To set the stage for the topics below, consider two classic examples of freelancers:
• Jorge is an independent videographer who works on a flat-fee basis (i.e., non-hourly fees that are fixed up front for the project) to produce videos that showcase his clients’ work.
• Niki is an independent software engineer who builds mobile apps for her clients on an hourly basis.
THE IMPORTANCE OF A CONTRACT
If you take nothing else from this article, please take away the following: You should always have a written contract in place when you are doing work as a freelancer! I say “written” contract because in most situations, while a verbal contract can be enforceable, it is immensely difficult to prove the terms of a verbal contract if a dispute arises.
The obvious reason that a contract is important is that if a dispute arises, you have enforceable terms that dictate how the dispute should be resolved. But the less obvious reason for always using contracts is that a contract is a tool that gets the parties on the same page from the outset. In other words, it sets expectations in a way that significantly decreases the likelihood of a dispute.
For example, without a contract, Jorge may believe that his flat fee only includes one cut of the video for his client, but the client may believe that the flat fee includes numerous revisions — as many as it takes for the client to be content. It may be that Jorge and his client never fully discussed this issue, but even if they did, there would be nothing in writing to demonstrate what was discussed. This dispute would likely not even have arisen if Jorge and his client had used a written contract.
A critical part of the contract, in addition to all of the legalese, is the section that explains the specific services to be performed. This section is particularly important for contracts that are based on flat fees because if the services are described in a broad and open-ended manner, Jorge could find himself bound to do a wide range of work on an ongoing basis with only the one flat fee payment.
Freelancers should consider putting together a template agreement that they can adapt and use with different clients. While there are some situations in which freelancers will not have the opportunity to use their template agreement — such as when the client is a large, established business entity that insists on using its own contract — there are many situations in which having one is helpful; if nothing else, it demonstrates the freelancer’s sophistication and allows the freelancer to start negotiations on their own terms.
DEALING WITH INTELLECTUAL PROPERTY
“Intellectual property” (IP) is often — and understandably — a baffling concept for freelancers. The term broadly refers to creative work product and inventions. IP can be protected in the US under the laws governing trademarks (e.g., logos, slogans, and business names which identify the source of goods and services), copyright (e.g., creative and literary works), and patents (e.g., inventions that provide a new way of doing something). Freelance work often involves the creation of intellectual property, and it’s important for freelancers to understand each party’s rights to it.
By default, i.e., absent a contractual provision, the work product created by an independent contractor — which is the standard worker classification for freelancers — is owned by the independent contractor. However, contractual provisions may alter this default by stating that the client owns the work product under either the doctrine of “work made for hire” or an assignment of the rights to the client. The details of these different doctrines are beyond the scope of this article, but the bottom line is that the parties should be on the same page from the outset about what rights each party will have in the work product created.
For example, Jorge may negotiate a contract whereby all work product related to or incorporated into the services provided by Jorge are considered a “work made for hire” and are owned by the client. In this situation, Jorge is not only granting ownership of the final video to the client, he is also granting ownership of all footage captured to the client, as well as other work product that may be incorporated into the final video. Further, in this scenario, Jorge has no right to use any of the work product for any purpose because he has granted all of his rights to the client. So Jorge would not even be able to show the video on his website for portfolio purposes to attract new clients! In this scenario, Jorge would be in a much better position to get future work if the contract included a license stating that Jorge has the right to use the video for promotional/portfolio purposes.
The takeaway here is that the freelancer should be clear about the rights they are granting and the rights they retain. In addition to maintaining some sort of portfolio rights, freelancers should consider explicitly retaining the right to pre-existing work product and tools that are incorporated into the final work product.
“Freelancers should be clear about the rights they are granting and the rights they retain.”
FORMING A BUSINESS ENTITY
A big dilemma freelancers face is whether they should form a formal business entity, such as a corporation or limited liability company, or operate as a sole proprietorship. There is no absolute right answer on this issue, as it really depends on the individual circumstances of the freelancer.
The downside of forming a formal business entity is that it comes with additional costs and administrative obligations. Most states impose a minimum annual franchise tax for formal business entities, and there are other associated formalities such as periodic filings, record-keeping obligations, annual meeting requirements, capitalization requirements, and the obligation to not commingle business and personal funds.
The primary reason to operate under a formal business entity is limited liability, but this protection is often misunderstood. In brief, limited liability means that the personal assets of a business owner are not available to creditors of the company. While obtaining limited liability is absolutely an important consideration, it is also important to know that limited liability does not protect the business owner’s assets against liabilities that arise based on individual acts of the owner.
For example, if Niki improperly uses a third party’s trademark when she puts together her client’s website, then limited liability may not protect her individual assets in a legal action for trademark infringement because the liability arose based on her individual acts. However, if Niki has an employee who improperly uses a third party’s trademark, then limited liability would likely protect her individual assets. That may be different from the conventional wisdom about limited liability, but it’s true in all states.
As demonstrated in the example above, forming a business entity may not always further the protections of individual freelancers, but when it comes time to hire folks to help with your work, doing so is usually a good idea. In addition, forming a formal business entity can be helpful in showing a level of sophistication and legitimacy to certain clients, and it can provide tax benefits in certain situations.
The previous section demonstrated that having limited liability does not always provide the protection that freelancers are looking for. The best way for freelancers to limit their risk is to obtain insurance that covers their specific activities. Also note that insurance and limited liability are not mutually exclusive — it’s often a good idea to have both.
Insurance comes in many forms and in many shapes and sizes. The best way to figure out which policies are necessary for a given freelancer is to speak with an insurance broker who understands the freelancer’s activities. The insurance broker can explain the different types of policies that may be available, and can shop around to find the right policies for the freelancer’s individual circumstances. The broker should be “independent,” meaning not bound to any individual insurance company. A policy that allows flexibility is best because freelancers are often required to meet specific requirements for individual clients, such as naming the client as an “additional insured” and/or increasing policy limits for an individual job.
It is easy to feel like a small fish in a big sea as a freelancer, but if you take the time to understand and implement a few best practices, you can approach your work knowing that you have protections in place, and you will demonstrate to clients of all sizes that you are sophisticated, knowledgeable, and confident.
INTELLECTUAL PROPERTY LINGO
Owner: The owner of the IP holds the full title to the work product and can then transfer ownership in the IP to others or license it out, etc. The rights associated with ownership can be limited in some ways by the licenses granted.
License: The holder of a license is entitled to some type of use that is not the equivalent of ownership. Licenses come in many shapes and sizes, and may include the following terms:
•Exclusive: The holder of an exclusive license is the only person who can use the IP.
Most licenses are nonexclusive to allow for multiple license-holders.
•Perpetual: The license lasts forever, as opposed to a set amount of time.
•Worldwide: The license may be used anywhere in the world.
•Fully Paid-Up: No payment
(or other form of compensation) is due for the transfer of the license.
•Royalty-Free: No payment for each use is due to the owner of the IP.
•Modifications and Derivative Works: Allows the ability to modify or make new works based on the original IP.
Ryan Shaening Pokrasso is an attorney who founded SPZ Legal in the San Francisco Bay Area to assist entrepreneurs using business as a tool for social change and environmental stewardship. Ryan advises for-profit and nonprofit businesses as general counsel on matters ranging from entity formation and financing to intellectual property.