How to review an independent contractor agreement: classification, IP and the clauses that matter

An independent contractor agreement does two jobs. It sets the commercial terms, and it records a relationship the parties say is not employment. The contract cannot decide that second question on its own: agencies and courts look at how the work is actually done. A good review makes sure the paper matches the reality and that the client owns what it pays for.

LexDraft has no dedicated contractor playbook. Its Services playbook is the closest fit and covers points such as scope and change control and IP ownership and licence; the classification analysis stays with you.

1. Classification: the tests that apply

There is no single test. The same worker can be analysed differently for federal tax, federal wage and hour law and state law.

• IRS (federal employment tax). The IRS applies the common-law control test and groups the evidence into behavioural control, financial control and the relationship of the parties. Either party can ask the IRS for a determination on Form SS-8.
• Fair Labor Standards Act. The Department of Labor's 2024 rule (effective 11 March 2024) uses a six-factor "economic reality" test looking at the totality of the circumstances. In May 2025 the Wage and Hour Division said it would no longer apply that rule in its own enforcement, and in February 2026 the Department proposed to rescind and replace it with an approach closer to its 2021 rule, which gave most weight to control and opportunity for profit or loss (91 Fed. Reg. 9932). As of October 2026 that proposal had not been finalised that we could find, so check the current status before you advise. Courts apply their own circuit's economic reality case law either way.
• California. After Dynamex Operations West v. Superior Court (Cal. 2018) and AB 5, California Labor Code section 2775 applies the ABC test: the worker is an employee unless the hiring entity shows (A) the worker is free from its control and direction, (B) the work is outside the usual course of its business, and (C) the worker is customarily engaged in an independently established trade or business of that kind. Sections 2776 to 2784 set out exemptions, many of which apply the older Borello test instead.
• Other states. Several states use an ABC test for some purposes; Massachusetts applies a strict version to its wage laws (G.L. c. 149, section 148B). Unemployment insurance and workers' compensation often have their own definitions.

Practical review points: does the agreement give the client control over how, when and where the work is done? Does it require exclusivity, provide tools and training, or pay by the hour indefinitely with no defined deliverable? Each of those cuts against contractor status.

2. IP: assignment, not just "work made for hire"

• Under 17 U.S.C. 101, work by an independent contractor is a "work made for hire" only if it falls into one of nine listed categories (such as a contribution to a collective work, part of an audiovisual work, a translation or a compilation) and the parties sign a written agreement saying so. Most software and many deliverables do not fit those categories. The Supreme Court applied agency principles to decide who is an employee for this purpose in Community for Creative Non-Violence v. Reid (1989).
• So include a present assignment ("hereby assigns") of all rights in the deliverables as a backstop. A copyright transfer must be in writing and signed by the owner (17 U.S.C. 204(a)).
• In California, be careful with work-for-hire language: under Labor Code section 3351.5(c) a person who commissions work under a written work-for-hire agreement can be treated as the employer for workers' compensation purposes. Many California agreements rely on an assignment instead.
• Handle the contractor's pre-existing materials with a licence, and check open source and third-party components.

3. Confidentiality and trade secrets

• The Defend Trade Secrets Act whistleblower immunity notice (18 U.S.C. 1833(b)) applies to contractors and consultants too. Without it, the hiring party cannot recover exemplary damages or attorney fees against that individual under the Act.
• Return or destruction of materials at the end of the engagement.

4. Commercial terms

• Scope, deliverables, acceptance and change control.
• Fees, expenses, invoicing and payment timing. Some jurisdictions have freelance payment laws, such as New York's Freelance Isn't Free Act, requiring a written contract and timely payment.
• Taxes: the contractor pays its own; the hiring party issues the relevant information returns.
• Insurance, indemnity and a limitation of liability that suits the size of the engagement.
• Restrictive covenants. Non-competes for contractors face the same state limits as for employees in many states, and California voids most of them (Bus. & Prof. Code 16600).
• Termination for convenience and for breach, and what survives.

A workflow in Word with LexDraft

1. Open the contractor agreement in Word and open LexDraft in the side panel.
2. Pick the Services playbook and the governing-law state, then run the review. The playbook covers points such as scope and change control and IP ownership and licence. Findings come back graded Critical, High, Medium or Low, with missing standard terms flagged.
3. Run the defined-term and cross-reference quick checks. They are rule-based and finish almost instantly.
4. Accept the word-level redlines you agree with as native Word tracked changes, reject the rest and add your own.
5. Check classification and tax points yourself. No contract review tool can tell you how a worker is treated in practice.

Starting from scratch instead? LexDraft can draft a consulting or services agreement from a plain-English description, asks a few questions about parties, jurisdiction and key terms, and writes the first draft into Word. You then refine it in conversation, for example "make the payment terms net 30".

What LexDraft does not do

LexDraft does not decide whether a worker is an employee or a contractor, file tax forms, check how the work is actually managed, or give legal or tax advice. It has no dedicated contractor playbook; the Services playbook covers the commercial and IP terms. AI review can miss issues or be wrong, so read the marked-up agreement yourself.

Using AI ethically

ABA Formal Opinion 512 (July 2024) and many state bars say the same four things: understand the tool, protect client confidences, check every output, and bill fairly for AI-assisted work. Our state-by-state guide to AI ethics for lawyers covers all 50 states and D.C.

Plans

Start on the Free plan: 5,000 generated words a month, no time limit and no credit card. Professional is $99 a month or $990 a year for 100,000 words a month. Business is $199 a month or $1,990 a year with unlimited words. LexDraft runs in Word 365 (Windows and Mac), Word 2021 and Word on the web, and it does not use customer documents to train models.

This guide is general information, not legal advice. LexDraft does not give legal advice; qualified counsel must review every draft. Spotted something out of date? Email support@lexdraft.ai and we will fix it.