an action for breach of covenant and not for breach of warranty or representation because these were true at the time they were made.

Measures of Damages for Breach of Warranty and Misrepresentation

Warranties and representations are some of the most important provisions in any agreement; in fact they are fundamental. To recap a prior post, a ‘warranty’ is a promise that a statement is true, and a ‘representation’ is a statement of fact which applies to the past or present and is intended to induce its recipient to act. The remedies for breach of either are different, and the recipient will want to receive both in any contract to ensure maximum enforcement rights.

A breach of a ‘representation’, or more correctly a ‘misrepresentation’ (representations are not promises and cannot be breached), can be innocent, negligent, or fraudulent. All misrepresentations must be material, meaning that a misrepresentation must pertain to an important part of the agreement and bargain. If a misrepresentation is innocent or negligent, the standard remedies are avoidance and restitution. Avoidance, which is the same as rescission, simply means the unwinding of an agreement, as if it had never occurred. Restitution means that each party returns to the other all that it has received, and the agreement becomes null. If a breach is fraudulent, meaning it was perpetrated knowingly and with intent to defraud, the injured party has a choice of remedies. The first choice is restitution, as with the breaches discussed above, the other choice is to retain the benefits of the agreement and seek damages in fraudulent misrepresentation, which may include punitive damages (monetary punishment).

With fraudulent misrepresentation the damages calculation used in Texas, and a majority of states, is the benefit of the bargain measure of damages. This simply means that the damages are calculated as if the breaching party had performed as promised. The number is obtained by subtractive the actual value received from the value of the benefit as represented. So, if an item was purchased for $5k, with a promised value of $10k, and in fact turns out to be worth $3k, the benefit of the bargain measure would mean the proper damages would be $7k, not $5k (the amount paid). The formula is: value as promised-actual value=damages.

The other measure of damages used by a minority of states is the out of pocket measure. This simply means that the actual value is subtracted from the amount paid. In the above example the amount paid was $5k-actual value $3k=damages in the amount of $2k. You can see that the benefit of the bargain measure provides a greater recovery for the plaintiff, and most would agree it is the more fair measure because the buyer relied on the promise that the value of the bargain was much greater than the amount being spent, otherwise the buyer would not have entered the transaction. Punitive damages are also available and should be sought in most cases. The measure for this type of damages is the amount which a court or jury would consider just and sufficient to compensate the victim for other than financial injury, deter further wrongdoing by the defendant, and affirm the public policy of deterring civil wrongdoing.

A breach of warranty will have the standard measure of damages which is the benefit of the bargain described above. The highest potential recovery will dictate the damages sought, which are likely to be benefit of the bargain for breaches of warranty, and benefit of the bargain to include punitive damages for fraudulent misrepresentations. Innocent and negligent misrepresentations will cause a contract to be unwound, avoided and restitution paid to the injured party so the parties end up as though the contract in dispute had never existed.

Contracts Building Blocks

There are seven concepts within in the language of contract drafting. These concepts must be understood in order to be properly expressed in a document so that a commonly understood meaning may be assigned to the document’s provisions by all signatories. This commonality of intent is necessary so that potential disputes are avoided as to the meaning, intent, or potential ambiguity which is not evident at the time of drafting. It is common practice that attorneys who do not know and have never studied the concepts of contract drafting will engage in drafting documents which will not be interpreted in the same manner by other parties, or courts. Contract drafting is a particularized niche which should not be entrusted to dilettantes, equally as much as litigation should be left to knowledgeable litigators.

The seven contract concepts are:
1. Representations
2. Warranties
3. Covenants
4. Rights
5. Conditions
6. Discretionary Authority
7. Declarations

These concepts will all be discussed in future posts, in pairs, and only two will be reviewed here. Representations and warranties typically go together because they cover the same ground and can be worded the same way. A representation is a statement of a past or present FACT, made as of a moment in time which is made in order to induce a party to act. This is not a promise but a statement. A warranty is a promise that the statement is true, and implies the indemnification of the other party in the event that this promise turns out to be false.

An example of a ‘representation’ within a contract would be: “The Mazda is five years and two months old, it has no known mechanical problems.” A representation can only apply to past or present facts, not to the state of future facts. Additionally, it must induce the other party to act or rely on that representation, AND that reliance must be reasonable. Therefore, if a mechanic inspects the vehicle and informs the buyer of mechanical problems, reliance by the buyer on that representation would not be reasonable, and a cause of action for misrepresentation would not lie, however, an action for breach of warranty may exist. There are three types of misrepresentations, innocent, negligent, and fraudulent, which imply a different determination of damages, these are to be discussed in another post.

A warranty is a promise of the truth of a statement, and it is irrelevant if the maker of the warranty knew that the warranty was false when made; the maker will still owe damages to the other party. “The Mazda is five years and two months old” is a warranty, which can be a promise about anything pertaining to the contract, and the determination of its breach is determined as of the time when it was made, not as of the time when the truthfulness or falsity of the warranty was discovered. Therefore, if the sale of the hypothetical car sale is not consummated for another three months, the car will not be “five years and two months old,” as stated in the bill of sale, however, no action for breach of warranty, or misrepresentation will exist because the statement was true when made. Most parties will seek that both representations and warranties are made by the maker, while the maker will seek to limit his/her obligation to one or the other to limit potential liability. The maker may but is certainly discouraged from making warranties about future facts. Breach of a warranty also contains its own measure of damages.

What Is An Independent Contractor?

This question is common in today’s lagging economy where the expense of the regulations, benefits, and paperwork of hiring employees may be cost prohibitive to many small to medium sized businesses. The answer is usually relatively simple, and one that also requires a solid contract to finalize. Without a contract, and in the event of a dispute and potential litigation, the judge or jury will decide, and even with a contract, independent contractor status is sometimes imposed and withdrawn by a court of law, as the facts of the relationship may dictate. However, a written agreement will go a long way towards memorializing the parties’ intent. The employer is not required to provide any benefits to an independent contractor, and is not responsible for any tax obligations, such as withholding. The employer merely must provide a 1099 form at the end of each tax year to the worker who files his or her own taxes.

Texas law presumes the relationship between a worker and the employer to be that of ‘employee and employer’, and the burden of proving independent contractor status is on the employer. The main issue in this determination is control. How much control over day to day activities does the hiring entity exercise over a particular worker? In the Texas Workers’ Compensation Act an independent contractor is defined as “a person who contracts to perform work or provide a service for the benefit of another and who ordinarily:

1. acts as the employer of any employee of the contractor by paying wages, directing activities, and performing other similar functions characteristic of an employer-employee relationship;

2. is free to determine the manner in which the work or service is performed, including the hours of labor of or method of payment to any employee;

3. is required to furnish or to have employees, if any, furnish necessary tools, supplies, or materials to perform the work or service; and

4. possesses the skills required for the specific work or service.”

An important point to add is that ‘non-compete’ clauses in any hiring relationship will strongly indicate employee status for the worker. In addition, the employer should have no interest in how the independent contractor allocates his time. By the same token, the employer should have no interest in the contractor’s right to hire his own helpers and provide his own tools. Finally, the more long-term, continuous, and exclusive the relationship is, the more likely it is to be considered employment.

The IRS uses its own eleven-part test based on common law and various criteria of its own making, which should be discussed with your federal tax preparer if necessary.

This office regularly drafts independent contractor agreements to ensure that the hiring relationship is understood by all parties from the get go. All forms of compensation should be clearly stated in writing, as should all duties and obligations of each party. Nobody wants to have this dispute after the work is completed or ongoing, at a significant cost and time expenditure.