Freelance IT professionals face several hurdles when branching out on their own, including legal liabilities. If you're thinking about becoming a consultant, here are three big ones to watch out for.
If you are an IT consultant, there are several factors to consider before going out into business on your own, including whether to specialize, what services to offer, and how to manage your books. But of all the things to consider, protecting your business against liability may be one of the most common and significant oversights. Jeff Somers, president of Insureon, shared the top three legal risks facing IT consultants and ways to mitigate them.
1. Unaddressed cybersecurity risks: The 2017 Ponemon Institute Cost of a Data Breach study reported costs of approximately $141 per record for data breaches that occur in the United States. Regardless of how seasoned you are as an IT consultant, you are at risk of a cyberattack or breach, especially if you connect to many (potentially unprotected) networks as part of the job.
The best way to protect your business is by taking a layered approach to security, including using strong authentication, creating security protocols and processes, and investing in cyber liability insurance, which can financially protect you and your clients in the event of a breach. Depending on the extent of the data loss or compromise, the cost to an IT consultant could be thousands of dollars just to contact each affected customer, as is required by law in most US states. Somers said that the moment you know that customer information has been exposed, you should contact your insurance company.
When considering cyber liability insurance, it is important to note the differences in first-party liability, which covers the cost of cyberattacks on your network, and third-party liability, which covers the cost of attacks against clients. According to Somers, with first-party cyber liability coverage, your insurance company will appoint a lawyer to handle the case and the policy can also pay costs related to customer notification, customer credit and fraud monitoring services, and crisis management. If a third-party breach occurs, cyber liability insurance can pay for any judgments or settlements against you.
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2. Non-compete agreement violations: Although becoming less common (and in some states, illegal), non-competes are still prevalent in the technology industry. If you have ever signed a non-compete in the past, you might be banned from soliciting business from companies you have worked with while under contract. It can be very risky to try to interpret non-compete agreements on your own, and it is recommended that you engage the help of a lawyer to decipher current and former contracts, and to figure out appropriate actions. It's important to mention that when it comes to non-compete contracts, the laws can vary by state. In most cases, a state will enforce non-competes if they seem reasonable and meet standards that are spelled out in statutes and cases. If you are found to have violated a non-compete contract in a state where they are enforceable, you may be sued for damages. Should that happen, an errors and omissions policy may be able to cover the legal costs, said Somers.
3. Insufficient financial preparation and record-keeping: Branching out as a freelance IT professional can be rewarding, but making it as a successful contractor takes a lot of work. Quitting your job to run your own business prior to landing enough clients to pay the bills is a major financial risk. "Before putting in your two weeks' notice and striking out on your own, make sure to have clients lined up on the sidelines," Somers said. He suggested moonlighting while you're still employed. "Taking on a few clients at a time and gradually building your book of business makes the jump a lot less risky," he said. You should build up a financial cushion to last a few months in case your business doesn't take off as fast as you envisioned. If you aren't sure whether you should pull the plug on your full-time job, Somers further suggested having a financial advisor look at your financials to help you decide if it is the right time to take the leap.
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"Above all else, IT freelance professionals must understand that they are not protected as employees in the event something bad happens," said Somers. General and professional liability insurance should be the minimum to address some of the risks. It further helps communicate that you are a professional, making it easier to get clients to sign on the dotted line.
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- White House urges states to ban employers from making non-compete agreements (TechRepublic)
- You're probably putting your company's cybersecurity at risk (CNET)