More and more startups and companies are outsourcing work to freelancers. Freelancers hold a tremendous amount of responsibility in some companies.
Given the trust and responsibility a business puts on their freelancers, how can businesses protect their intellectual property when hiring contract workers and freelancers?
Defining Contract Workers
There are various forms of employment a business can agree upon with its paid workers. When determining how to treat payments you make for services, you must first define the business relationship that exists between the company and the paid worker.
According to the IRS, a person performing the services for a company can be:
- An independent contractor
- An employee (common-law employee)
- A statutory employee
- A statutory nonemployee
- A government worker
When determining what your employee classifies as you must follow the common law rules that provide evidence of the degree of control and independence. There are three categories to consider:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer?
- Type of Relationship: Are there written contracts or employee benefits? Will the relationship continue and is the work performed as a key aspect of business?
When determining whether a worker is an employee or an independent contractor, businesses must weigh all of these factors. A business must look at the entire relationship to consider the degree of the right to direct and control.
Things to Think About Protecting IP When Outsourcing
43% of companies in the United States outsource programming jobs and software development for a wide variety of reasons. A company may outsource a project they need to be done quickly if their employees do not have the bandwidth to complete it.
Companies also may outsource work if it makes more sense financially for the company to pay an individual for hourly work rather than to hire a new employee full-time.
While outsourcing makes sense in certain situations, it does not come without risks. Oftentimes companies outsource work that is highly crucial to their operations. Many outsourced projects have to do with intellectual property, which is an essential thing to protect.
Intellectual property is an interesting concept because it is not a physical entity that you can keep within your business. By giving freelancers access to your intellectual property, you leave room for the possibility of that IP getting stolen.
Intellectual property encompasses all of the creations of the mind. This can include not only artwork and ideas but inventions, literary pieces, designs, symbols, trade secrets, and even images.
There are copyright and patent laws in place, but when businesses outsource work they likely do not have a copyright or patent in place for the software development work they often give to freelancers. This leaves the company’s intellectual property vulnerable to an outside contractor.
Using freelancers comes with a risk of data misuse. This was Alex Claro’s, VPN Analyst at CreditDonkey, whose main concern with freelancers.
Due to the absence of security in freelance developers’ software and equipment, your files and information are vulnerable to misuse, theft, loss, or leaking. In a software development firm, where developers are governed by company norms and regulations as well as cybersecurity laws, it’s a different scenario.
The firm can take legal action and allocate the pending job to another developer if a developer leaks a product or exploits a code for personal gain. Because freelancers are technically not employees of your firm, it’s important to have them sign a non-disclosure agreement to secure your data even more, especially if there’s been a data breach.
According to Technology Rivers, a good way to protect intellectual property is to outsource only parts of your software development. By doing this, you can outsource some of the more mundane, run-of-the-mill work while keeping the unique aspects of your intellectual property closer to the company. By holding secrets close, companies can protect their intellectual property from freelancers.
Along these lines, another great way to protect your most valuable intellectual property is to outsource to multiple groups. Rather than giving all of your intellectual property secrets to a freelancer, you can outsource each part of the project to a different group. This way, no group working on the project has all aspects of the company’s important IP.
Daivat Dholakia, Director of Operations at Force by Mojio, utilizes this protection by identifying low-risk and high-risk freelancers.
We use a tiered system for assigning projects out to freelancers. New freelancers or those that work with us less often receive low-risk assignments that don’t require as much knowledge about FOrce by Mojio.
Once a freelancer has worked with us for a while and we get comfortable with them, we’ll give them higher-level projects that may involve access to internal corporate files. Assessing these projects requires signing a separate NDA. As of now, we’ve only had three freelancers who reached this level with us (two of hom still work with us now).
Identifying who you can trust is important when outsourcing important work that could compromise your company’s intellectual property. You should be sure that the people you are trusting have earned it.
Once you decide who you are outsourcing your work to, you should then start figuring out the legal process. A comprehensive contract between you and your outsourcing partner is necessary to set up any protections possible. Some possible legal agreements to implement are listed below.
- Non-Disclosure Agreement: NDAs are a very common type of contract in outsourced work. These are to be signed by the company and all individual employees working on the software. If the IP is taken by the freelancer and given to another individual or company, they would be liable under this agreement.
- Joinder Agreement: A joinder agreement is an agreement not only with the firm or company you are working with, but with the individuals working on the project as well. This kind of agreement keeps everyone liable, not just the company.
- Non-Compete Agreement: Non-compete agreements ensure that everyone who worked on your project cannot compete with you at all for an agreed amount of time.
Tommy Gallagher, Founder at Top Mobile Banks told us that one of his main concerns with using freelancers is related to this question of security.
One of the main risks associated with working with a freelancer is the problem of security. As we all know, freelancers can work from any location in the world. It can sometimes cause issues if they decide to disclose internal information to competitors or even criminals or hackers.
This will constantly pose a security threat to the company. Even if the freelancer is found, the only option is to terminate him and recruit someone else. Copyright might be violated by freelancers who disclose personal information to the public. As a result, many businesses need to sign contracts before approving any project.
Gallagher knows that copyright laws are not always sufficient and the security risk of hiring freelancers is one that may be needed to take.
On a similar note, Tomasz Mlodzki, CEO of PhotoAiD, finds that freelancers are their greatest security link as well.
According to 60% of business owners, freelancers are the weakest security link within the organization. In fact, they have access to the company’s documents even if they are not under that company. To protect data, freelancers should always sign a nondisclosure agreement.
The company can also include a clause stating that the freelancer must return or destroy any materials they used to work. Apart from contractual conditions, freelancers should be given access to the minimum amount of information needed. A simple password can protect all the other non-essential data.
These agreements that our contributors have stated necessary are in compliance with laws and regulations in the United States. Many companies outsource to firms in other countries so when doing that, you have to make sure you look up the rules and regulations with said country and international work.
You don’t want to miss a crucial loophole in a different country’s international laws that leave your intellectual property unprotected and vulnerable.
If global laws that govern the international transfer of intellectual property are not present, then you can still protect your intellectual property through service level agreement clauses (SLAs). According to Full Scale, SLA clauses may cover the following key components of a legal protection agreement:
- The non-competition and non-disclosure obligations of the company and their outsourced employees.
- The ownership allocation and access rights to the intellectual property during the performance and eventual termination of the outsourcing operations.
- Measures that service providers will use to minimize the client’s intellectual property risks.
- The availability of intellectual property rights and resolution to the client in case there is a misuse, infringement, or any illegal disclosure on the part of the outsourced employee.
- The applicable laws governing the transaction and dispute resolution.
Other Problems with Freelancers
Though the intellectual property is a huge area of concern for startups and companies who outsource work, it is not the only obstacle companies have to hurdle when working with freelancers. Other issues arise like inconsistencies in the quality of work, keeping freelancers accountable, and grappling with missed deadlines.
Craig Anderson, founder of Appliance Analysts finds that one of his biggest frustrations with freelancers is their unreliability.
My main risk with a freelancer is that they go AWOL for a time. As I write this, my company is going to be missing out on a key Q2 goal because a foreign freelancer disappeared for around a week.” …. “I believe if this person was in-house, they’d be more obliged to tell us if something is happening and they can’t work.
However, since freelancers are less personally involved, I’ve noticed that they can disappear on occasion. It’s unfortunately one of the cons – especially of less involved work – which comes with the pros of easy availability, hiring, and lower rates. All of which are critical for startups.
Anderson sees this as a risk that startups need to be willing to take. Given the tight funding at first, the sudden availability and low rates for freelancers is an essential step to building their business.
A good way to mitigate the lack of accountability when it comes to timing with freelancers is to utilize online tools that track deadlines. Daniel Rutberg, Co-Founder and Chief Operations Manager of MuteSix, shared his thoughts on that.
Things can become far less productive when you’re working with a freelancer who isn’t adhering to project deadlines. That’s why it’s imperative to make use of a project-management app, such as Asana, Trello, Teamwork, ClickUp, or any one of a host of others.
Constant communication and goal-setting is the way to build a great company/freelancer relationship. If that door isn’t open, then it causes the freelancer to feel less engaged, and therefore stop being as productive.
Another issue many business owners find with freelancers is that they do not have loyalty to the company. Sep Niakan, Managing Broker of Condoblackbook wrote to us to say that is his main issue with freelancers.
Employees who are loyal understand the company’s values, and it shows in their work. Freelancers, on the other hand, are entirely self-employed. They are in charge of numerous projects at the same time, and your organization could be the tenth on their list of customers.
A one-off freelance job may not be the best choice if you want extra attention paid to your brand or if you want all employees to embrace the company’s vision and values.
Bogdan Krstic, Owner of RepairSprout, agrees with Niakan about the risk a lack of loyalty poses to her company.
Freelancers are also people who have bills to pay, so assuming you’re their only client can be like assuming your waitress is working her shift tonight for you alone.
Freelancers usually work on multiple projects simultaneously, so their loyalty to your brand likely lags behind that of a full-time employee sporting gaudy company swag like t-shirts and stickers. You should consider this factor depending on the project you are hiring for.
If you take Krstic’s advice, maybe you only use freelancers for the less-important and crucial tasks at hand and save the very important ones for your full-time employees who have that sense of loyalty freelancers lack.
In conclusion, there are a lot of risks presented when working with freelancers. Whether or not you are worried about your intellectual property or just the reliability and responsiveness of your freelancer, you should be doing extensive research into who you trust with your company’s information.
If possible, you should put any legal agreements in place that could further protect your company’s intellectual property, and keep up communication with your freelancers so they feel involved and dedicated. Freelancers are a lifeline to startups so it may seem impossible to reduce the risk that they pose, but you can take steps to mitigate it.
