FREELANCE 101: Four kinds of Contracts you May Need
Coming from an entrepreneurial family, it was ingrained from the beginning that I needed a contract to start working for people to protect myself, my time, and my new business. I made my first contract by copy/pasting the ones I could find (and understand) from the internet, then sent to my Dad to wordsmith. Love ya Dad, but you’re not a lawyer. As I got more legit, I realized the value of paying someone to do it right, and the value of having a lawyer on your side when things with clients go sideways (and they invariably will).
Instead of trying my best to fake my way through this blog post, I decided to interview Small Business Lawyer Braden Drake from Braden Drake Law to help answer some of the basic legal Q’s about Contracts.
Hey there, Braden! How did you know you wanted to study law?
The answer to that question is a bit difficult, but I’ll try my best to be brief. I had always considered being a lawyer. It interested me. The first moment I seriously thought I would pursue this career path was in high school government class. My teacher encouraged me. Then, in college I was all over the place. I took business classes, public policy classes, German, and even considered fine arts. I ended up with degrees in Russian and political science. After undergrad, I began a Master’s of Public Health. It wasn’t for me. Many of my close friends were in law school, and I was envious. It was clear to me that they were all working very hard, but I found the subject matter interesting and the process seemed rewarding. That’s when I decided to apply to law school and move across the country. It was a great decision for me.
Why are you interested in Small Business Law?
Like you, I have many family members who operate their own businesses. My dad is a self-employed contractor, and my sister runs her own personal training studio. Many of my uncles are farmers, one has a mechanic shop, one builds and installs custom kitchens, one uncle owns a flower shop, and I have another uncle who builds custom hauling trailers. Each of these individuals operates single-member LLCs. I took these role models for granted until I began looking for jobs and realized owning my own business was an option. I suppose the first reason I like small business law is because it’s directly applicable to my own work.
In addition, I like to see others who are successfully building their owns businesses. It’s inspiring. I also love to feel like I can help. It’s a natural human instinct to want to feel useful and knowledgeable on a particular topic. Thus, in being a small business lawyer, I can provide guidance to help individuals launch their businesses.
Let’s get to the particulars… as a freelancer, are you classified as a contractor or an employee? What form will you get during tax season?
Naturally, lawyers have made the waters here a bit murky. Most believe that the critical factor as to whether a person is an employee or an independent contractor depends on what the agreement between the parties states. That’s not always the case. In the eyes of the law, that classification depends upon how the parties actually interact. I won’t bore you with the fine line details, but just consider that contractors should and will maintain a greater degree of independence. I’ll use Michelle and I as an example.
If I hire Michelle to revamp my website, we will sign an agreement stating that she is an independent contractor. It’s her prerogative as to when and where and how she will get that work done. Conversely, if I said “Hey Michelle, can you come to my office Monday and Wednesday from noon to five to do various design projects for me?” If I paid Michelle an hourly rate, she may be an employee rather than an independent contractor.
I provide this example mostly for the reason that if you are being treated like an employee but paid as a contractor you’re missing out on important employee benefits and will own more in taxes.
With all that said, the vast majority of freelancers are going to be independent contractors. If someone pays you $600 or more, that person should issue you a form 1099. The form is very straightforward. Don’t let these forms freak you out. It’s just like receiving a W-2 as an employee. These 1099s help match up freelancers income with the payor’s claimed deductions.
I feel like there are four kinds of contracts here that freelancers could use. Can you explain the differences between these three, why and when you would use them?
For simplicity, let's call these the 4 kinds of contracts:
Ongoing Independent Contractor Contract (i.e. working with an agency, or doing a recurring job like blogging or social media management)
Internal Contract for Independent Contractors (i.e. if I hire and manage someone to work on my team)
External Independent Contractors (i.e. you work for someone else)
The client facing contract is what we typically call a service agreement. From a lawyer's perspective, the second, third, and fourth agreements are each independent contractor agreements. I’m going to flip the script here a bit. Let’s reframe these agreements and break them into two different types:
1. SERVICE AGREEMENT
This is your client facing contract. Essentially, think “to whom does my business provide services.” Your service agreement is your agreement between your business and that individual.
This agreement, most obviously, should state the cost of your services and exactly what you are providing. I have my clients bullet point the services they will provide for two reasons. First, if you want to check on your progress for a client you can go down the list in your agreement is check. Second, if there's ever a dispute as to whether you “fully performed” on an agreement, you have the full scope of services itemized in the agreement.
Here is an example. I hire Michelle to redesign my website and I casually state at some point that I would also like business cards and a letterhead. Michelle sends me her service agreement and she specifies the scope of services as “MKW Graphics will design for Braden Drake Law a website with x, y, z pages.” It does not hurt to include a provision explicitly stating what services will not be provided. Thus, the provision continues saying “this agreement is for an initial web design and does not include search engine optimization or ongoing maintenance.”
If I, upon completion of Michelle’s work, refuse to pay Michelle until she designs my business card and letterhead, she would be in the right by explaining those items were not included in our service agreement. She has positioned herself well for similar disputes.
Many freelancers understand that the cost of services needs to be in the agreement. That is simple. You simply state something like, “In consideration for the services specified above in provision X, Braden agrees to pay Michelle $5,000.” What many freelancers fail to specify is the method of payment. Remember that this is your agreement and you can put what you choose. However, you should also remember that you want to entice clients and use your judgment to shape the agreement in a way that makes sense for the client. With that in mind, consider whether you want to do a payment, take all the money up front, have half as a deposit and take the remainder upon completion, or opt for a different plan. Also specify whether you require payment by credit card, check, paypal, etc. You should also includes payment deadlines like, “within 7 days of receipt of invoice” or for ongoing work “on the 15th of each month.”
You typically want to include other provisions stating how you will resolve disputes, if a client will be penalized for a last minute re-scheduling of a meeting, and what state laws you wish to apply. If you have been in business a while, simply brainstorm what issues you have had in the past and how you can prevent those. If you’re newer to the business, ask others what problems they have had. Contract drafting essentially is foreseeing problems and planning to prevent them.
If you don’t want to hire a lawyer to write your contract, you can usually pay a lawyer a modest amount to review your contract and suggest additions and edits.
2-3. INDEPENDENT CONTRACTOR AGREEMENT (INTERNAL + EXTERNAL)
This is your agreement between yourself and a non-client third party. I would then break this into two types:
A. Internal Independent Contractor Agreement - this is your contract you are providing to the third party to do contract work for you.
B. External Independent Contractor Agreement - this is a contract, which will likely be provided to you in which you are contract to perform services to a third party.
Now that we have a mutual understanding of the categories of contracts, let’s discuss necessary provisions and important considerations.
Ideally, you will have one master template contract for independent contractors. You can them custom tailor it for subcategories of contractors and specific needs. Here are some of the potential sub-categories:
- Contract for someone doing ongoing work for your business. We will call this an “ongoing contract.”
- Limited scope contract for someone to do one project for your business. This we will call a “limited contract.”
- An influencer agreement
If you hire someone to manage your social media, that will likely be an ongoing contract. For an ongoing agreement, you will want to specifically consider how and when that person will be paid. Specifically state the the person is an independent contractor. You should state what services the contractor will provide to you.
Note that some agreements could be either ongoing or limited. For example, if you want to hire a copywriter or a content creator for blogging, you could have a limited contract for each project or an ongoing contract for one blog per week or month. Again, you simply detail the scope of services, method of payment, and other specific provisions.
Influencer agreements are a type of internal independent contract agreement. Some are “limited” and should specify the number of mentions, shares, or whatever. These agreements could also be drafted for an “ongoing” basis agreement. For example, there are Instagrammers who promote a product by doing a giveaway once per month.
On more a business note, when hiring influencers you should consider whether that influencer’s audience is similar to theirs and how much the influencer’s mentions are worth. How many new followers or clients will it yield. What is the value of that? How am I going to pay the influencer? These are the considerations you should make.
4. EXTERNAL CONTRACT
In most circumstances, external contracts are drafted the paying party, in other words the person paying a contractor for services. This is more of a standard rather than a rule. Whether you draft the agreements on your own or have a lawyer do it, the process will cost you time or money. The flip-side is that when the other party provides the agreement, you save the time and money but have less control. Although, you should remember that you can also edit an agreement and negotiate terms.
This agreement, for the most part, will have the same provisions as your internal contracts. It may look differently if the other party drafted it. However, the bones of the agreement will be similar. The key is simply remembering that when you are not the party doing the drafting, you need to read the agreement with a critical eye. Consider whether the terms are favorable to you and if not favorable whether they are reasonable and agreeable. For a more complex agreement, it may be worthwhile having a lawyer review the agreement and provide notes.
What should happen if a client refuses to pay?
At some point, we are all going to have a client who does not pay. It’s a sad fact of business. Obviously, you can best prevent these issues by taking money up front or vetting clients. However, assuming you are past that point, there are a few things you can do.
If there is a genuine dispute as to the amount the client owes or if the client disputes the quality of work, consider mediation. Mediation is a great way to resolve issues cost effectively. If you reach an agreement to settle the dispute for a lesser amount than owed or remedy work, don’t forget to reduce this new understanding to writing.
You can file a small claims suit. In San Diego, you can file a lawsuit against an individual in small claims court. The filing fee and service of process will cost you about $150 total. You can ask for reimbursement of that in court. Picture Judge Judy without the cameras. It’s a relatively simple process and does not involve lawyers. The limit for small claims is $10,000.
Ask a lawyer to draft a demand letter. This can be a great solution. If you have already done your best to get payment, a strongly worded letter with a lawyer’s letterhead and signature may be just the trick to getting your client to pay. However, be wary of whether the client may simply become defensive and want to turn the dispute into a legal battle.
Why should freelancers be in touch with small business lawyers?
A good lawyer should have your back and want to help your business succeed. A small business lawyer is also aware of ways to structure your business for success and avoid potential pitfalls. It’s a great investment to have a lawyer set up your business entities, draft your contracts, and help you plan for small business taxes. Your goal should be to get the legalities out of the way and get your business systemized such that you can focus your time on your clients. I see people all the time who have gotten into trouble and accumulated thousands of dollars in legal fees and penalties because they either didn’t file proper paperwork and did not review a contract carefully. You should view a lawyer’s services as a cost saving investment because typically they are.
Braden Drake is passionate about helping entrepreneurially minded and self-motivated individuals plan for success. His goal is to provide personalized solutions for individuals and small business owners who have specific goals, so that they may focus their time and energy on their true passions. Aside from being a tax law and small business enthusiast, Braden enjoys training for and competing in endurance athletic events. Braden enjoys the opportunity to cook for his husband and take his three dogs to the beach.