Almost every business transaction on the planet has some type of written agreement, why should it be any different when hiring a freelancer? The gig economy is expected to reach 455.2 billion dollars in 2023, with no signs of stopping. At some point, your company may be involved with a freelance business, and having a written contract is instrumental in protecting your assets.

What is a Freelance Contract?

A freelance contract establishes the scope and terms of work between a freelancer and a business that requires services. It ensures freelance projects are completed on time and payments are made promptly. The agreement contains three main elements:

1. Both parties must agree and sign to create a legally binding contract.

2. There must be an exchange of economic value.

3. There must be the intention to enter a legally binding agreement

Contracts are there to protect your business and guarantee the freelancer delivers work according to the agreed-upon specifications and timelines. If a company has any policies relevant to the project that must be upheld (like equipment use, protection, training, or additional compensation) that can also be specified in the contractor agreement.

What are the Common Challenges Companies Face Without a Freelance Contract?

In the absence of a contract, a lot of things can go awry. First, expectations and requirements for the project will be unclear. There may not be a common understanding of the scope of the project, which leads to confusion and extra work. The project will have no bounds or scope creep.

The freelance contract is also a legal document that establishes to the IRS that the independent contractor is not an employee of your business. Otherwise, a company may be expected to cover an individual’s social security taxes, Medicare, and any liabilities while on the job. There are serious consequences for misclassifying a freelance worker, and in some cases, heavy fines or jail time.

Other challenges a business can face without a freelance contract include:

• Breach of company information and intellectual property rights

• Confusion on payment terms, timeframe, and/or payment schedule

• Misalignment of key project deliverables

• Loss of time and unexpected expenses

• Data protection, security breaches, and compliance issues

No freelance work should ever begin without a detailed and carefully planned contractor agreement.

What Do Companies Need to Include in A Freelance Agreement?

What you choose to include in the contract is really a custom agreement between two parties, however, there are some important elements a business should include to ensure it’s a legally binding contract. Some of these are:

Scope of Work

The scope of work sets the work expectations for the entire project, listing what kind of work will be done, and when. This section should include contact information for both parties, as well as the following:

• Contract start and end date

• Deadlines and due dates

• Detailed description of project and milestones

• Payment schedule and rate

Project Deliverables

Just as it sounds, this section covers what is expected to be delivered during the project. Is there a certain time the project must be completely finished? Are there multiple deadlines or milestones? Does the worker need to come to specific meetings? This is where you go into detail about the services provided during the contract, including project-specific activities, deliverables, and timelines for vendors involved.

Payment Terms

This is where you discuss the checkpoints that must be met in order for the freelancer to get paid, and what happens if they aren’t met (like late payment fees). When are invoices due? Both parties must agree in this section on how to parse payments and when they will be sent out. Typical freelancer payment terms include:

Pay Upfront

This is usually done with a trusted freelancer who has spent a certain amount of time with your brand. It can be very high risk. If anything happens to them and they cannot work, you might end up paying a retainer for something you won’t get.

Pay After

New freelancers working short-term contracts will usually accept payment after the job is completed. This is during the stage of building trust and is the least risky option for a business. You should also consider any materials or resources that need to be paid upfront and whether you will split the cost with the contractor. This will help to maintain a positive working relationship.

Pay Hourly

Some freelancers may request to be paid an hourly rate. Online payment trackers can be used to monitor screenshots and keystrokes when necessary. This may not be an ideal choice for a freelancer working full-time, as it may cost a business more than a regular employee.

Milestone Payments

This is the most popular way to pay a freelancer, especially when working with them long-term. Milestone payments are set to go out every time the freelancer completes an agreed-upon goal. This payment style also covers instances when a freelancer asks for a 50% deposit upfront, before starting the project.

Payment Methods

How you plan to pay freelancers should also be part of the contract. It’s important to discuss this ahead of time and put it in writing. Common payment methods for freelancers include:

• Bank wires - Wire transfers are a popular way to pay freelancers and are generally very safe. It’s also the best way to pay independent contractors larger sums of money and those overseas.

• ACH - The Automated Clearing House manages ACH transactions and they are some of the more affordable ways to pay freelancers.

• Online Payments - Some freelancers use online payment systems to process debit and credit card payments. It’s typically one of the easiest ways to pay people, since most companies are used to making online payments.

• Online Marketplaces - These platforms act as the middleman between new clients and a freelancer. Brands like Upwork secure payments for workers via direct deposit, wire payments, and PayPal.

Lumanu is another way to enhance the freelancer payment experience and simplify the entire process. 

Focus on selling products and promoting your brand, while Lumanu handles all the heavy lifting including freelancer onboarding, taxes, and both domestic and international payouts. Gain access to instant working capital and integrate with existing accounting systems, all while collaborating in a shared space.

Indemnification

Indemnification (also called hold harmless provision) is used to shift the potential responsibilities or costs from one party to another in the event that certain circumstances occur. This answers the question, “if something goes wrong, who is responsible?” If someone breaches the contract, the other party is going to want some form of reimbursement.

The main advantage of an indemnity clause is that it protects the indemnified party from losses or third-party claims. In a mutual indemnification, both parties can agree to compensate the other for losses due to a breach of contract. In a Limitation of Liability clause, the freelancer states they are not open to damages, should the project fail for reasons beyond their control.

Copyright Information

This section establishes who owns what when a project is completed. For example, if you hire a graphic artist and they design a coffee mug for an event, can you use that same design years later for a T-shirt? How about photographs a freelance marketer provides? Since you are paying freelancers to do the work, companies typically own the rights to whatever is produced. However, there are some exceptions.

If you hire a developer, it’s possible they will develop proprietary software that you can use, but not own. In this case, intellectual property rights and usage terms should be established ahead of time. Standard practices for end product ownership really depend on the industry and type of work. For example, photographers are more likely to license an image, while freelance writers usually give up ownership depending on client needs.

Termination Clause

This section involves the right to terminate the contract if the relationship is not working. It can be for a variety of reasons from missed deadlines to poor communication. The termination clause should clearly define the grounds for termination and the penalties or expenses associated with ending the contract prematurely. If there is a cost, this is also called a “kill fee” and will be what needs to be paid to end the contract.

Non-Compete Clause

If you hire highly skilled talent, you don’t really want them working for your competition. That’s a form of self-cannibalization. Therefore, it’s not uncommon to add non-compete clauses to your freelancer contracts. This disclaimer can include limiting the worker during the time of the contract, or for a period of time after it ends (like if you’re running a specific campaign).

Non-Disclosure Agreement

To protect a company’s privacy and trade secrets, this part of the freelancer contract is critical. A non-disclosure agreement can be a separate document, but it doesn’t hurt to mention it again in the freelancer contract.

This clause will govern exactly what can and can’t be shared about the specific project (and sometimes the brand or product involved). It protects both parties from the mutual non-disclosure of any confidential information. The NDA is considered a legally binding agreement.

Resources

If you need to provide assets or a freelancer needs to purchase tools for certain types of work, this should be delineated in the contract. If you allow the contractor to do their own procurement, it’s important they keep well-documented receipts and expense reports. This section should also clearly spell out who is responsible for what resource costs.

Signatures

In order for the contract to become a legal document, both parties must agree to it. This is most clearly demonstrated by both parties signing and dating the document. Prior to any work beginning, this is the last and most important step. If a freelancer starts work and one party hasn’t signed the contract, your business may not be protected if something goes wrong.

Additional Clauses to Consider

• Dispute Reconciliation - For freelance jobs, it’s important to have an arbitration clause that defines what actions will be taken if either side claims there was a contract breach. This is especially important when dealing with freelancers outside of the country.

• Legal Terms - This quick clause defines any important legal terms and conditions that ensure all parties thoroughly understand their legal obligations.

• Changes and Revisions - This is most important for creative freelancers and outlines how many revisions or edits can be requested for each project.

Freelance Contract Templates

If you’re wondering how to begin drafting a freelancer contract that works for your business, consider top needs first. Ask a few important questions like:

• What type of freelancer are you hiring?

• What are your deadlines?

• How can you pay people and how often?

• What is the scope of the work?

• Is there any confidential property to protect?

Once you have answered some basic questions, here are a few free contract templates to download:

Legal Templates

Download the freelancer contract here for free. This quick and easy freelance contract can be used to hire a self-employed worker for your business right now.

Ryan Robinson

Download the free template for a freelancer contract here. Join over 136k other freelancers in Ryan’s network who are staying safe and getting paid on time. This site has a customizable, copy-and-paste freelancer contract template that’s easy to fill out.

Final Thoughts: Freelancer Contracts

A freelancer contract will protect your brand, products, and intellectual property. It covers every legal avenue, from what happens in the event of an accident, to who pays for what when resources are needed. If there are grounds for termination or the relationship is dysfunctional, this legal document can provide key guidance.

The most effective freelancer contracts will list the scope of work, payment details (terms and methods), copyright information, NDA, termination clause, and indemnification. To date, a contract is still one of the best ways to protect your business and is an essential tool for building trust. If you’re still not sure about how to draft this document, it may be best to seek legal advice.

If you’re ready to explore options for freelancer payments, Lumanu is offering a free demo. Get started today and work out payment methods before you finalize that contract!