Protect Yourself When Freelancing: Legal Issues to Consider
While federal and state labor laws guarantee some protections and rights to a more traditional workforce (like protection from labor abuse, workplace harassment, and discrimination), freelancers are generally not covered by most of these regulations.
And while you may have known that, have you considered the other legal issues you might face as a freelancer? Have you thought about taxes, insurance, or how to protect your freelance business? Becoming a freelancer can be a rewarding career option, but there are several legal issues you should know about and plan for as you embark on—or continue—your freelance career. Here’s what you need to know about protecting yourself as a freelancer.
Start With Your Previous Employer
Before you take on your first freelance client, check any prior agreements you have with your current (or former) employer. You may have signed certain legal documents that could limit what you can and can’t do as a freelancer and who you can and can’t work with.
- A non-compete agreement means that you won’t “compete” with your employer for a specific time after you end your employment. This could mean you can’t work in the same geographical market as your employer, but it could also mean that you can’t work in the same industry as your employer.
- If there’s a non-solicitation agreement in place, you can’t solicit your employer’s clients or customers for your new business. It could also mean that you can’t hire former coworkers either.
- A non-disclosure agreement means you can’t disclose certain aspects of your employment. While this may not seem like a big deal, it could limit how you do business (you can’t use the same business model they do, for example).
As you plan your freelance future, make sure you understand how these agreements could impact it. If you aren’t sure what rights your employer may have, speak to a qualified attorney for guidance.
Limit Your Liability
You likely won’t need to keep an attorney on retainer when you’re a freelancer. However, that doesn’t mean you won’t encounter legal problems. For example, if a client accuses you of plagiarism and a judge agrees, you’re going to have to pay up.
As a freelancer, you can operate as a sole proprietor, but you might be better off setting up a limited liability corporation (LLC). Operating as an LLC will let you protect your personal assets (like your personal bank account and your home) in the event you lose in court.
Dealing with Uncle Sam is one of the bigger issues that face freelance workers. As a freelancer, you’re the boss, and you’re responsible for self-employment taxes, which is how Social Security and Medicare payroll taxes are taken care of. Employers split this expense with employees, but as an independent contractor, you will pay the total amount.
You’ll likely need to enlist the services of a good accountant. But, the easiest thing to remember is that you won’t just owe taxes on April 15th. You’ll also have to send in estimated quarterly taxes to stay in the IRS’s good graces.
Not sure how much to set aside for taxes? Save roughtly 30% of your net income to cover your yearly tax obligations when you start freelancing. Another quick tip is to estimate how much you’ll owe at the end of the year at the beginning of the year.
After the first quarter of the calendar year (January, February, and March), do a quick calculation, and see how much you’ve already earned. Then, multiply that number by four, and you’ve got an estimate of how much you’ll earn this year. Use that number as a guideline to help you figure out what you’ll owe each quarter and at the end of the year.
Whether you work from home, the coffee shop, or a coworking space, don’t overlook insurance. We’re not talking about health insurance for freelancers, or life or disability insurance (although you should have those, too!). Here is other insurance to consider.
General Liability Insurance
In case someone comes to your home for business purposes and injures themselves.
Your regular homeowner’s or renter’s policy may not cover your work gear, like your computer, if it’s damaged or stolen.
Professional Liability Insurance
Also called errors and omission insurance, this covers expenses you’ll have to pay if your client suffers business losses due to your negligence.
Commercial Auto Insurance
Your regular car insurance policy may not cover you and your car if something happens while you’re using it for work purposes.
Business Interruption Insurance
If there’s a natural disaster, for example, and you can’t work, insurance can help make up for the lost income.
If you do work for a client and your computer loses it, you’re liable for that loss and need to reimburse your client.
It’s illegal for you to make false or deceptive claims about your products or services. That includes claims on your website, in any advertising, and even in regular old conversations.
Not only can you not make false or misleading claims (“I can write your novel in one day!”), you have to be cautious when you include client statements in your promotions. If you place customer testimonials in your materials, or you claim that you worked with a famous brand, you have to prove that the statements are true.
Make sure that if you include either of these in any promotional materials, you have written permission to do so and can prove that you did the work for the client. You also have to prove that any claims you make about yourself or your product are valid and truthful.
Freelance Contracts 101
As much as you might like to work with an informal agreement, that won’t help you when a client refuses to pay. Freelancing without a contract is like walking a tightrope without a net, and you’d never do that, would you?
Fortunately, creating a boilerplate freelance contract doesn’t require an expensive lawyer or reams of paperwork. There are plenty of free contract templates out there. However you go about creating your contract, make sure you include the following.
Does your client need to provide a down payment? Milestone payments? When is final payment due? And what happens if the client doesn’t pay?
Scope of Services
What services will you provide and by when? And, how many times can a client send back work for updates or revisions for free?
Who owns the rights to the final product? Since you created it, you technically own the rights. When do those rights transfer to the client (hint: not until after you receive final payment)? And, can you use the final work product as part of your portfolio?
Are you bound to work in secrecy? Can you never reveal that it was, in fact, you who wrote the book? Will your client give you a glowing recommendation even if you have to mask your identity?
What happens if you’re not satisfied with your client or if they aren’t satisfied with your work? How does either side terminate the agreement?
Spell out the details and make sure you and the client are clear on the terms. This way, if there are disputes later, you both have the contract to fall back on.
And, use the contract as a red flag. Any client that refuses to sign a contract or negotiates terms that heavily favor their needs is someone you should not do business with.
Protect Yourself While Freelancing
The long and short of it is that as a freelancer, the law only protects you if you first protect yourself. So, do some research and talk to a lawyer about potential issues that could arise to make sure you don’t end up on the losing end of a legal dispute.
Whether you’re just starting your freelance career or you’ve been at this for a while, we’ve got plenty of help for all kinds of freelancers. Learn how to find freelance work and what you can do when a client won’t pay, and find out what it takes to be a successful freelancer.
And, if you’re looking for fully vetted and legitimate freelance jobs, check out our listings. FlexJobs members have full access to our job postings every day. Not a member? Take the tour and learn more about how FlexJobs can help you find success as a freelancer!
Originally published April 2, 2013.
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