A Consulting Agreement is a contract between a company and a second party (the “consultant”), usually an individual, establishing the scope of work, compensation and other terms of the company-consultant relationship. A Consulting Agreement contrasts with an Employment Agreement in that it does not establish an employee-employer relationship under the law, but rather an independent contractor relationship. The latter arrangement typically offers both parties more flexibility in negotiating the terms of the relationship, but it also leaves the consultant without some of the legal protections that employees may have, such as unemployment insurance and other benefit entitlements. Consulting arrangements are typically shorter term and more limited in scope than employment relationships.
Consulting arrangements are often used when dealing with high level executives and other key employees, because the agreements permit significant flexibility over the typical employment relationship. For example, a company may require an expert to assist on a specific project for a limited time. The expert may have a number of clients and be reluctant to give them up to work for the company exclusively, a typical requirement for an employee. In such circumstances, the company and the individual could enter into a temporary and non-exclusive consulting relationship, thus meeting each party’s needs.
A consulting relationship may also be mutually beneficial where a senior officer or other key employee approaches retirement. The company may be reluctant to lose such an employee altogether, and the employee may be willing to remain involved with the company on a limited basis during retirement. A Consulting Agreement allows the parties to negotiate precisely this arrangement.
Another common use of a Consulting Agreement occurs where a buyer of a business wants to ensure continuing access to one or more of the target company’s retiring senior officers, who know the acquired business better than the buyer’s personnel. This arrangement may last a year or two, long enough for the buyer’s own officers to learn the acquired business.
Consulting Agreements may also serve other divergent needs of a company or consultant, including:
• attracting new talent, by establishing a relationship with a skilled person unwilling to assume a full-time, exclusive position as a company employee;
• limiting a departing employee’s ability to join a rival company;
• protecting a company’s intellectual property, trade secrets, know-how and intellectual capital; and
• if the Consulting Agreement is with another company, opening a new business relationship that can lead to deeper business collaboration and cooperation.
Characteristics of Consulting Agreements
While Consulting Agreements vary depending on the surrounding circumstances, they typically contain certain common elements, such as: (1) a description of the consultant’s duties, including his or her time commitment; (2) whether the consultant’s work is to produce any specific results and if so, whether any benchmarks or deadlines apply; (3) how compensation will be determined and paid; (4) each party’s rights to terminate the relationship; and (5) restrictive covenants applicable to the consultant.
The Consulting Agreement should identify the parties and describe the duties and responsibilities of the consultant. Where multiple divisions, subsidiaries or affiliates are concerned, the agreement should identify which of these the consultant will serve, and how. Additionally, the agreement should address, as applicable, issues such as the location of the consultant’s work, extent of expected travel and permissible telecommuting.
The typical Consulting Agreement envisions a part-time, short-term consultation of one year or less, or from year to year if the parties extend the consulting relationship by mutual agreement. Consulting Agreements with retiring executives more often envision a multi-year term. A consulting arrangement may be exclusive or non-exclusive as to the consultant, in contrast with full-time employment, which typically requires the individual to work exclusively for the company for the term of employment.
The Consulting Agreement will state the compensation payable to the consultant, typically an agreed hourly rate, or a fixed cash amount periodically. In some cases, the agreement will specify that bonuses or other incentive compensation is available, and describe the conditions to earning them. The agreement should also address reimbursement of expenses, such as those related to travel or business development, and any benefits to be provided.
Termination of the Consulting Relationship
Consulting Agreements often provide each party the right to terminate the arrangement on 30 days notice, without specifying any particular reason. Like contracts generally, Consulting Agreements may also usually be terminated by either party for continued material breach by the other.
Some Consulting Agreements, however, mirror the approach commonly taken in Employment Agreements. In these cases, the Consulting Agreement identifies the permissible basis for termination and the respective economic consequences to the parties. The consultant may even be entitled to a “Golden Parachute” (i.e. significant benefits granted to a key employee or executive upon actual or constructive termination due to a change of control of the company), in which case it is important to clearly define what constitutes a change of control.
Like Employment Agreements, Consulting Agreements will usually describe dispute resolution strategies and obligations in connection with the above matters, generally preferring alternative forms of dispute resolution over potentially extended, expensive and complicated legal battles in the courts.
Like Employment Agreements, Consulting Agreements generally include broad confidentiality clauses restricting the individual from misusing or divulging information gained while serving the company. In this context, it is usually important for both parties to craft the confidentiality restrictions in a way which protects the company’s legitimate interests without overly restricting the expert’s right to continue working for others as an expert, based on the expert’s considerable knowledge gained outside the company. These provisions are subject to limited exceptions, including for information which becomes public through no breach by the consultant, and information which must be disclosed pursuant to requirements of law or legal process.
If the consultant has been brought in to supply technical expertise (for instance, on a research and development project), the Consulting Agreement should also address the question of which party is to own the rights to any discoveries made. Subject to negotiations between the parties and their relative bargaining positions, Consulting Agreements typically provide that all discoveries belong to the company, and that the consultant is bound to report discoveries promptly. Where the consulting relationship is non-exclusive, this restriction may be subject to an exception for discoveries the consultant develops independently, provided the consultant can persuasively demonstrate such is the case.
In some cases, Consulting Agreements may include non-competition clauses prohibiting work for company competitors, as well as non-solicitation provisions, prohibiting the consultant from inviting company employees to leave the company to work elsewhere.
Special Types of Consulting Agreements
Some variations on Consulting Agreements are common enough to merit separate mention.
Entity vs. Individual Consultants
Consulting Agreements with an entity consultant, rather than an individual, are something of a misnomer. When the consultant is an entity rather than an individual, many of the needs and concerns summarized above do not apply. Generally, these agreements function as a Services Agreement of one kind or another.
Independent Contractor Agreements
As noted above, Consulting Agreements uniformly state that the relationship between the company and the consultant does not rise to the level of employer-employee, a rise which would elevate the company’s costs, responsibilities and risks relating to the outsider. In this respect, Independent Contractor Agreements are similar to Consulting Agreements. Independent Contractor Agreements are even more insistent, however, that the company has no control over, and therefore bears no responsibility for, the details of the contractor’s work, including the contractor’s conduct and any misconduct. In addition, a company provides no benefits to an independent contractor, though it may to a consultant.
Independent Contractor Agreements also differ from Consulting Agreements as to the scope of work involved. Typical Consulting Agreements envision a cooperative, ongoing effort across a potentially broad range of business areas, in which the consultant must coordinate (“consult”) with company personnel in order to fulfill his or her duties. By contrast, Independent Contractor Agreements usually relate to specific projects which the outside contractor is fully capable of accomplishing on its own, with no guidance or help from the company as to the details of the work. The company hardly does more than indicate what project is to be accomplished, provide necessary access to relevant business areas, and step back to await and appraise the results of the contractor’s efforts.
Work for Hire Agreements
In “work for hire” arrangements, the consulting party expressly agrees in writing that the copyright for any work created in the course of the arrangement will belong to the client. In effect, the client has commissioned a work to be made by the consulting party, on the condition that the copyright will belong to the commissioning party. Under US copyright law, a work made for hire is an exception to the general rule that the person who actually creates a work is the legally-recognized author of that work.1
In a secondment arrangement, a company temporarily places one or more of its employees under the day-to-day supervision of another company (the “client”), typically a client or business partner of the employer. The employee continues to receive pay and benefits from the primary employer, while the client repays the primary employer, often with a premium.
Secondments offer benefits to all parties. The employee can gain specialist skills and develop working relationships with the client’s personnel, increasing the employee’s value. The employer benefits along with its employee and builds good will with the client. The client benefits from the work done, and from the opportunity to teach an outside provider more about its business.
• Consultant’s position, title and duties
• Compensation for the consultant
• Any expense reimbursement, benefits or other “perks” due the consultant
• Rights to terminate the company-consultant relationship
• Consequences of terminating the company-consultant relationship
• Restrictive covenants binding on the consultant
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