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Hey there, I’m Danielle. Welcome to episode 43 of Simplifying Legal for Small Business Owners. Today, I’m talking about how to work with subcontractors.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
For a lot of service business owners, subcontractors are often a part of the growth of your business. In this episode, I’ll review a number of important areas to consider when working with subcontractors.
Who is Considered a Subcontractor?
But, before we start, what is a subcontractor? A subcontractor is an individual or business that carries out a portion of your work for your clients. In some industries, like construction, a subcontractor may be subject to more specific rules; however, I’m focusing on the types of subcontractors that might be hired by a service based business owner.
For example, if you are a website designer, you may offer a full-service website overhaul to your clients, including modifying all of the design and copy. However, if you don’t have a copywriter on your team, it may make sense for you to subcontract copywriting to an individual or agency.
Hiring a Subcontractor
Working with subcontractors can be a great way to get help in your business before you are ready to hire an employee to handle the tasks.
I have one caveat before I dive into the tips for working with subcontractors. All of the information I’m providing is general and assumes that you are able to work with a subcontractor in your business.
A subcontractor is an independent contractor, and state laws vary regarding hiring independent contractors. Please check your state’s laws to ensure that you are able to hire a subcontractor.
If you are hiring virtually for someone who lives out of state, make sure you review the laws for the state where the subcontractor is located too. Of course, if you aren’t sure about how a law may apply to you, please talk to your lawyer before moving forward.
1. ENSURE EVERYTHING IS IN WRITING
The first tip I have is the most important: Make sure you get your subcontractor agreements in writing. There are a number of really important provisions that you’ll want to cover, so it is critical to get the agreement in writing.
Now, I’m going to review some additional areas for you to consider as you create the contract and the boundaries for your relationship with your subcontractor.
2. CLIENT AND SUBCONTRACTOR INTERACTION
One of the first things to consider is whether you want your client and the subcontractor to have direct interaction. This may be dependent upon the type of work that you do and what type of activities the subcontractor will be completing for you.
No Client Interaction
If there won’t be any client interaction, state this in your subcontractor agreement. Especially if you are prohibiting any interaction between the subcontractor and client.
You may want this to go beyond simply providing the services. For example, you may want to state that your subcontractor cannot connect with the client on LinkedIn or other social media.
If you do allow interaction between your subcontractor and your client, consider what that will look like. One of the most important aspects is to ensure that you stay informed of what’s happening.
One common way to structure this is that your client and subcontractor may interact, but all communications are housed within your project management software, like Dubsado or Trello. And you make it clear to the subcontractor that the communications don’t take place in other forums.
Another option is that your client and subcontractor may interact, but you must be copied on everything so that there are no private conversations. This could include limiting the interactions to a Slack Channel that everyone has access to.
Of course, you may also prefer that your client and subcontractor may interact with no supervision. If there is interaction between the subcontractor and your client where you aren’t involved, ensure that there is a procedure in place to update you on these communications.
This is often a project management system, CRM, or EMR (depending upon your business type). Be sure to advise the subcontractor of what should be documented and how quickly you expect updates to be made. For example, it isn’t helpful to you to receive a one-line note that they talked to the client without any other context. Be clear about what details you need to receive about the communication.
Once you’ve decided what this type of interaction will look like, outline the details in your subcontractor agreement. Typically, this can be done in a scope of work that is labeled as client communication or something along those lines.
3. BE CLEAR ABOUT THE SCOPE OF WORK
My next tip is to make sure that your subcontractor agreement has a clear scope of work. This is something that I’ve talked a lot about in past episodes, but I think it is absolutely critical. Here are a few things to consider including:
- What deliverables is the subcontractor completing on your behalf?
- When are the deliverables due?
- What format do you expect to receive the deliverables in?
- How should the subcontractor communicate with you about the project?
Many business owners struggle if a subcontractor turns in deliverables late. If time is of the essence, clearly communicate this in the agreement. (Some business owners will reduce pay if there is unexcused lateness in the subcontractor’s delivery. If you take this approach, document this clearly in the agreement.)
Also, this type of timing is something that you should consider carrying over to your client agreement as you may want to allow some padding in your due dates with your client to allow for any adjustments needed due to subcontractor lateness.
4. PAYMENT PROVISIONS
The next thing to consider is payments. Your agreement should have information on when and how the subcontractor will be paid. This is especially important if the subcontractor will not be paid until certain work is done. Make sure it is clear what they need to do to get paid. For example, do they need to submit an invoice? Do they have to hit certain milestones? If you are paying your subcontractors on an hourly basis, make sure you determine how they will track and submit the time to you.
When it comes to payments, some businesses include a subpar work provision. Essentially, what happens if they do work that you aren’t happy with? Do you reserve the right to request that they modify/revise it without you having to make an additional payment? If so, be sure to include this.
5. TERMINATION OF THE SUBCONTRACTOR AGREEMENT
Like with any agreement, include a termination provision in your agreement. This way, if the agreement ends earlier than planned, you both know what process should be followed. A few things to consider:
- Can either party terminate?
- How much notice is required to terminate? You may want to reserve the right to terminate immediately and then state that the subcontractor must provide you with a set amount of notice.
- What happens if the agreement is terminated during an active project?
- Is the subcontractor required to complete certain deliverables prior to termination?
If the subcontract is terminated, make sure your agreement states who owns the deliverables, along with any drafts and iterations, that a subcontractor prepared for a client project. You should ensure that you are the owner of any deliverables created on behalf of your client, which then allows you to: a) complete any unfinished work and b) transfer ownership to your client.
And, if the subcontractor is working with you on a particular client project, you may also want to include the ability to terminate the subcontract immediately in the event that the client terminates their agreement. This way, you aren’t paying the subcontractor for the full project if it isn’t being completed.
6. YOUR INTELLECTUAL PROPERTY
Next, let’s talk about your intellectual property. If the subcontractor will have access to your intellectual property as part of executing their deliverables, be sure to state how they can use it.
In most cases, your agreement would state that the subcontractor would only be able to use your intellectual property to complete their deliverables. If that’s the case, it’s important to state that their rights to the content are limited to that particular use.
7. OWNERSHIP OF DELIVERABLES
Next, let’s talk about ownership of deliverables. If the subcontractor will be creating content on behalf of your business for your client, it’s extremely important that you address who owns the deliverables. I’ve reviewed these in past episodes, but there are a few common ownership terms:
- First is work for hire – Under this type of clause, you own the original content created by the subcontractor under the agreement.
- Next is an assignment of rights – Here, a subcontractor would assign their copyright rights to you.
- Last is a license to you – Under this type of clause, if the subcontractor retains ownership of the copyright to the original materials, but allows you to use it in certain ways, this is a license. If you use this option in your agreement, get specific about what the permitted uses are and any other restrictions that might apply because this can impact your client agreement.
In a subcontract, you will typically want to own the content so that you may transfer ownership to your client. Work-for-hire or assignment provisions are typically preferred.
When you consider the ownership of the deliverables with your subcontractor, consider what your client agreement states. In the client agreement, if you state that you transfer full ownership of any deliverables to your client, it’s critical that you have full ownership of anything created by the subcontractor. If the subcontractor is retaining some ownership and granting you a license, your client agreement should address what they can and can’t do with that content.
Next, let’s talk about the creation of original content. If the subcontractor is creating content for you, your agreement should state that it should be original and won’t infringe on the rights of any third parties. Additionally, the subcontract should state that any licenses related to stock photography or fonts must be transferred to you so that you may transfer them to your client. This is most likely to come up for a website or graphic design.
Next, let’s talk about portfolio listings. Often, service business providers, especially creatives may request to list a client in their portfolio for marketing purposes. Think of the logos that might be listed under a client section. Or it could also be a sample of the work completed.
Can the subcontractor include the work on behalf of your client in their portfolio? Address this in your agreement.
- You may say that the subcontractor may not include their work on your behalf in their portfolio. This includes no listing of the client’s name or logo in their portfolio or website.
- You could also allow the inclusion of the work in their portfolio with no limitations. This might include an example of the work or listing the client’s logo.
- You could also allow limited inclusion of the work in their portfolio, with attribution to you and stating that the work was created on behalf of your company for your company’s client. Often, this would mean that the subcontractor will include your logo rather than the client’s logo.
When you work with subcontractors, address the confidentiality of both your and your client’s confidential information.
Your Confidential Information
Your agreement should address what information the subcontractor should keep confidential. In some cases, you may request that they keep the relationship fully confidential. In other words, you may ask them not to disclose that they work with you in any capacity.
Additionally, you may ask them to keep payment terms confidential so that your client does not learn of how much the subcontractor was paid to complete the deliverables.
Your Client’s Confidential Information
If your subcontractor will have access to any of your client’s confidential information, you need to include how this should be treated in the confidentiality clause. Generally, you will state that all confidential client information must be kept confidential.
If you’ve entered an NDA with a client, verify that you are allowed to share information on a need-to-know basis. If you aren’t permitted to share, you may need to obtain permission from your client prior to disclosing to the subcontractor. In some cases, the client may ask that the subcontractor also enter an NDA.
9. PROTECT YOUR CLIENT RELATIONSHIPS
Now let’s talk about your client relationships. For most business owners, your client relationships are one of your most important assets. Of course, you want to ensure that you protect these relationships.
Most commonly, business owners will include a non-solicitation clause in the subcontractor agreement that states that they cannot solicit your clients within a certain timeframe. Your ability to use this type of clause may be limited by where you live, so check your local laws to ensure that this would be enforceable.
10. PROTECT YOURSELF IN THE EVENT OF A DISPUTE
Now, what happens in the event of a dispute? In an ideal world, your relationships will go smoothly; however, disputes will occasionally arise, so you want to ensure that your agreement addresses how to deal with disputes.
Dispute Between You and the Subcontractor
Your agreement should include how to handle a dispute that may arise between you and the subcontractor. This might include an arbitration provision or a limitation of liability clause. Also, be sure to include that your state’s law will control in the event of a dispute.
Dispute Between You and Your Client
Where things can get tricky is if your subcontractor is the cause for a dispute between you and your client. In this situation, it can be much more complicated.
Here, you may want to include a paragraph to ensure that the subcontractor has appropriate insurance coverage.
Additionally, you will want to include an indemnity provision, which would state that the subcontractor would hold you harmless in any claims brought by your client, if the subcontractor is the cause of the claim.
This wraps up my tips on working with subcontractors. Now let’s talk about today’s action steps.
- If you work with subcontractors, review your agreement to ensure that you have covered the most important terms? Consider whether your client agreement aligns with the subcontractor agreement as you will need to make sure they do. This is especially important when it comes to confidentiality, ownership of deliverables, and deadlines.
- If you don’t work with subcontractors yet, but you are considering it, you can use the tips I reviewed as guidance in your conversations before hiring. And, of course, you should get the agreement in writing.
- If you need a subcontractor agreement template, we sell one through Businessese. I’ll include a link in the show notes.
- Last, as always, if you aren’t sure how to structure your subcontractor agreement, please contact your lawyer. I’d be happy to discuss whether or not my law firm, Liss Legal, would be a good fit to assist. If you’d like to learn more, visit LissLegal.com.
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