An employee is someone who works directly for a company on an ongoing basis. The company typically controls their schedule, tasks, and how the work is performed. Employees are usually paid a regular salary or hourly wage, with taxes withheld by the employer. They often receive benefits such as health insurance, paid time off, and retirement plans, and are covered by labor laws and workplace protections. The company also typically provides the tools and resources needed for the job.

A contractor (or independent contractor) is self-employed and hired to complete specific tasks or projects. They usually have more control over how they do their work. Contractors are typically paid per project or via invoices and are responsible for managing their own taxes. They generally do not receive benefits from the company and are not covered by most employment protections. Contractors often use their own tools and work on a fixed-term or project basis.

A contractor agreement (sometimes called an independent contractor agreement, consulting agreement, or services agreement) is a legally binding contract between your company and a self-employed individual or entity providing services. It defines the scope of work, payment terms, deliverables, IP ownership, and the legal nature of the relationship.

Unlike an employment contract, a contractor agreement makes clear that the worker is not your employee. They are running their own business and providing services to yours. That distinction is not just semantic. It determines who pays which taxes, who is liable for what, and what rights the worker does and does not have.

For startups, contractor agreements become critical when:
•   You are hiring freelancers, consultants, or fractional executives
•   You are working with developers, designers, or agencies on project-based work
•   You are engaging contractors outside the U.S. (global contractors)
•   You need to protect IP created during the engagement
•   You want to clearly establish that the worker is not an employee
•   The contractor will have access to confidential business information

1. Parties and scope of work
Name your company (the legal entity) and the contractor. If they work through their own LLC, name the LLC. Then describe the services. Be specific about deliverables but flexible enough to handle normal scope changes. Many startups use a Master Services Agreement (MSA) plus a Statement of Work (SOW) for each project.

2. Payment terms
Specify the rate (hourly, project, or retainer), invoicing process, and payment timeline. Net-15 or net-30 is standard. Use the word “fees,” not “salary” or “wages” — word choice matters for classification.

3. Independent contractor status
State clearly that the contractor is not an employee, is responsible for their own taxes and benefits, and is free to work with other clients. For U.S. contractors, you'll issue a 1099-NEC at year-end if you pay them $600 or more.

4. Confidentiality
Define what counts as confidential — code, customer data, financials, roadmaps — and make the obligation survive the end of the engagement.

5. IP Assignment
Here's the trap most founders miss: when an employee creates work, you own it by default. When a contractor creates work, they own it by default — unless your agreement explicitly assigns it to your company.

Without proper IP assignment language, the contractor owns the code, designs, or content they made for you. They could license it elsewhere or refuse to let you modify it.

Permanent Establishment Risk
If a contractor abroad is essentially functioning as your local employee, that country's tax authority may decide you have a taxable presence there. Keep relationships project-based and arms-length.

Foreign Misclassification
Certain countries have stricter rules than the U.S. — UK (IR35), Spain, Germany, Brazil. For long-term or full-time global contractors, consider an Employer of Record (EOR) instead.

Local IP and Privacy Law
Moral rights limit IP assignment in much of Europe. GDPR may require a Data Processing Agreement if your contractor handles EU data. A good template covers both.