Common Contractor Disputes and How to Face Them

Contract disputes are common across all business industries. Contracts are signed between people, who don’t always have the same understanding of the matter—especially when one entity signing is a business and another is a freelancer or other contractor. This can create many opportunities for misunderstandings or disagreements that might lead to future issues for your business.

Building a strong legal foundation can help you mitigate risks of some of these issues, while understanding the role of litigation, as well as mediation and arbitration, can increase your chances of a successful outcome if disputes do arise with your independent contractors.

Common Misunderstandings and Disputes Between Contractors and Companies

Contractor disputes often involve issues related to money, scope of work, or details such as deadlines. Clear, complete contracts that keep everyone on the same page regarding such details can substantially reduce misunderstandings. However, even clear contract language doesn’t always deter bad actors, and honest mistakes and miscommunication are still possible.

Misclassification or Misunderstandings About Classifications

One common dispute between businesses and the professionals they contract with can relate to the person’s classification as a contractor. This often occurs when you work with freelancers or contractors who provide services such as project management, graphic design, writing and editing, or consulting.

Businesses can inadvertently fall into an employer/employee relationship with such contractors, which can lead to classification issues. It’s also possible that the contractor misunderstands the arrangement.

State and federal laws define W2 employees and 1099 contractors. For example, 1099 contractors are paid for specific work they do and, in general, how and when they get that work done is up to them. They also don’t receive benefits like W2 employees.

However, if you control someone’s workload and how they complete that work—and you supply the tools required for the work—you might cross the line as a business that contracts someone to one that has a W2 employee. This can result in a dispute in the future if the contractor realizes this and attempts to seek the type of benefits you offer employees.

You might also hire someone as a 1099 contractor and they misunderstand the relationship. If they aren’t an experienced freelancer, they may not realize you’re not hiring them as a W2 employee.

Payment Issues

When dealing with relationships that involve payment, clear and comprehensive contracts are critical. Still, a misalignment in payment expectations or performance can arise.

A contractor may submit an invoice that isn’t paid, and obviously that can be a problem. However, as the business, you might have refused to pay the invoice because you believed the work was not delivered as agreed. Or there may be a disagreement about how much payments should be. Perhaps the contractor has billed a certain number of hours, but you question the accuracy of that invoice.

A wide variety of payment disagreements can occur, but the basic premise of all of them is that one party expects that payment should be made in a certain amount, at a certain time, and in a certain way. The other party disagrees with—and does not want to comply with—at least one of these details due to its understanding of the contract and what was or was not delivered.

Misunderstandings About Scope

The amount of work required—or even what work is required—can be a contentious issue in some contacts.

For example, a company might hire a 1099 freelancer to handle social media marketing. The company’s intent may be for the contracted individual to handle the social media marketing strategy and create posts, including writing captions and creating or sourcing images. The freelancer may think they’re being hired simply to write content for social media posts, and this misunderstanding can obviously lead to some issues with the contract.

Other common examples of scope-of-work issues can include:

  • Misunderstandings about how long the relationship will last. A business might hire someone only for the season, but the contractor may think it’s a long-term contract.
  • Disagreements about how much work will be delivered. Perhaps the company wants 12 articles written by a contractor each month in the quarter, but the 1099 freelancer misunderstood the agreement to be for 12 articles by the end of the quarter.
  • Miscommunications about the quality or content of a deliverable. A business might hire a contractor to develop an app, for example, but when the product is delivered, it doesn’t include all the requested functions.

Why Are Mediation and Arbitration Important Steps?

When disputes do arise with your 1099 contractors, your contract hopefully provides you with legal recourse. Before you jump to litigation to force the issue, though, you might consider mediation and arbitration. In fact, many contracts require this step.

Mediation and arbitration are typically less expensive and time-consuming than a court battle, which is why many businesses choose to start there if there is an issue. During mediation, a neutral third-party who is trained to mediate between two sides works with the business and the 1099 contractor to come to a resolution. The mediator may facilitate the entire process, which involves the parties working through a sort of conflict resolution process to come to an agreement about the issue.

Arbitration is a bit more formal. An appropriate third-party acts as a non-court judge in the matter and hears arguments from both sides about the issue. The arbitrator then issues a decision. If the contract states that arbitration is binding—or the parties agree to binding arbitration before going into the process—the arbitrator’s decision is final. If arbitration is non-binding, one or both of the parties can escalate to litigation if they don’t agree with the arbitrator’s decision.

Ensure Your Contracts Call for Mediation and Arbitration

Mediation, arbitration, and litigation all have important roles to play in managing 1099 contract relationships. Businesses may want to ensure their contracts call for mediation and arbitration prior to litigation, as this can save a lot of money if 1099 contractors bring disputes.

To get help creating strong contracts you can count on, reach out to InPrime Legal today by calling 770-282-8967.