3. How to Structure an Independent Contractor Relationship

a. How to Properly Document the Relationship

If you want to properly document that a relationship is with an independent contractor and not an employee, it is important to ensure that the contract clearly reflects the following elements:

• The contract should describe a specific “result” that the contractor is responsible for delivering, and not only for performing day-to-day tasks within his field of expertise.
• The “result-based” nature of the engagement will typically imply a defined scope, and in many cases, a temporary duration until the result is actually delivered. Estimated delivering dates may be practical. In other cases, this will not be practical, cf. the “Foster Mother” case as described under section V below.
• The payment should be linked to the delivery of results rather than the time spent working (e.g. hourly compensation).
• The contractor should, as a general rule, use his own tools, unless the work performed is dependent on tools and assets from the principal company.

In addition, it is important to ensure that the actual performance of the contract is consistent with these principles throughout the engagement, and that this is appropriately documented. Especially from a tax perspective, the independent contractor should be registered with his own company, and preferably as a company and not a sole proprietor.

b. Day-to-Day Management of the Relationship

It is important that the day-to-day management of the relationship with an independent contractor reflects that the contractor is not an employee and therefore should not be treated or instructed as such. The more the principal company instructs and controls the contractor’s day-to-day work, the greater the risk that the relationship may be reclassified as an employment relationship by the courts.

Furthermore, invoicing from the independent contractor should be based on the delivery of a defined result, rather than on hours worked.

The normal situation is that independent contractors are engaged for a temporary period, even if the duration is not always precisely defined. In some companies, however, contractors may work for the same client over extended periods, sometimes 10–15 years. Such long-term and stable arrangements may increase the risk that the relationship is characterised as a disguised employment relationship.

If the contractor is able to actually perform work for other principals in addition to you, this indicates that he is more likely to be an independent contractor rather than an employee.