Going Freelance? The Contracts To Consider

04 Mar 2016

Making the transition from full time employment to working for yourself is a big step and it can be a most satisfying and self-fulfilling one. The freedom to run your life the way you want to, doing the type of work that you enjoy the most - to the beat of your own drum - is a big attraction for many. In fact, the number of freelancers across the world has seen a sharp rise during the past decade.

However, the circumstances of working as a freelancer are different than those involved in full-time or part-time employment. This article will help you get the information you need to take responsibility for your rights and obligations as you go freelance.

  • Restrictions in your current employment that could impact you opportunity to go freelance
  • Tax compliance considerations to take into account
  • How to be off to a good start with 3 key contracts in place

Going from Employment to Freelance

While working with your clients as a freelancer, you will be solely responsible for protecting your rights and interests, as an independent contractor. At the same time, if you are a full-time or part-time employee and working freelance as well, you must ensure that there is nothing in your employment agreement restricting you from pursuing your freelance ambitions.

Generally, you will find one (or more) of the following terms in your employment agreement which may impact what kind of freelance work you can do while still being employed:

  • You may be forbidden from performing any other paid work
  • You may be permitted to do a part time job that is irrelevant to your employment (e.g. working in a restaurant) but not consultancy/freelance work
  • You may have to inform your employer of any other paid work
  • You may be forbidden from working in the same field as your employer You may be forbidden from working for a competitor Your employer may have ownership of any intellectual property you create
It is worth putting in the time to look at your employment agreement for any restrictive stipulations – you want to ensure that you are not on the wrong side of your contractual obligations while pursuing your freelance ambitions. See also legal reviews of employment contracts.

Considering Tax Compliance

If you are not bound by an employment agreement, then working as a freelancer allows you to influence any restrictions on your work through your contract with your clients. Having said that, depending on where you are (i.e., which jurisdiction applies to you), there may be certain legislative guidelines and restrictions you need to follow. For instance, if you are in the UK and do not satisfy the HMRC’s definition of ‘self employment’, you may be subject to IR35 rules, which will result in an increased tax and National Insurance liability (See article on IR35 compliance).

Similarly, in the US, employers pay a portion of Social Security and Medicare taxes, and carry out tax withholding on behalf of their employees. In contract, independent contractors are solely responsible for paying Social Security, Medicare and all their taxes. The Internal Revenue Service (IRS) applies multiple tests to determine whether the worker is an employee or an independent contractor for proper assessment of the taxation liability of the employers.

Off to a Good Start

Once you start working as a freelancer, you want to make sure you have a clear understanding of your rights and responsibilities as well as those of your client. Those rights and responsibilities may be secured by both parties through the execution of the following legal agreements, which provide a sound legal basis for your freelance career:

  1. Contract for Professional Services
  2. Confidentiality Agreement
  3. Master Service Agreement

#1 Contract for Professional Services

The contract for professional services (which is also known as an Independent Contractor Agreement or a Consultancy Agreement depending on the country you reside in) contains the terms and conditions of your work with your client. Terms, like ‘self-employed’, ‘consultant’ or ‘independent contractor’ are often used interchangeably to indicate the freelance status of your engagement with the client.

The contract for services usually contains the following clauses:

  • Term or duration of engagement
  • Modes and effects of termination of contract
  • Payment terms (including invoicing details)
  • Taxation liability
  • Scope of work
  • Working conditions
  • Point of Contact
  • Ownership of Intellectual Property
  • Indemnity clause
  • Premature Termination Fee (to be paid by the client for the proportionate work performed by the freelancer in case the agreement is ended prematurely)
  • Non-Compete clause
  • Limitation of Liability
  • Warranties and Representations
  • Force Majeure (Act of God)
  • Miscellaneous provisions (including severability, waiver, etc.)
You can, for example, use this Independent Contractor’s Agreement template to create your own Contract for Professional Services.

#2 Confidentiality Agreement

Also called a Non-Disclosure Agreement (or an NDA) a Confidentiality Agreement is important for your clients, as they will typically want some kind of protection for the confidential information they are likely to share with you during the engagement. Such information may include manufacturing details, client lists, suppliers’ information, trade secrets, business strategy, pricing policy, etc.

Your client may provide a confidentiality agreement, but having one ready and suggesting it yourself can make you seem more professional and also enables you to better control the terms of the agreement. If your client does provide an NDA, it is worth checking in detail to make sure you know exactly what information you must maintain confidential under the terms of the agreement. In fact, many clients will insist on signing an NDA even before entering into discussions for hiring the services of the contractor.

Depending on the nature of confidential information to be shared with you as a contractor, some clients may insist on a non-exhaustive confidentiality clause within the Contract for Services. Typically titled ‘Confidentiality’, this clause sometimes gives an inclusive definition of Confidential Information. As such a definition can be very broad, as a freelancer, you are usually better off with an exhaustive NDA, which not only defines Confidential Information, but also identifies the information, which does not form part of Confidential Information.

As a freelancer, your NDA must not contain any restriction on the use of any information about the client or client’s business, which you already possess or which you come across outside of your engagement with the client. Similarly, there must not be any restriction on using the technical knowledge you already possess for future clients. Importantly, you should not restrict yourself unreasonably from working in the same industry or similar client during or after your engagement with any client.

You can use one of our Confidentiality Agreements templates to create your own, and we can also help review an NDA you are requested to sign by the client.

#3 Master Service Agreement

A Master Service Agreement (MSA), containing the generic terms, that govern your relationship with the client may also come into the picture, especially if you are hired on an ongoing basis by the client. The clauses that generally form part of an MSA include term and termination, payment terms, ownership of intellectual property, warranties, dispute resolution, limitation of liability, confidentiality, etc.

Once you have agreed and signed an MSA with the client, your work will be performed on the basis of a Statement of Work (SoW), which contains the finer details of the work to be performed, like scope of work, timelines, benchmarks, etc. The SoW will be governed by the MSA.

If you often enter into longer engagements with clients spanning multiple projects, you may find it helpful to have a standard MSA you can use. You can use templates for MSAs and SoWs to create your own.

Take Responsibility for Your Rights and Obligations as a Freelancer

As you can see, there are a few important legal documents which govern your relationship with your clients – and it’s helpful to have these in place before you begin your freelance work. As mentioned in the beginning, you are far less protected as a freelancer than as an employee, so you need to take responsibility for your rights and obligations as a freelancer from the beginning – so you start your freelance career on a solid foundation and avoid getting caught up in restrictive covenants that can put a stop to expanding your business. If you are not sure about your rights as a freelance worker, it is a good idea to get professional legal assistance.

Tact can help review your contracts with clients to ensure you have the legal cover you need as a freelancer - see more about our contract checking service.

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