At first glance, Upwork saves you money. But, you pay for it somewhere. And if it all goes wrong, it might cost you everything. If you like your Upwork contractor, we suggest that you contract without Upwork.
To hire your Upwork worker directly, you have to have been working with the contractor (for the purposes of this post, let’s call him “Bob“) for 3 years or you have to pay Upwork a fee that is the greatest of:
- (A) 15% of the estimated future yearly salary;
- (B) 52x the average weekly Upwork fees; or
- (C) $500.
In most situations, Option A is what you’ll pay because it is probably the highest, which is the equivalent of a modest recruiting fee to Upwork. Here are 12 reasons why you should pay the fee and contract directly:
1. Simple economics.
If you pay Bob through Upwork $10/hour for 10 days/week for 50 weeks/year, you pay $5,000/year. In turn, Upwork keeps about $750 and gives Bob about $4,250/year.
Quick math: You can hire Bob directly for $4,250/year. Under the Upwork buyout policy, you’ll owe Upwork at most $637.50 to poach Bob, for a grand total of $4,887.50 for the next year. You just saved $112.50 right off the bat!
It gets better: You just reduced your risk by cutting Upwork out of the picture. Keep reading why.
2. You’ve got a lousy independent contractor agreement through Upwork.
Your primary labor contract is with Bob and not Upwork. You agreed to this in Upwork’s User Agreement, which makes clear that “a Service Contract is formed directly between such Client and Freelancer.”
That’s legalese for “You are on the hook if Bob gets pissed off and wants to sue you.” For lots of reasons below, we would never advise a client to use Upwork’s service agreement as a contractor agreement.
3. You agree to pay for Upwork’s lawsuits and legal bills.
This is huge. I mean, this could sink your business. Be honest: Did you read and understand the indemnity section in your agreement with Upwork?
Well, you signed up to pay for “all claims, damages, liabilities, costs, and expenses” that Upwork might suffer if Bob sues Upwork. This includes, “but [is] not limited to, reasonable attorneys’ fees and all related costs and expenses” like court fees, translation fees, travel, lodging, and more!
What if Bob is in Poland and sues Upwork for violating Polish employment law, or damaging Bob’s reputation, or not paying up, and Bob wins or settles? That’s right, you’re on the hook for the winning amounts from the lawsuit or settlement.
And whether Upwork wins or loses, you’re on the hook for all of Upwork’s related attorneys fees and costs. Is that worth the extra 2% you’re paying by keeping the contractor on Upwork? No f***ing way!
4. Anybody can do the work you assign.
Did you notice that Bob can subcontract with third parties? It’s right there in the User Agreement. All Bob has to do is set up a “legally recognized entity with the ability to hire and/or contract[.]” In other words, Bob can hand off tasks to whoever he wants.
5. Your IP might not be protected.
You should carefully consider how your IP is protected in your relationship with Bob. In particular, you should avoid any land mines that might exist in foreign law, which is what will govern your employment relationship when Bob is working from outside the United States.
With that in mind, your Service Contract in your Upwork User Agreement likely does NOT protect your IP in all jurisdictions. For example in France, which is a pretty good indicator of how this will go in any civil law country, you must jump through a bunch of legal hoops both in the particular provisions and overall agreement if you want to protect your IP rights as they apply to French contracts for labor.
Bluntly stated, a French (or Colombian, or Spanish, or Polish) Labor Court would LOVE to throw out your California-based provisions on work product assignment. The best practice here is to have a local advisor provide your agreement under local law, which is an inexpensive move and the kind of foresight that a future investor or acquirer would love.
6. If foreign laws require you to treat the Upwork worker as an employee, you’re screwed.
So, we’ve surprised many well-heeled general counsels about this concept. No matter what your contract says, local employment law almost always governs the relationship you have with a worker who works in another country. The exceptions are so few and specific that you can pretty much accept this as the rule.
So, for example, how much do you know about how to classify, say, a Chinese independent contractor? Did you know that it is illegal to hire an independent contractor in China? Do you realize that you could pay 2 – 10x the Chinese contractor’s wages and lose all of your IP when the relationship goes bad?
Well, you better know these kinds of details in any country because you assume “all liability for proper classification of Freelancers as independent contractors or employees based on applicable legal guidelines.” I.e., foreign legal guidelines in many Upwork relationships.
In this provision and others, Upwork makes sure to cover its own ass but not your ass. Proper classification is one of the easiest things to get right from a legal perspective, but you’ve got to make sure you have the right agreement in place, a basic understanding of local rules, and proper restrictions on Bob’s activities.
If not, you’ll have to pay for all tax compliance, withholdings, penalties, and fines. You’ll also have employment law risk in that country. And, you might even have corporate tax liability in that country based on your contractor/employee’s activities. Your User Agreement with Upwork makes sure that it is your ass for any liability.
7. And if Upwork screws up, you can sue them for $2,500 and what you paid them.
Let’s take a little detour away from employment, tax, and IP issues and glance at your civil litigation options if Upwork really screws you. Let’s assume that something goes way wrong and you actually have a claim against Upwork. You could get some coverage there, right?
Well you can get something, because in your User Agreement, you agreed (in all caps!) that:
THE LIABILITY OF ODESK TO ANY USER FOR ANY CLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL NOT EXCEED THE GREATER OF: (A) U.S. $2,500; AND (B) ANY UPWORK FEES RETAINED BY UPWORK WITH RESPECT TO CONTRACTS ON WHICH USER WAS INVOLVED AS CLIENT OR FREELANCER DURING THE SIX (6) MONTH PERIOD PRECEDING THE DATE OF THE CLAIM[.]
Ouch! You can get $2,500 and about 15% of your Contractors’ wages back. That sucks, but you signed it…
8. Oh and get this, Upwork can sue you.
You remember that last class in Contracts during your first year of law school where they talked about third party beneficiaries, right? I barely remembered it, but I looked it up and now I remember.
Basically, a third party beneficiary (the missing hyphen kills me) is a third party who is not party to the contract but can still sue either party even though it isn’t a party. In Section 3.10 of your Service Contract, Upwork hereby names itself as a third party beneficiary, so it can sue you.
9. Weak-ass Upwork confidentiality provisions.
Okay, back to the employment and IP stuff. If you’re like most startups, you are fiercely protective of your confidential information. After all, this is likely your most valuable asset. So, you can rest easy knowing that Upwork has robust confidentiality provisions, right?
Not so fast. While the Service Contract offers some protection, it’s certainly not the confidentiality agreement we would ever use. We will limit this critique to a few of our concerns.
First, the provisions are not in a logical order. Your Service Contract incorporates the confidentiality provisions of your User Agreement by way of reference. Not fatal, but certainly not ideal when dealing with a court, whether in the United States or in another country.
Second, you could drive a truck through the provisions. For example, Bob must protect your “Confidential Information with the same degree of care he uses to protect his own confidential information, but in no event with less than due care.” What is the standard for due care? Is it the average Ukrainian freelancer’s standard? Google’s security team? Not clear!
Third, I won’t even comment the line allowing Upwork to disclose your confidential information “to any Client or Freelancer engaged in a Contract” except to say: on its face, that’s crazy.
These are just our initial concerns with Upwork’s confidentiality provisions.
10. No trade secrets protection.
In a related vein, we cannot help but notice that you do not have contractual trade secrets protection. Without digging too deep into the law here, let’s take a simple example of a customer list.
Let’s assume that your Upwork contractor gets ahold of your customer list. You also list all of your customers on your website, which means your customer list is not confidential. However, you would be afforded trade secrets protection under California (and many other states’) laws, if you properly contracted with your employee. However, Upwork’s agreement does not include provisions that adequately protect your trade secrets, so you’ve got a much tougher fight.
11. No non-compete.
And notably, you have absolutely no non-compete provisions in your Upwork Service Contract. To the contrary, the Bob “is free at all times to provide Services to persons or businesses other than Client, including any competitor of Client.” Did you read that part?
To be fair, this provision can cover your ass in many jurisdictions. And, as you may know, non-compete provisions are prohibited in many jurisdictions, most famously in California. But, shouldn’t you have the choice if non-competes are allowed in your jurisdiction?
12. You’re giving jurisdiction to California.
Ah, jurisdiction. The stuff we lawyers love to talk about in our lavish conference rooms that you pay for but you’ll never see. But seriously, you designated California as your jurisdiction of choice for any disputes arising from your Upwork User Agreement.
This is fine if you’re in Mountain View, but what if you are in Boston, New York, or D.C.? Are you really going to pursue or defend an expensive lawsuit in the Golden State? Not likely!