Can Your Employer Stop You From Freelancing?

Moderated by John J.Thompson, Esq, Guest Speaker on How to Freelance
This is an abridgment; view the full video presentation here.

John Thompson, a New-York based attorney who works with freelancers, gave the following presentation to the UX Researchers’ Guild.

Can Your Employer Stop You From Freelancing?

In some cases, yes! As an employee, you owe a “duty of loyalty” to your employer to protect their interests and you’re bound to keep the agreements you’ve made with them. You need to review the employment agreement that you likely signed when you were hired and have since completely forgotten about. Here are four clauses to look for that allow your current employer to limit your freelancing:

• No conflicts
• Non-solicitation
• Non-compete
• Non-disclosure

The first is a no-conflicts clause. This says that while you’re working for the company you can’t do anything on the side that would conflict with that company. For example, while you’re working for Coke you can’t get a side gig with Pepsi. The nice thing about this provision is that when you leave your job, the no-conflict provision no longer applies.

A second important clause to be aware of is non-solicitation. This is an agreement to not take away or encourage clients or employees to leave their relationship with your employer. If you’ve signed a non-solicitation agreement, you may be prohibited from freelancing with your employer’s clients, even after you leave. And you may also be restricted from inviting your co-workers to join you in a freelance endeavor.

The next clause is the non-compete. This is different than non-solicitation in that it specifies that you will not work for a competitor. This provision applies even after you leave the company, but most courts require the provisions to be very narrow. For example, you may only be restricted from working for direct competitors, in the same geographic area, for 12 months after your departure from the job. It’s common that non-competes go beyond what the law allows, so before you assume you can’t take a particular opportunity, you should consult with an attorney. The federal government and various state governments are even considering banning these completely.

The fourth common restriction inemployment agreements is a non-disclosure or confidentiality agreement. This states that you will not share confidential information from your employer with other parties outside of the business. For obvious reasons, they do not want their confidential business information to fall into the hands of competitors. This has important implications for showing case studies in your portfolio. You should obtain your employer’s permission to show the work you’ve done for them. You may have to scrub the company name and proprietary findings in order to gain their permission, and in some cases, that may not be enough. In those cases, it may be possible to obtain permission to show the work in person, but not display it on your website or leave it in a form that could be transmitted to others.

Many employment agreements also require you to obtain approval from management before taking on outside work while still employed. If your side work is not seen as a threat, maybe it can be framed as professional enrichment that will allow you to gain experience that will benefit your employer.

Do Freelancers Need a Contract?

You should have your own well-written freelancing agreement or contract which helps align everyone’s expectations. If you’re a freelancer and you’re starting out, plan on looking at a lot of contracts from your customers or having them ask you for a contract. Either way, it’s something you want to get comfortable with and be familiar with. John believes the best analogy for the importance of contracts is “Good fences make good neighbors.” It’s not just about the worst-case scenario. It really is about getting on the same page with your new client and is a great way to keep everybody happy. 

What are the Terms in a Freelancing Agreement?

Crafting your own freelancing agreement or contract is an important skill that cannot be overlooked. Whether you consult a lawyer to draft such a document (which generally is unnecessary), or access an online template, there are significant clauses that should be included. John recommends that every contract contain the following four provisions:

• Defined venue or choice of law
• Limitation on liability
• Attorneys’ fees provision
• Placing a deadline for your client to raise disputes about your invoices (e.g., 30 days after receipt).

The venue or choice of law is crucial if you are working with clients who live in different states. This is the idea that the contract should indicate the state or location where any disputes will be settled and therefore which laws would apply in such a conflict.

The second one is a limitation on liability. This can be very helpful if something occurs that you never expected to happen, but that you’re being held responsible for. Perhaps you are accused of losing data which then resulted in another failure. The limitation on liability states that you’re not financially responsible for anything beyond what you’ve been paid.

Going along with this, lawyers sometimes refer to what is called, the “concept of consequential damages.” An example might be if you hire someone to park your car but then they have an accident. The person would, of course, be expected to pay for damages to the car. But what if you then tell them you had an multi-million dollar Faberge egg in the trunk that was damaged? It is not fair to ask them to pay for those losses.

The last two provisions relate to the collection side and getting paid for work done. First is an attorneys’ fees provision. In the United States, the default rule is everybody pays their own attorney’s fees. Those expenses are not cheap and can totally overshadow whatever the dispute is. Having that attorney’s fee provision can change the game and they’re enforceable in all 50 states. You can put it in your contract which in essence says, “If you don’t pay me and I have to sue you, you will need to pay my attorney fees.”

The last provision, which is less commonly talked about, involves placing a deadline on disputes to invoices. Consider the following scenario: a business may be having a cash flow crisis, you haven’t been paid in months and they haven’t complained about your invoices. But when you pressure them or hire a lawyer, suddenly they start scrutinizing the invoice in their defense, with the ulterior motive of trying to get you to write off justly earned debt, or just to buy time. This provision can deter that kind of behavior because they agree in advance that if they don’t bring up issues within 14 days, for example, then the issues cannot be litigated.

In addition to adding these provisions, there are other steps you can take to avoid or negotiate collection issues.

What if Your Freelance Clients Don’t pay?

Being compensated when working for yourself is quite different than being fully employed and having a paycheck show up every week. As a freelancer, you have to put time into invoicing and bookkeeping matters. It is incredibly common, no matter who your clients are, to see a lot of people either not getting paid, or more often, having to wait to get paid. 

As you start your freelance business, you may begin to recognize warning signs of a particular client or company. John prefers calling them yellow flags, rather than red flags, because you don’t want to necessarily say no to business just because you might have some doubts. But you do need to be on the lookout for signs that you might have trouble getting your invoices paid by a potential client.

What might be some of those yellow flags? One thing concerns startups. This could a large, well-funded company that would be a great client, but many of even the best of early-stage startups are eventually going to run out of money.  And when they do, they’re going to leave a lot of unpaid bills. 

Also, if you are considering working with overseas companies, be aware that if they don’t pay, you don’t really have any practical recourse. The cost of hiring a lawyer in another country is rarely worth it.

So, what can you do to get ahead of the ball on this and cover yourself? Being professional and organized is more than just a fancy-looking invoice. Many freelancers make the mistake of being laid back about bookkeeping and focus exclusively on the work they are doing. This is understandable, but it comes at a real cost if they’re not sending out invoices at clear intervals. If you send a client an invoice once every three months, they might really get sticker-shock when the bill arrives. So, pick a more frequent interval such as twice monthly or maybe monthly, and then stick to it. The more organized you are, the more your clients will appreciate and respect your system which will increase the probability that you will be paid on time.

If you have not been paid on an invoice, you may want to consider hiring an attorney. But John recommends taking this action only if the unpaid invoice is more than $5,000 to $10,000. Even then, he says, call around to consult with an affordable lawyer. An unpaid bill of a lesser amount might result in attorney fees being greater than the invoice you’re trying to collect on. But if you do need legal advice, find someone in your area who understands local laws and statutes. 

Is a Sole Proprietorship or LLC Better for Freelancers?

If you’re thinking of setting up your own freelance business, or if you’ve left employment and want to make it work on your own, there is a lot to consider. The first issue that many freelancers run into is whether or not to create any kind of entity. For most freelancers, this is going to be a choice between an LLC or what’s called a sole prop, or sole proprietor,  which is basically the default status under the law. Take, for instance, a simple example of a lemonade stand. If you go down to the corner and start selling lemonade technically in the eyes of the law, you are a sole proprietor.

While there are other corporate entities to look at, for the vast majority of freelancers, the decision will be between an LLC and a sole prop, with an LLC being frequently the entity of choice.

Pros and Cons of an LLC

The number one reason to get an LLC is to create a layer of protection between your business and your personal finances. An LLC gives you what is sometimes called the ‘corporate shield’ or the ‘corporate veil’. This can be very beneficial if something goes wrong with the business or you take on a lot of business-related debt. But it is also there if you find yourself involved in a lawsuit and potentially stand to lose a large sum of money. With this shield in place, unless specific exceptions apply (e.g., for deliberate fraud), you can generally walk away from your LLC with your personal finances intact.

Other benefits of an LLC include giving yourself a more established and professional look, which shows your clients that you’re devoted to your business. There can also be some tax savings beyond a certain earnings threshold. Those are the big three reasons but, the liability shield is really head and shoulders above the other factors.

With any entity option, there are potential drawbacks. With an LLC, these are mainly administrative issues, and paperwork that needs to be filed to ensure you are compliant with state and federal laws. On this note, be aware that tax filings for LLCs can have different deadlines than regular taxes.

Another factor is the registration fee which varies from state to state. In California, for example, it’s upwards of $800 a year, whereas in most other states it’s significantly less. With more and more work being done remotely, this can be somewhat confusing. If you live in one state and are doing work for clients who live in another state, where should you register? John offers this: “Generally, if you’re doing a service-based business, like UX researching, and you’re in one state, the likelihood is that you don’t really go to the other state physically to work with clients. Because of this, I think you’re just fine just registering in the state where you live.”

Other Things to Consider

Do Freelancers Need Business Insurance?

If you’re a freelancer and you’re not doing anything crazy or earning millions and millions of dollars, it’s probably not necessary. Insurance can provide peace of mind but can be expensive with high deductibles. Even with insurance, it’s not always as clear-cut to make a claim on. It’s a rare freelancer that will need this kind of insurance.

Can I Include Work Samples in my Portfolio?

Another question that may arise concerns the risks of including samples of previous work done in a portfolio  to show to potential clients. This can be done with a few reasonable cautions put in place. De-identify, cross out, or cover up private or potentially sensitive information. If doing this would dilute the reason for adding this case or study in the first place, you might have to exclude it from your portfolio. 

Data Security Tips for Freelancers

Data security is definitely on a lot of people’s minds these days. And unfortunately, there are actually not many strict laws about data security or data privacy for most industries, with healthcare being one of the obvious exceptions. As long as you’re exercising reasonable precautions such as using passwords and maybe antivirus protection, you’re probably going to be all right from a liability perspective. 

But as a freelancer and professional in the UX space, you are working with different data and have to be cognizant of it. Be sure and talk to the client to understand if this is something that is a particularly sensitive issue. If it is, then you might want to take extraordinary precautions, and perhaps, even charge your client more for those efforts. It’s always fair as a contractor to factor in that risk. If they’re doing something that is going to require you to to be more careful, then then you should see some benefit from that as well.

 

John Thompson‘s practice includes employment law, commercial litigation, startups, and freelancers. He received his law degree from the Georgetown University Law Center, where he interned with the Department of Justice. John is a partner with Thompson & Skrabanek, a law firm based in Manhattan. Visit their website at https://www.ts-firm.com/.

DISCLAIMER: This content provides general advice, which is provided as-is. The advice may not be applicable to your specific scenario or your jurisdiction. This article is not regularly updated and may not be current. If you need legal advice, consult with an attorney in your area.