What is a contractor agreement?

When a business engages a contractor — whether an individual operating as a sole trader or through their own limited company — the terms of that engagement should be documented in a contract. A contractor agreement serves a different purpose from an employment contract, and understanding what it needs to cover and why the distinction matters is important for founders who regularly work with external contractors.

A contractor agreement is a commercial contract setting out the terms of an engagement between a business and a self-employed contractor or their company. It typically covers the scope of work, payment terms, intellectual property ownership, confidentiality obligations, notice provisions, and the basis on which either party can terminate the arrangement. It should reflect the independent nature of the relationship — specifying that the contractor is responsible for their own tax and that the client is not directing how work is done.

A well-drafted contractor agreement protects both parties and supports the genuine self-employment status of the engagement. Contracts that look like employment contracts — specifying fixed hours, requiring personal service, and giving the client extensive direction over how work is done — can undermine the claimed contractor status even if both parties intended an independent arrangement. Our guide to contractor agreements covers what to include and what to avoid.