Hiring an independent contractor or freelancer can be an attractive option for getting business done. This is especially true for a startup or a small business in the early stages of growth. Freelancing comes with fewer strings attached, and it can be a helpful tool for saving money while growing a business.

For a business, working with freelancers carries fewer costs. A business owner does not have to provide a benefits package to a freelancer, foot the bill for their health insurance or pay employment taxes. They also have greater flexibility in hiring and firing.

On the flipside, freelancing is an attractive option to many people who relish the chance to work for multiple companies and want the freedom to set their own hours and work on their own terms.

“There is this sort of gig economy out there,” says Rebecca Bernhard, labor and employment law counsel for Dorsey Whitney. “There are a lot of individuals who prefer not to be tied down to one employer and don’t want all their eggs in one basket that way."

But before jumping in and hiring a bunch of freelancers, there are a few details entrepreneurs and small business owners should be aware of about freelancing.

Under Contract

Independent contractors are not the same as a full-time or part-time employee. An independent contractor works on a per-project basis, works with multiple clients, advertises their services, pays for their own expenses and provides specialized skills. They set their own hours, work from a separate office, send invoices for payment and pay their own taxes.

Businesses employing a freelancer should have the independent contractor fill out a contract before beginning any project for the company. The contract is useful in spelling out everything from ownership of the final work product to payment for the freelancer.

Bernhard says a freelance contract should cover specific ground to offer legal protection to both parties. These details include:

  • pay rate and pay schedule
  • ownership of the final work product
  • non-disclosure of confidential information
  • state law governing the agreement
  • right to termination if work produced is substandard

The Work Relationship

One thing businesses should be careful of is putting in too many control clauses into the contract. It’s natural for a business owner to want to have some control over how and when a freelancer produces the work product. Exercising too much control, however, can change the nature of the work relationship from freelancer to employee.

“It’s important, of course, to have the business terms be clear, but people should scrutinize what type of control they really need to put in the contracts with regard to the work,” Bernhard says. “The more you put in there, the higher the risk that the IRS or the Department of Labor is going to look at that relationship and think that really feels more like an employer/employee relationship."

Freelance contracts should not mandate specific things like training or working in a company office—things that are typically required of an employee. They should not restrain independent contractors from working with other clients. These types of clauses can cause an independent contractor to meet the legal definition of an employee and put a business in hot water.

If the IRS believes an independent contractor is being treated like an employee, it will require businesses to reimburse those employees for wages they should have been paid under the Fair Labor Standards Act. Businesses can be forced to provide benefits such as health insurance and retirement. And they can expect to face stiff penalties related to non-payment of federal and state income taxes, Social Security, Medicare and unemployment.

Protection

What a work-for-hire contract should do, ultimately, is protect the business. For example, a typical clause will assign all rights to a work product to the business—turning it into a work-for-hire situation and keeping a freelancer from taking that work product to a direct competitor down the road.

In addition to making it clear who owns the work product, “you can protect your confidentiality,” Bernhard says. “You can restrict their ability to use any confidential information they learn from you.