Service Agreement FAQ - United States


A Service Agreement is a contract - either written or verbal - which sets out the terms and conditions for service between a Customer and a Service Provider. LawDepot provides a written Service Agreement. A Service Agreement may sometimes be referred to as a contractor form, an independent contractor agreement, a contractor agreement or a freelance agreement.
Service Agreement BasicsTerm of AgreementCompensationRestrictive CovenantsDispute ResolutionMiscellaneous
Service Agreement Basics
Why isn't an oral Service Agreement sufficient?

The problem with oral agreements is that they are difficult to prove. If a dispute arose, a court would have to hear evidence and decide whose version of the truth to accept. If there is a written agreement, courts will generally be obligated to uphold its terms even if they don't agree with them.

What is addressed in a Service Agreement?

Service Agreements typically address the following:

  • the parties to the agreement;
  • the service being offered;
  • the term of agreement; and
  • the compensation that will be provided to the Service Provider.

In addition, Service Agreements may also provide specifics on:

  • how confidential information is to be treated upon the Service Provider's termination;
  • whether there are limitations on the Service Provider's ability to compete with the Customer's business upon the Service Provider's termination; and
  • how disputes between the Customer and Service Provider will be handled.
Who are the parties to the Service Agreement?

The parties to the Service agreement are the Customer and the Service Provider. The Customer is the individual or business seeking the Service while the Service Provider is the individual or corporation providing the Service. Service Providers may sometimes be identified as "individual contractors", "freelancers" or "consultants".

What is the difference between an Employment Contract and a Service Agreement?

Service Agreements are used to hire Service Providers or independent contractors, not employees. A Service Agreement is limited to a specific project or time period. Employment Contracts are used to hire employees.

What is the difference between an employee and independent contractor?

Independent contractors are individuals who provide services for a fee but are not considered to be employees because they work for themselves and do not have an employer. Examples of independent contractors include those who operate their own practice or trade in fields such as plumbing, carpentry or graphic design or in more specialized technical settings such as accounting, engineering or computer programming.

The law treats employees and independent contractors differently, but it is not always easy to establish which category an individual falls into. In cases of dispute, courts will determine the appropriate category by examining a number of factors. Some factors will be considered more important than others. Examples of relevant factors are:

  • who is providing the tools for the job;
  • the level of skill required for the job;
  • who controls the work and the work product;
  • whether the hired party must provide oral/written progress reports;
  • whether the job is performed on the business premises;
  • the duration of the relationship between the parties;
  • the ability to delegate or sub-contract the job of the hired party;
  • whether the hired party has discretion over how long and when they work;
  • whether any insurance or benefits are provided to the hired party;
  • whether the hired party's expenses are reimbursed;
  • whether the hired party can realize a profit or loss;
  • whether the work is part of the regular business of the hiring party;
  • whether the parties have a written agreement defining the status of the hired party;
  • the method of payment; and
  • the way the hired party is treated by taxing authorities.
Is this a Master Service Agreement?

No. If you need a Master Service Agreement as well as subordinate agreements, you should consult a lawyer qualified in your jurisdiction.

Term of Agreement
What is the end date of the agreement?

The end date is the date when the Service under the agreement is no longer provided or needed.

What does "notice" mean?

Notice refers to the amount of time that is provided by one party to another when they wish to end their obligations under the agreement prior to the agreed end date. The purpose of notice is to allow the Service Provider to find other employment or the Customer to find a replacement Service Provider. In most jurisdictions, the law does not offer independent contractors the same minimum notice protection that is typically offered to employees (unless the notice is expressly provided in the agreement). However, courts may award notice (or pay in lieu of notice) to an independent contractor if he/she can show that he/she was economically dependent on the Customer. In those circumstances, courts may impose a reasonable notice period or damages.

Compensation
How should the Service Provider be paid?

The Service Provider can be paid or compensated in many different ways. If the Service Provider will be paid a certain amount (rate) for each time period, use "Hourly", "Weekly", "Monthly" or "Yearly" as appropriate. If the Service Provider is to be paid a certain fixed amount for the complete performance under the agreement, use "Fixed Amount". If the Compensation is several payments or involves the trade of services or goods, use "Other". If you have a certain rate for the services performed together with additional remuneration, use this question for the basic rate and use the "Additional Compensation" question to describe the additional compensation.

Which currency should I select?

Select the form of currency for all monetary amounts (compensation, expenses, etc.) referred to in this agreement.

What is additional compensation?

Additional compensation refers to any compensation the Service Provider will be paid in addition to the basic compensation specified under the question "How will the Service Provider be paid?".

What items should be provided to the Service Provider?

If the Customer wishes to provide any services, tools, office space, materials, etc. to the Service Provider to perform the services, then the Customer should select "Yes" to the question "Will the Customer be providing anything to the Service Provider?" and then describe what he/she is providing.

What does "Penalties for late payment?" mean?

This question refers to whether the Customer will be penalized for failing to pay the Service Provider on time. Select "Do not specify" to not mention whether there will be penalties for late payment. Select "No" if the Agreement will expressly state that there are no penalties for late payment. Select "Yes" to be able to expressly state what the penalties will be for late payment.

What does "Penalties imposed for non-performance of the services in a timely manner?" mean?

This question refers to whether the Service Provider will be penalized for failing to perform the services on time. Select "Do not specify" to not mention whether there will be such penalties. Select "No" if the Agreement will expressly state that there are no such penalties. Select "Yes" to be able to expressly state what the penalties will be for failing to perform the services on time.

What is a 1099 form?

For income tax purposes, Form W-2 is used to report ordinary employee wages, salary and tips, however, self-employment earnings must also be reported. Form 1099 is used to report self-employed, service related income. Usually the payer will provide a completed Form 1099 to the payment recipient as well as to the IRS. Various kinds of income other than wages and salaries are reported using Form 1099 but the most common use of the Form 1099 is for reporting earnings as an independent contractor.

Restrictive Covenants
What is a confidentiality clause?

The confidentiality clause prevents the Service Provider from using or disclosing the Customer's confidential business information to a third party.

What is a non-competition clause?

The non-competition clause prevents the Service Provider from competing with the Customer.

What is a non-solicitation clause?

The non-solicitation clause prevents the Service Provider from inducing others to leave the Customer's employment.

What is the difference between a non-competition clause and a non-solicitation clause?

A non-competition clause prevents the Service Provider from unfairly competing with the Customer after the employment is terminated. This means that when the Service Provider's work comes to an end, he or she cannot take a job at a business which is in direct competition with the Customer. A non-solicitation clause prevents the Service Provider from inducing other employees or contractors from leaving the Customer or from interfering with the Customer's relationship with other employees in general. This means that the Service Provider cannot invite the Customer's employees to move with him or her to another workplace. Courts MAY NOT enforce a non-competition or non-solicitation clause if:

  • clause could be injurious to the public (e.g. if it could depress the local economy);
  • the clause is broader than necessary to protect the Customer;
  • the clause would cause undue hardship on the Service Provider (e.g. it would make it difficult for the Service Provider to find new work); or
  • the clause has unreasonable time and geographic restrictions.
What geographic restrictions can the Customer make in the non-competition clause?

You can only prevent a Service Provider from engaging in a business that competes with your business within a geographic area large enough to protect your business. The restriction must be reasonable so that the employee is not restricted from engaging in his or her usual trade in an area that could not affect your business.

Dispute Resolution
What do "mediation" and "arbitration" mean?

Mediation is a process where an impartial 3rd party or mediator facilitates the negotiation of a settlement between parties to a dispute.

Arbitration is a process whereby parties to a dispute mutually agree to an impartial referee who hears and makes a binding decision.

Both processes are superior to the court process when there is a long term relationship involved and the survival of the business relationship is desirable. These processes can be less expensive, more expedient, and more efficient than the court process.

Miscellaneous
What is contained in the standard clauses?

Our standard clauses are those clauses which are most often included when creating a Service Agreement. Some of the clauses deal with:

  • assignment;
  • the capacity of the independent contractor;
  • modification of the agreement;
  • time being of the essence; and
  • severability of invalid or unenforceable clauses.

If you don't want all these clauses in your agreement, select 'No' and you can pick and choose which clauses to include.

What is meant by Corporation/Organization under the Type of Customer and Type of Service Provider fields?

A Corporation is a duly registered corporate entity. An organization can be any other type of business entity such as a sole proprietorship, partnership, or a Limited Liability Company. If you are entering the agreement as the representative of a business then you would select the Corporation/Organization option. If you are acting strictly for yourself then select the Individual option.

What does the Assignment clause do?

The Assignment clause prevents the Service Provider from transferring their rights or responsibilities to another party without the Customer's consent.

What does the Capacity/Independent Contractor clause do?

The Capacity/Independent contractor clause reiterates that the Service Provider is hired as an independent contractor or consultant and not as an employee of the Customer. Note that disguising an employment relationship as an independent contractor in order to avoid having to pay employee benefits like holiday pay, pension, worker's compensation and income tax is illegal. A court may find that a work relationship is an employee/employer relationship if the person hired is closely supervised and directed by the hirer. An independent contractor usually provides a skilled service, is paid for a specific result, controls how the services are provided, is free to refuse additional work, and usually bears the cost of repairing faulty work. A court would take all these factors into consideration when deciding if a particular work relationship was a sham contracting arrangement.

What does the Modification of Agreement clause do?

The Modification of Agreement clause states that any changes to the agreement must be made by written consent of all the parties to the agreement.

What does the Time of the Essence clause do?

This clause provides that all dates and time limits are strictly enforced.

What does the Entire Agreement clause do?

The Entire Agreement clause confirms that there are no other provisions or terms outside of this agreement.

What does the Severability clause do?

The Severability clause declares that if the courts find that a particular clause of the agreement is invalid or unenforceable, the validity of the remaining provisions of the agreement will not be affected.

What does the Return of Property clause do?

The Return of Property clause states that the Service Provider will return all property belonging to the Customer upon termination of the Agreement.

What does the Limitation of Liability clause do?

This clause allows the parties to completely absolve the Service Provider in the event that any losses, damages or any other liabilities arise out of the services provided.

Where this clause is selected, the contract cannot also have an indemnification clause.

What does the Indemnification clause do?

An Indemnification clause is where the Service Provider agrees to pay back the Customer for claims made against the Customer by any third party for any damage or loss arising out of the provision of the services.

Where this clause is selected, a limitation of liability clause cannot be selected.

What does the Legal Expenses clause do?

The Legal Expenses clause reiterates that legal costs and fees associated with any legal action will be awarded to the successful party.

What does the Notice clause do?

The Notice clause indicates how all notices under this agreement will be given.

What does the Enurement clause do?

The Enurement clause declares that any rights and responsibilities of the parties will pass on to their successors.

What does the Titles/Headings clause do?

The Titles/Headings clause states that the titles/headings of each section are inserted for clarification only and are not for purposes of interpretation.

What does the Gender clause do?

The Gender clause declares that words in the singular or masculine sense also encompass words in the plural and feminine sense, respectively.

What does the Waiver clause do?

The Waiver clause states that if one party waives its rights to enforce a breach by another party, this failure to enforce its rights will not be held as a waiver of any subsequent breaches.

What does the Ownership of Materials clause do?

The Ownership of Materials clause declares that materials developed in the course of the services will be the exclusive property of the Customer. The clause further holds that the Service Provider will not be held responsible for damages resulting from the use of the mentioned materials for work other than services contracted for in the agreement.

 

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