IT outsourcing with Upwork: What you need to know

If you are looking for a developer for an IT project these days, you no longer need to hire a local company. Platforms like Upwork offer exciting opportunities for outsourcing small or even medium-sized IT projects over the Internet. In this article, we explain how you can use Upwork in a legally compliant manner.

Insufficient legal resources can quickly become fatal for your IT company. You can easily check the legal status of your company yourself with our IT law checklist – so that you can relax and concentrate on your business:

How does Upwork work?

1. You describe your project, what kind of support you are looking for and how much you are willing to pay. When paying, you can choose between a fixed amount or billing on an hourly basis.

2. After you activate the offer, developers from all over the world apply to you.

3. You choose one of the developers and offer him a contract he then accepts. (Upwork is therefore not a general contractor but merely mediates services between you and the developer.)

4. Payments on this contract are processed through Upwork. The platform acts primarily as a trustee between you and the developer from the moment the contract is signed.

The legal situation

Before you can be a customer on Upwork, you must accept the Upwork User Agreement. This is a contract between you and Upwork and will be governed by the laws of the State of Delaware (21.2). This contract then also indirectly influences the contractual arrangements between you and the developer because according to Section 5.1 of the User Agreement, all contracts that you conclude with a developer via Upwork consist of the following components:

1. The “Fixed-Price Escrow Instructions” (only if a fixed price has been agreed). This regulates how projects are processed via Upwork if a fixed price is agreed, e.g. B. when money is collected from you and when it is to be released to the developer.

2. The Hourly, Bonus, and Expense Payment Agreement with Escrow Instructions (for hourly payments, bonus payments, and reimbursement of expenses). This document regulates the process for billed hourly contracts, bonus payments, etc.

3. The “Engagement terms,” i.e. the individual terms of employment that you have agreed on with the developer. This includes the project description, hourly wages or fixed amount, project duration, etc.

4. The “Service Contract Terms” in Section 8 of the User Agreement. These are standard contractual terms between you and the developer and will always apply unless you expressly agree otherwise.

5. Other contractual additional agreements between you and the developer that you have individually negotiated with him.

Above all, the Service Contract Terms (4.) contain basic regulations on the rights and obligations between you and the developer. So that you can assess whether these regulations are acceptable for your project or whether you should make adjustments, we have listed and commented on the most important of these clauses below.

Upwork Standard Contractual Clauses and our assessment

Intellectual Property – who owns the rights to the software developed?

First things first: The distribution of rights to the developed software is regulated in your favor by default (8.6 User Agreement). Intellectual Property will pass to you the moment the Developer receives payment for their work, which is when Upwork, as trustee, releases the money previously collected from you. You can opt-out of sharing if you are not happy with the work. Upwork then keeps the money until the dispute is resolved and the rights remain with the developer. If, on the other hand, the money is paid out, you are entitled to the exclusive (exclusive) and complete rights to use the software, including the source code. Therefore, your developer may not reuse the code created for you in another project.

In addition to the rights to the developed software itself, you are granted a non-exclusive but irrevocable right to use all background technology, ie material previously developed by your developer outside of your project and later incorporated into it.

It also regulates how to deal with intellectual Property that you make available to your developer so that he is able to implement the project. Such usage rights are strictly earmarked under the Upwork Standard Contractual Clauses and may be revoked by you at any time.

Our rating: Absolutely acceptable. You do not need to make any changes here.

Use of Third Party Software and Documentation

Closely related to the distribution of rights between you and the developer is the risk that your software will be burdened with the rights of third parties and the resulting obligations due to the installation of code from open source projects. In the worst case, this so-called viral effect can mean that your expensive software development is economically worthless, for example, if you are forced to publish the source code or you are only allowed to pass on your software free of charge. Upwork is obviously aware of this danger, as the standard contractual clauses stipulate that the developer guarantees, unless otherwise agreed, that software projects will be implemented without the use of third-party software (8.6 “Background Technology”). If you allow the use of third-party software, the developer is obliged to document exactly which software he is using in which version and where and which license terms it is subject to. Third-party software, the use of which triggers unacceptable obligations for you (such as the obligation to publish your source code, to acquire licenses/rights of use or only to pass them on free of charge) may not be used in your project per se.

Our rating: Exemplary. There is no need for any changes here either.

Our advice: In order to ensure that your developer is also aware of his documentation obligation, it is advisable to explicitly point this out to him again in the project description. It is best to specify directly where and how the documentation should take place. A common Google Docs spreadsheet can be considered, as well as professional solutions such as fossa.io .

Termination of the contract

The termination options at Upwork (as is usual in Anglo-American countries) are very generous. You can terminate hourly contracts at any time without giving any particular reason. Since no period of notice has been agreed in principle, the termination is also effective immediately. The same applies to the developer: in principle, they can also say goodbye to your project at any time with immediate effect, without having to give reasons.

In the case of fixed-price contracts, on the other hand, the termination options are somewhat limited. If Upwork has already received the money for this (payment is due as soon as you commission the entire project or the first milestone), ordinary termination (by both you and the developer) is only possible if the developer releases money back to you. However, you can cancel milestones that have not yet started at any time.

In addition to ordinary termination (without any particular reason), you also have the option of extraordinary termination (for good cause) or mutual cancellation of the contract in both payment options, both with immediate effect.

Our assessment: The fact that you can cancel fairly freely is very beneficial for you. Not that your developer can do it too.

Our advice: As a client, you should protect yourself from a good developer suddenly running away from you when he receives an even better offer. Although there is already a certain urge for loyalty due to Upwork’s rating function (because good ratings are necessary to receive further orders), legal protection on this point cannot hurt. It is advisable to a) contractually exclude the possibility of ordinary termination for the developer or b) agree on a long period of notice. Since an amendment to the standard contract terms (4.) – in contrast to an addition – is only possible in writing (see introduction to 8. User Agreement), agreeing on a notice period should generally be preferable.

Authorization to engage subcontractors

According to 8.2 of the User Agreement, so-called subcontracting, i.e. the commissioning of subcontractors by the developer, is generally possible. However, the developer remains responsible for the work product and can only charge you for the time he himself has spent on your project.

Our assessment: Since you probably chose your developer based on his references, you have an interest in him being the one who works for you. Therefore, include a clause in the project description that makes it clear that the involvement of subcontractors is always inadmissible or at least depends on your prior consent.

Acceptance, Payment and Dispute

Hourly contracts are billed weekly. On the Monday following the workweek, Upwork will bill you for the amount equal to your developer’s hours worked and give you four days until Friday to review your developer’s “time logs” and dispute the billing if necessary. A check is possible with Upwork insofar as the developers use a special software solution to create the logs, which automatically evaluates their work activity and creates a screenshot of their desktop every 10 minutes. If Upwork does not receive an objection within the allotted time, the statement will be deemed accepted and the payment will be irrevocably forwarded to the developer. In the event of an objection, however, the dispute procedure begins (see point 8 of the “Hourly, Bonus, and Expense Payment Agreement with Escrow Instructions”). In the case of hourly billing, an objection can only refer to the fact that the developer was actually not working on the respective project at the logged time. Deficiencies in content, on the other hand, do not justify an objection. If no agreement can be reached between client and developer in the dispute process, Upwork will make a binding decision as to whether the logged times are to be recognized or not.

For Fixed-Price Contracts, acceptance occurs as follows: Once the developer has submitted their work, you have 14 days to review it. If you accept them, it is considered acceptance and Upwork releases the funds collected for the relevant milestone or the entire project to the developer. Conversely, if you do not accept the work and request changes, Upwork will withhold the money during this time. After the developer has made the changes, the approval process starts over. If there is a disagreement between you and the developer as to whether or not the pre-defined requirements have been met, an enhanced dispute process will be initiated where, after mediation by Upwork, the dispute may be resolved, if desired, for a fee of $875 ($291 each for You, the Developer and Upwork) may be bindingly determined by the American Arbitration Association.

Our assessment: The Upwork regulations in this area mean that you have to react immediately to defects if you don’t want to lose your warranty rights. This is extremely unfavorable for you in comparison to the generous German warranty law. Even worse when paying by the hour: In this variant, you cannot complain about defects in content at all. Correcting an error always costs you more hours, so constant control is even more important.

Our advice: According to German law, a corresponding clause would be invalid if it were provided by the developer, with Upwork it is a mandatory part of the contract. From our point of view, it is not possible to change this without violating Upworks’ contractual terms, as these provisions are part of the (not subject to negotiation) Escrow Instructions (1. and 2.).

Insufficient legal resources can quickly become fatal for your IT company. You can use our

Other tips and best practices

What else should you look out for when signing up on Upwork?

· Crystal-clear service description: For projects in the IT area, it is crucial from a legal point of view to create service descriptions that are as detailed as possible . This is all the more true if you communicate in English with a developer who is also not a native speaker himself. The clearer it is what exactly needs to be done, the fewer misunderstood requirements will lead to deficiencies and disputes. You should therefore take special care with the description of services – or let us help you with this . You can find out more about this in our e-book .

· Confidentiality and NDAs (Non Disclosure Agreements): By default, an NDA is not part of the Upwork Terms of Service. However, you can easily arrange one if required – or leave that to us . Read here what such an NDA should contain and how to deal with it .

· Exclude developer employee status: Record that your developer is not an employee but is paid on a project basis. According to German law, it is also crucial in this context that you treat the developer as a freelancer and not as an employee. You may e.g., B., do not make any specifications regarding working hours and location.

· Applicability of German law: Agree that disputes will be decided according to German law. This is particularly relevant for later disputes about liability for other breaches of contract (e.g., against the confidentiality obligation from the NDA) or about the intellectual property of the software. Indeed, the Upwork contractual terms and conditions are not aligned with German law. However, since the relevant regulations are pretty short, we believe that this can be gotten over, at least in the case of projects that are not too large. Last tip: So that the German general terms and conditions law does not undermine the contract components that, according to the Upwork User Agreement, must be part of every contract via this platform, insert the following sentence at the beginning of your project description: “This contract is comprised of the following agreements (as applicable): (a) Upwork’s Fixed-Price Escrow Instructions; (b) Upwork’s Hourly, Bonus and Expense Payment Agreement with Escrow Instructions; (c) the Engagement terms awarded and accepted on Upwork; (d) the terms in Section 8 (Service Contract Terms) of Upwork’s User Agreement, unless other terms are agreed to between the parties of this contract; [(e) any other agreements (e.g., NDA)].”

What is the legal position of your IT company? Check it out with our IT law checklist for IT companies.

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