This post is also available in: Spanish
Many business owners hire freelancers through websites like Upwork.com, Fiverr.com, or 99designs.com. The hiring process on these websites is as easy as reading candidate profiles and clicking a button.
But you might wonder if that is enough to form a contractual relationship with a freelancer. Are there any legal requirements missing? Should any documents be signed? Do businesses have sufficient protections against future conflicts? How about tax consequences?
1. How is the relationship defined between the hiring company and the freelancer?
Upwork.com is the only among the three popular freelancer sites that discusses the relationship between a company and a freelancer. According to its User Agreement, a freelancer is engaged by a company as an independent contractor, unless the company uses the Upwork Payroll service (User Agreement, 8. Service Contract Terms).
Upwork adds that it is not a party to any service contract. Some business owners might be surprised by this, because they have been paying Upwork, and would consider it to be a service provider.
Upwork also specifically disclaims any responsibility for misclassifying workers (User Agreement, 8. Service Contract Terms, 8.7 Worker Classification). In the US, and in many other countries, misclassifying employees as independent contractors can result in large back payments and fines. Even if Upwork’s platform gives the impression that a user is hiring a contractor, a business should always confirm whether the facts suggest an employment relationship. If the contractor is from a foreign country, it is wise to check local laws to verify the contractor status.
2. Can you have a separate agreement with a freelancer?
Upwork permits clients and freelancers to enter into any supplemental or other written agreements they deem appropriate (User Agreement, 22.2 Side agreements). However, Upwork’s obligations and rights in its Terms of Service cannot be altered in a supplemental agreement, and its Terms of Service will supersede if there is any conflict between the agreement and the Terms of Service.
3. Is your information safe? Look for confidentiality and non-disclosure clauses.
A typical contractor agreement contains a confidentiality clause to protect the business’s information from disclosure or misuse by contractors. It is important to employ this clause if a contractor will have access to confidential information in order to fulfill their given tasks.
Upwork has a confidentiality clause that protects confidential information provided by either party. It stipulates that the party which provides confidential information can make a written request to destroy or return the information, and to provide a certification of compliance.
Fiverr talks about confidentiality briefly in the section about ownership of intellectual property. According to its terms, sellers in Fiverr confirm that the information shall be kept confidential, and shall not be shared or used for any purpose, other than the delivery of the work.
If you feel freelancers might have access to confidential information and want to protect your business more, it is a good idea to have a separate confidentiality or non-disclosure agreement.
4. Who owns the intellectual property of a contractor’s work?
In the US, independent contractors own the copyright interests in the work they do for a company. The company licenses its use of the work for a specified purpose and period, and does not possess full ownership of the work.
To avoid this situation, the company should have a clause in the contractor agreement that transfers ownership of the intellectual property to the company.
Upwork’s Terms of Service states that all intellectual property rights to the work product will be the sole and exclusive property of the client, upon the freelancer’s receipt of full payment from the client.
99designs has a similar intellectual property transfer clause in its Design Transfer Agreement. However, 99designs specifies that an owner owns only a non-exclusive copyright license for certain designs sold on a non-exclusive basis.
Fiverr also has terms about intellectual property rights transfer. Subject to full payment, the delivered work shall be the exclusive property of the buyer, and the seller assigns all rights, title and interest in the delivered work. However, Fiverr itself retains the right to use all published delivered works for Fiverr marketing and promotion purposes.
5. Is there an image/media licensing clause to specify how images and other media will be handled, in order to avoid the risk of copyright infringement regarding work being created by a freelancer?
Intentional or accidental copyright infringement by contractors can be a hiring company’s liability. It is critical that a company has a process in place to guide contractors concerning how media is used and licensed.
The only relevant part in Upwork’s User Agreement is that the user agrees to comply with all applicable laws and regulations, such as import and export control laws, and third parties’ intellectual property rights.
Fiverr has Intellectual Property claims procedures, where a third party can report copyright or trademark infringements. However, Fiverr’s Terms of Service itself provides no guidance on how to prevent infringements.
As a website that focuses on providing design-related freelancers, 99designs has more extensive policies against infringements. Its Designer Code of Conduct, Concept Originality Policy, and Stop Image and Clip Art Policy lay out a designer’s duty to create original work, free of infringement.
If a company hires a freelancer to create copyrighted materials, it is a good idea to share the company’s image handling and media licensing policies, in order to mitigate the risk of copyright infringement.
6. Is your company indemnified if a contractor commits copyright infringement?
In order to reduce the risk of copyright infringement costs, the company should consider creating an indemnity clause that stipulates that the contractor will indemnify the company for any intellectual property violations the contractor commits.
The company can better protect itself against future liabilities if it creates a separate Indemnity agreement for copyright infringement and other claims.
7. Is your contractor prohibited from hiring or soliciting your employees or customers?
In some cases, your freelancer could be in a position to take advantage of their access to employees and customers. To avoid this, a non-solicitation or no-piracy clause is often added to an independent contractor agreement.
Even though this clause is commonly used in independent contractor agreements, none of the freelancer search sites provides the clause to protect clients.
8. Is a non-compete clause necessary?
A company can restrict a contractor’s ability to work for a competitor or start a competing business for a specified period of time after the contractor terminates their relationship with the company. A non-compete clause is broader than the non-solicitation clause, in that it restricts the ability to enter into a similar business, in addition to soliciting employees or customers.
Not all states in the US uphold non-compete clauses, because they can unreasonably limit the ability to earn a living. In many cases, with a short-term engagement, the non-compete clause might not even be required.
9. What should a business know about the tax consequences of hiring a freelancer online?
Company owners may wonder whether they should issue a 1099 to a freelancer they hire through these websites. The company does not have a reporting duty for payments made to such freelancers.
The IRS recently created new tax rules, assigning a reporting duty to the entity that actually makes payment and/or facilitates the hiring. As a result, Upwork, 99designs and Fiverr should issue 1099-K documents to freelancers at the end of the year. Client companies no longer need to issue 1099-MISC for this purpose.
10. Always check your state or national laws.
State laws govern the hiring of independent contractors in the US, and they can vary in many ways, whether in regards to distinguishing a contractor from an employee, or in how much protection is available for a company or a contractor.
Therefore, it is important to check state laws before hiring.
If you are hiring someone from a different country, find out about local laws that will govern the relationship. Many countries have protective laws for their workers, even if they are contractors.
And remember that the determination of whether the freelancer is a contractor or employee is a responsibility of the company.
If you want to further protect your company from liabilities arising from contractor relationships, call our office to schedule a consultation.
Call our office to schedule a time to talk about a Business Audit Session, where we can identify the best ways for your business to prevent risks and maximize growth.
Schedule a Consultation at Jiah Kim & Associates
Contact Jiah Kim & Associates to schedule a time to talk about a Business Audit Session, where we can identify the best ways for your business to prevent risks and maximize growth. We work closely with our clients, getting to know their businesses so that we can provide practical, insightful guidance tailored to their unique circumstances. To get started with a confidential initial consultation, call us at (646) 389-5065 or get in touch online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
This post is also available in: Spanish