On this episode of THRIVE—sponsored by Workamajig—Kelly talks with Sharon Toerek of Legal + Creative, an IP and marketing law firm for agencies. They dive into MSAs versus short-form Terms & Conditions, Independent Contractor Agreements, and Digital Influencer Agreements for liability protection and FCC compliance.
EP 31: Top 3 Contractual Gaps for Agencies, with Sharon Toerek
Kelly: Welcome back to THRIVE. Today, we're talking about the top three contractual gaps for agencies and my guest is Sharon Toerek. How are you doing today Sharon?
Sharon: Hi Kelly! I'm great. It's good to be here.
Kelly: I am so excited to talk to you. Today we're talking about these contractual gaps. So you own Legal + Creative in Cleveland, IP advertising and marketing law firm.
Kelly: And I just think it's going to be a great show because a lot of agency owners that I talk with or who write in to me are always asking me different kinds of legal questions, and I have to find some kind of resource. So now this show is going to be a great resource to them as well.
Sharon: Awesome, yeah, I'm happy to do it.
Kelly: Yeah, thank you. So everyone after the show head over to legalandcreative.com to download your free marketing agency legal audit checklist. Alright. So Sharon, let's start today by talking a little bit about the dreaded three letter M.S.A. Master service agreements for client engagements and what you typically advise clients on when there are smaller projects or even like one-off projects. How should they handle things like that?
Sharon: Well fundamentally, the first thing I always like to share when it comes to client contracts or agencies, is that I'm not really hung up on what you call them. What I'm hung up on is making sure the agency protects itself appropriately, given the size of the risk involved and the work you're going to be doing for your client. So, what we typically recommend is that you have two documents in your toolkit that help you with your agency-client relationships from a legal perspective. And the titles are just that.
You can rename them if you---I actually had an agency owner approach me after a conference presentation and he said we don't believe in contracts at our agency. And I'd started to talk with him a little bit more, and he said, because you know our point of view is that the client can leave whenever they want to leave and so can we. I said okay, so how do you express what work you're going to be doing for the client?
And he said, "Well I have a statement of work." And I said, "Well, I don't care what you call it. The idea is that you've got something in writing that says what's going to happen and what the legal terms are." So, what we generally advise are one or the other of the following. In every agency you really have both. First of all, the M.S.A. the master service agreement, and even if you're an agency that tends to work off what the client presents to you in terms of documentation having a master service agreement of your own is an absolute top recommendation for any agency, because it's going to give you your own benchmarking tool for actually reviewing a master service agreement that a client might present for you.
So a master service agreement is more appropriate really for the larger volume, or longer term, or larger client relationships that your agency has. That's for a few reasons, you typically need a more robust agreement, and then secondly, most clients of that size or who are throwing projects your way that are of higher dollar volume are going to expect a more comprehensive agreement, and they're more comfortable with a master service agreement than something that's more abbreviated.
For other relationships where your agency is working strictly on a project basis or for those lower dollar projects that you're working on for a client, having a short form set of legal terms and conditions that you can incorporate into your statement of work, or your proposal, or your estimate, however you like to coin them at your agency, is a great tool as well. Because it enables you to capture all the essential legal provisions for the engagement in a less formal and a more abbreviated way.
Kelly: Okay, great. So we need an M.S.A and we need the short form…
Sharon: Legal terms and conditions, right.
Kelly: So now let's change gears a little bit and talk about freelancers. There are so many people that are leaving agencies and they're becoming freelancers or consultants. What do agencies need to know from a protection standpoint in regard to independent contractors? Because I know that comes up every single day with agencies.
Sharon: Sure, it's actually related to how I got into the industry of working with marketers and then agencies.
Kelly: Oh really?
Sharon: Yeah, I'm an intellectual property lawyer by training and background, and I think agencies tend to undervalue how much intellectual property they're actually creating. And this is the case when you're using a freelancer or an independent contractor as well.
And the top thing that most agencies don't realize is that when you're engaging somebody to help you create client deliverables, if they're not your employee then you don't own the rights to the work that they do for you, even after you've paid for it, which is an insult, I know, to many of us. Unless you've got something in writing that says so. And so, it's definitely necessary for every agency to have in their toolkit an independent contractor agreement that includes provisions like IP ownership of the work that the freelancer creates for your agency. Because remember that in most cases you're going to be required to give ownership of that work to your client at some point.
And you can't convey what you don't own. So it's really a chain of title question more than anything else. And also, you want to pay attention to issues like restrictive covenants, confidentiality, addressing the ability to display work in portfolios. And other related issues that are important to nail down with a freelancer. Because your freelancer's going to be stitching together gigs to earn a living, and so they may be working directly with brands in some cases, they may be working with other agencies in your market, and so you want to nail down an understanding relative to those areas of your relationship as well.
Kelly: And then maybe not so much from the legal standpoint but maybe from some other tax implications standpoints. Don't you also have to have some kind of sheet or information from each freelancer or independent consultant with proof of the fact that they are not an employee, they have their own business card, the hours that they work are not predicated based on you know your schedule, like those types of things?
Sharon: Yeah. Well you know there's the IRS specific set of criteria that governs whether somebody is really an independent contractor, versus someone who should be treated like an employee for tax purposes. So it's always good to be cognizant of what those major requirements are. And there are things like, do they have their own independent workspace?
Do they set their own work hours? Do they come and go as they please and is the relationship at will? And one of the factors is, do you have a written agreement with them? Because if you have an arm's length contract with somebody that clearly states they're an independent contractor, that's going to tick off a lot of the boxes as far as the IRS is concerned, about whether or not somebody is treated as an employee versus an independent contractor.
And it's an important distinction, because in many cases these days with agencies, sometimes you're almost embedding these people into your agencies. They're coming to your place of work to meet with clients, you're giving them business cards that have your company's name and logo on them.
Kelly:It's a little slippery slope.
Sharon: It does, and in some cases using titles for them that make them seem like they're part of your leadership team. There are those IRS criteria that are important in every industry to discern whether someone's an independent contractor. And then there are things you want to address in your agreement with them that are more industry-specific.
Kelly: So there is crossover between the legal implications and the IRS and tax implications.
Sharon: Absolutely and getting the legal relationship nailed down appropriately can go a long way towards helping you fulfill what the IRS expects and independent contractor.
Kelly: And I know the last time that we spoke you were telling me that a lot of your work at Legal + Creative really focuses around social influencers, and I know that you guys are very well positioned as a law firm, specifically for creative agencies. So it's interesting to me that you do so much work with social influencers which clearly sets you apart from a lot of other law firms, even law firms that specialize in agencies. Because social influencers is a very, very specific space, right?
Sharon: It is very specific.
Kelly: So what kind of things do agencies need to consider with their relationships with social or digital influencers, in particular?
Sharon: Well the first thing I always say to agencies who want to recommend influencer strategies to their clients is that it's as much about the experience of education of everybody who's in the chain as it is about compliance. And what I mean by that, is most of the time an influencer campaign that goes sideways because it's not complying with the FTC's rules regarding transparency and disclosure is because nobody who was supposed to know the rules knew the rules.
Or had an adequate set of understandings about the rule. So, your first role as an agent: not only should your team be educated, but your client's marketing team needs to be educated. And then they need to make sure that they are working with influencers who also understand the rules of the road. So, the first part of the task is really one of making sure everyone is on the same page, and you get there with communication and education.
The next thing then thereafter that you address is making sure your agreements with both the client and the influencer carry through everybody's understanding about who's going to be monitoring the campaign for compliance, what the basic rules are for being compliant, what the FTC's expectations, and what the process is going to be for sweeping up quickly, because influencer marketing is very viral. It almost exclusively uses social channels and once something's out there, it's out there. So, it's about having well-documented processes for reacting to something that doesn't go well.
And all of this ought to be reflected in your legal toolkit in the form of an influencer or a brand ambassador agreement. Again, I'm not really as hung up on what it's called as I am on what it includes. And do yourself a favor and include a summary of what the FTC requires and make that an exhibit to the agreement. So that somebody has got sort of a cheat sheet to refer to so that they understand what the rules are and how to follow them.
Kelly: That's a great idea, I love that.
Sharon: Use your legal agreements and your documents as business tools. That's the goal at the end of the day, right? To help you minimize your risk, but you can also use them to help people understand how to comply. They're doing double duty for the same amount of work invested.
Kelly: And typically with the social influencers, are the agreements with them typically with the agency, or with the end client or both?
Sharon: I've seen all three situations, or I should say both situations. I've seen them contract directly with the brand where the brand has a relationship. That's particularly true in the case of macro influencers or even some minor celebrities who their brand might be using. I've seen the agency contract directly with the influencers if they're the ones tasked for finding these folks.
And then I've seen three-way agreements between brand, agency, and influencer. So it's typically going to be two out of those three, again to create that chain of relationship between the influencer and the end brand. You know what I can tell you as far as the FTC is concerned, everybody in the chain is responsible.
What we're seeing so far is the FTC looking to brands first, influencers second, and now agencies increasingly. Especially where it's clear that agencies are either being lazy about following the rules or are willfully just disregarding them.
Kelly: So, it sounds like, if all parties would be responsible, it sounds like the direction that those contracts might move in is that it would require all three parties to be included in them, right?
Sharon: Yeah I think so, or that you have mirror agreements that sort of point to one another. I would extend that also to the issue of privacy. Because as privacy laws are tightening up and agencies work on campaigns that are more data specific and involve more personal information, we'll see the liability spread out equally amongst agencies, brands, and a set of influencers, third-party data manipulators or warehouses.
Kelly: Great, so that also probably means that their business insurance is going to go up as well.
Sharon: They do, it will. And so every agency needs to be regularly looking at its insurance portfolio, not only general liability but errors and omissions. And in some cases special writers for influencer stuff and for cyber.
Kelly: Very interesting. Really, really good points there. So as we start to wrap up, can you share with me an example of an agency client, obviously anonymously, but an agency client that you've worked with, where something that you put in place for them from a legal perspective help to mitigate something.
You know some kind of liability that came up, some kind of issue. Is there something that you can point to just to kind of give some context to the work that you do?
Sharon: Well, this is an example of a story that probably didn't start out very happy, but ended up being a learning moment for the agency ultimately,l which will help it down the line. They spent a lot of time putting together--and I'm going to mask some of the details so that I anonymize this as much as possible. Let's say a campaign.
They spent a lot of time putting together a tremendously visual impactful campaign that ultimately incorporated imagery that came---visual and still imagery that came from a lot of different sources. And they thought they were licensing everything and getting permissions appropriately, but they didn't have the work reviewed early on by the client's legal team. And the agency didn't have its legal team look at it either. And they spent almost a year putting the campaign together and right before it was ready to be released said, "Well you know let's call the lawyer and see if we're okay using all this imagery."
And about eighty percent of it was improperly licensed. Either because it was stuff that was not available for use whatsoever, but mostly because they had not properly licensed it, or they thought they had a specific kind of license and it was a different kind of license. So this is an example where first of all, the contract needed to have been clear on the liability for something like this.
Which they probably ticked that box off, but we were able to turn it into a teaching moment by helping them put processes in place for making sure they analyze these licenses every time they got a third party asset and wanted to put it in. This happens all the time. Font, photography, video, code, whatever. And so the teaching moment there was training in putting some minor processes in place that were easy to follow, and that ultimately will save them a lot of time and money in the future, because they'll know what checklists to go to and what process to follow to make sure it doesn't happen again.
Kelly: And thankfully they came to you for that review before actually distributing the campaign because that would that would've been a lot more work for you.
Sharon: It would have been a lot more work for me, but my goal is to help them avoid it in the first place.
Kelly: Absolutely. Well Sharon, this has been really fun. I love the conversation I think there's a ton of value that you're providing to the agency leaders that are listening and watching today. So I really, really appreciate you coming on the show.
Sharon: Thanks Kelly, and I love the work you're doing to help agencies out too, so it's been fun to have the conversation.
Kelly: Thank you.