It is common today for more and more businesses to hire freelancers instead of full or part-time employees. Hiring a freelancer, often referred to as an independent contractor, can make sense both financially and from a general business standpoint. Some of the benefits of hiring a freelancer include instant support and greater expertise for specific jobs, less overhead and costs, and more flexibility with hiring and letting go of workers. Additionally, businesses are not required to pay or withhold income taxes, Social Security, Medicare or unemployment taxes for independent contractors like they would for employees. Because of this, hiring independent contractors can save you time, money and paperwork.
However, if you misclassify a worker as an independent contractor when in reality they are providing “employee” services, your business could face penalties, back-taxes, administrative enforcement proceedings, as well as a civil lawsuit from the contractor/employee. Therefore, it is critical to understand the legal nuances between being classified as an employee versus an independent contractor.
While there is no single criteria that is going to qualify someone as an independent contactor, generally, the classification comes down to how much control the employer has over the way work gets done.
Use a Written Independent Contractor Agreement
Not using a written agreement for your freelancer’ work is a problem waiting to happen Written contracts provide certainty for both parties as they clearly set out the details of what was agreed to, such as the scope of the independent contractor’s work, the conditions of payment, and what happens when a dispute arises. With an independent contractor agreement, you can clarify the status of an independent contractor by clearly setting out the details of your relationship. More importantly, a written independent contractor agreement can help establish a worker’s independent contractor status by showing the IRS and other agencies that both you and the worker intended to create an independent contractor relationship, not an employer/employee relationship.
An independent contractor agreement should include at least the following:
- a description of the services the independent contractor will perform;
- the terms and conditions of payment;
- an explanation of who is responsible for expenses, materials, equipment, and office equipment;
- a description of the term or length of the job assignment;
- a statement that you and the worker agree to an independent contractor relationship;
- a statement that the worker will pay state and federal income taxes;
- a statement acknowledging the worker is not entitled to any of the benefits provided to employees;
- a description of how a dispute over payments or performance will be resolved; and
- specifics as to how either party can end the contract before the work is completed.
Even if you think you have an iron clad contract, a written contract is ineffective if you treat your independent contractor like an employee. Once you have hired an independent contractor, there are a number of work habits you should avoid in order to maintain independent contractor status.
- The independent contractor should perform services without your direction. You should avoid supervising the independent contractor or his or her assistants.
- The independent contractor should not work at your offices unless it is absolutely required to perform the nature of the services.
- Your business should not provide equipment or materials to the independent contractor unless absolutely necessary.
- Your business should not establish working hours for the independent contractor.
- Your business should require the independent contractor to submit invoices.
Unlike employees whom you can closely supervise and monitor, independent contractors enjoy a significant amount of autonomy to decide how best to complete the task for which they were hired. If you interfere too much in an independent contractor’s work, you risk making the independent contractor look like an employee. The bottom line: the more the relationship looks like an employer/employee relationship, where the employer exercises significant control over what their workers are doing and how they’re doing it, the more likely it is that the courts will view them as employees.
Protecting Your Company’s Intellectual Property Rights
Normally, an employer owns intellectual property created by employees in the course of employment. However, the same rule does not automatically apply with independent contractors. Unless it is expressly set forth in the independent contractor agreement, an independent contractor most likely will own the intellectual property that he or she creates. This is true even if the idea or invention is made within the scope of the contractor’s engagement or on the worksite of the employer.
You can solve this problem through the independent contractor agreement. For certain types of creative work, called “works-for-hire,” the employer will own the copyright as long as a “work-for-hire” agreement has been executed between you and the independent contractor. There are nine statutorily specified types of works that qualify as works for hire: a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional test, a test, answer material for a test, and an atlas.
Outside of these nine very narrow categories, the copyright belongs to the independent contractor unless the independent contractor assigns the copyrights in writing. In an assignment, the copyright ownership is expressly transferred from the independent contractor back to you. The independent contractor agreement should clearly state that the independent contractor’s work of authorship, finished product, invention, or other intellectual property will be owned exclusively by the company, free of any royalty fee or license.
Problems arise when you hire a contractor without a written agreement assigning the intellectual property rights, leaving you with only a limited license to use the work product. Since your license to the work product is not in writing, it can be difficult to determine what is permitted and not permitted. For instance, under this unwritten license, it may be unclear whether you have the right to hire other contractors to modify the work or whether you have the right to sublicense it to other companies. This lack of an assignment of intellectual property could jeopardize an entire project.
Additionally, the independent contractor agreement should limit the contractor from including or intertwining others’ intellectual property in work product made for you pursuant to the agreement. If this situation is unavoidable, you should carefully negotiate and obtain the appropriate licensees and permissions.
There are also times when you and the independent contractor will share ownership of the intellectual property. Obviously, the company’s position is (and should be) always that all work done for the company belongs to the company, and not their employees or contractors.
Trade Secrets, Non-Solicitation and Non-Compete Agreements
It is likely that while performing work for you, a freelancer may be exposed to the company’s sensitive information that may include trade secrets and other intellectual property. These concerns may be addressed by limiting access, where practicable, and by including nondisclosure provisions in your written independent contractor agreement. It is important that these provisions survive termination of the agreement.
You may also want to consider setting forth in your agreement restrictions on solicitation of employees and customers. A non-solicitation clause is an agreement whereby a party pledges not to solicit the clients and customers of another party and is common in independent contractor agreements.
Having strong non-solicit, anti-circumvention, and similar provisions in the written agreement that you have your freelancer can help avoid a situation where your freelancer learns everything about the industry by working from you, and goes on and uses all that information to set up a competing business, misappropriating your business’s confidential information or trade secrets, or worse, using them to compete against you by assisting one of your competitors.
► Getting Legal Help
AXIS Legal Counsel’s Business and Corporations Practice provides legal advice to numerous businesses with a wide range of business matters. Axis represent small, medium-sized, and large business clients with a wide variety of business and corporate law matters. We represent early-stage companies as well as established businesses on a wide variety of business law matters, ranging from contracts and transactions, intellectual property, labor/employment law, business financing, mergers and acquisitions, real estate, insurance, business succession planning, and general advice and counsel. For information on retaining AXIS Legal Counsel to represent your business in connection with any legal matter, contact [email protected] or call (213) 403-0100 for a confidential consultation.
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