Consulting Agreement

Overview

A consulting agreement engages an independent consultant to provide services to a client, on terms that must be carefully drafted (and, more importantly, carried out in practice) to support the parties' intent that the consultant is an INDEPENDENT CONTRACTOR and not an employee. Misclassifying a worker who is functionally an employee as an independent contractor is one of the most common and costly compliance failures in US business practice, exposing the client to back taxes, unpaid overtime, benefits claims and penalties — so worker classification deserves more attention here than in a typical services contract. Federal classification test: the IRS applies a facts-and-circumstances analysis (often summarized as a '20-factor test,' though the IRS now groups the factors into three broad categories: behavioral control, financial control, and the type of relationship) to determine whether a worker is an employee or independent contractor for federal tax purposes. No single factor is decisive; contract language alone (calling someone a 'consultant' or 'independent contractor') is NOT sufficient if the actual working relationship looks like employment — for example, if the client sets fixed hours, closely directs how the work is performed (not just the result), provides all equipment, and the consultant works exclusively and indefinitely for one client. State ABC tests: on top of the federal test, several states apply a stricter 'ABC test' for state law purposes (wage law, unemployment insurance, and in some states broader worker protections), under which a worker is presumed to be an employee UNLESS the hiring party proves all three of: (A) the worker is free from the hiring entity's control and direction in performing the work; (B) the work performed is outside the usual course of the hiring entity's business; and (C) the worker is customarily engaged in an independently established trade, occupation or business of the same nature. California (under AB5, with specific statutory exemptions), New Jersey, Massachusetts and several other states apply some form of ABC test, which is considerably harder to satisfy than the federal test, particularly prong (B) — confirm whether {{governing_state}} applies an ABC test and whether any exemption might apply to this engagement. Practical drafting implications: to support independent-contractor status, the agreement (and actual practice) should emphasize that the consultant controls the manner and method of performing the work, uses their own equipment and business structure, sets their own schedule to the extent practicable, may (subject to confidentiality) work for other clients, and is paid based on deliverables or a project fee rather than treated like a payroll employee (no withholding, no employee benefits). IP ownership: unlike an employee's work product (which is often automatically owned by the employer under 'work made for hire' doctrine for certain categories of work), an independent contractor's work product is NOT automatically owned by the client under federal copyright law unless the agreement expressly assigns it (or the work happens to fall within one of the narrow statutory 'work made for hire' categories, which most consulting deliverables do not) — this agreement includes an explicit IP assignment clause for that reason. When to use: for engaging a consultant to provide services on a project or ongoing advisory basis where genuine independence in how the work is performed is intended and can be maintained in practice. Common pitfalls: contract language claiming independent-contractor status while the actual working relationship functions like employment; and no explicit IP assignment clause. This template must be reviewed against {{governing_state}} worker-classification law (including any ABC test) before use.