Examining the agreement: the pressure points and pitfalls of consulting contracts.

• Author: Spendlove, Gretta
• Position: Legal Brief

"This Agreement may only be I enforced through the tribal courts of the Chippewa Tribe of Wisconsin." "Consultant makes no representations or warranties as to the quality of its services."

"This Agreement may be terminated at any time and for any reason by Company, and following termination no further sums will be due and owing to Consultant."

Lawyers wince at outrageous clauses in consulting contracts, such as those above. However, as established companies outsource more of their work and as startup companies use contract workers rather than employees, the challenge of drafting and negotiating reasonable consulting contracts increases.

"It's our standard agreement," consultants and companies say, as if agreements that are often used need not be examined or changed. In fact, consulting agreements should be carefully reviewed and the conflicting needs of consultants and companies evaluated. Here are some of the pressure points:

Scope of work. What is the consultant being paid to do? Some companies use consultants for clearly defined projects, such as delivering a series of training seminars or doing soils analysis for a particular building. Other consultants handle tasks that merge into one another and extend over long periods of time--like the tasks of employees. Consulting contracts can either describe a particular task or provide the general terms for any work that is assigned to the consultant. The less specific the scope of work description, the more likely that there will be a dispute over whether what was done was authorized, and the more likely that the consultant will be considered an employee, rather than an independent contractor.

Independent contractor status. Is the consultant really an employee? A consultant who handles work for several companies at a time, provides her own equipment and provides a finished product, with little company feedback, is likely an independent contractor. The IRS may consider other consultants to be employees, such as a collections "consultant" who spends most of the workday at a desk in the accounting department, uses a company computer, and whose work is closely supervised by the CFO.

To the IRS, an independent contractor relationship exists if the company "has the right to control or direct only the result of the work and not what will be done and how it will be done" Consulting contracts should state that the consultant is an independent contractor, but the actual relationship must also match IRS...