Freelance agreement — why paying for the work does not buy the rights, and the law that makes late payment genuinely expensive

Why freelancers lose money

Not usually through a dramatic dispute. Through four quiet things, in roughly this order of frequency.

• The work expanded and the fee did not. Three rounds became nine. Nobody ever said no; the money simply ran out.
• The invoice was not paid and there was no leverage. The work had already been delivered, so the only remaining pressure was politeness.
• Everything was agreed in messages. When the client’s position changed, there was no single document either side could point to.
• Rights were never dealt with. Either the freelancer gave away more than they meant to, or the client discovered years later that it never acquired what it thought it had bought.

Every one of those is a drafting problem with a drafting answer. That is the whole argument for having an agreement, and it applies at every fee level — a contract for a twenty thousand rupee job takes the same afternoon as one for two lakh.

Section 17 — who owns the work

This is the provision that reverses what almost everybody assumes.

Read the exception carefully. It applies to a contract of service — employment. A freelance engagement is a contract for services, which is a different thing, and the exception does not reach it.

So the default position on a freelance job is that the freelancer owns the copyright in the design, the code, the photographs, the manuscript or the film, notwithstanding that the client commissioned it and paid for it. Payment buys delivery of the work. It does not, by itself, buy the rights in it.

Two cautions, because this is a general statement about a technical area. There are other exceptions in Section 17 — for certain commissioned photographs, paintings, portraits, engravings and cinematograph films, and for work done under a contract of service for publication in a newspaper or magazine — and their application depends on the facts. And the section operates “in the absence of any agreement to the contrary”, which is precisely why the agreement matters.

Section 19 — the assignment and its defaults

If the client is to own the rights, they have to be assigned. Section 19 governs how, and it contains three default rules that are among the most consequential in Indian commercial practice — and among the least known.

The fifth row deserves a moment. A company commissions a campaign, the campaign is shelved, and a year passes. The assignment may be deemed to have lapsed in respect of the unexercised rights unless the agreement said otherwise. That is not a trick; it is Section 19(4) doing exactly what it was written to do.

Moral rights survive everything

So even a freelancer who has assigned everything keeps the right to be identified as the author and to object to treatment of the work that damages their reputation. A client should know this before planning to attribute the work to somebody else; a freelancer should know it before accepting a clause that purports to waive it.

Order a freelance agreement — free, pay after work

How the IP clause should be written

Both sides can be served properly by the same well-drafted clause; what changes is where the lines sit.

• State the trigger. Rights assign on receipt of full payment, not on delivery. This single choice is the freelancer’s strongest commercial protection, and a reasonable client will accept it.
• State the scope. Which deliverables, which rights, and in which media.
• State the period and the territory. “Perpetual” and “worldwide” if that is the deal — otherwise the statutory defaults apply.
• Carve out what the freelancer brings in. Pre-existing tools, libraries, templates, fonts, presets and code should be licensed rather than assigned, or every job strips the freelancer of their own kit.
• Deal with rejected concepts. If three logos were presented and one chosen, say what happens to the other two.
• Deal with the portfolio. A freelancer who cannot show the work cannot get the next job. Agree it in writing, with any confidentiality carve-out.
• Deal with third-party material. Stock images, fonts, plugins and music come with their own licences. Say who buys them and who bears the risk if a licence is breached.
• Attribution. Whether the client will credit the author, given Section 57.

The MSMED Act — the freelancer’s best weapon

Now the payment side, and this is the part of the page worth the most money to the reader.

The Micro, Small and Medium Enterprises Development Act, 2006 was not written with freelancers in mind, but an individual professional providing services can register as a micro enterprise, and once registered the Act’s payment provisions apply to what is owed to them by a buyer. Those provisions are considerably stronger than anything most freelancers could negotiate.

Four sections do the work, and they operate together.

Forty-five days, whatever the contract says

Read the proviso again. The parties may agree a shorter period; they may not agree a longer one. A client who insists on ninety-day payment terms is proposing something the statute does not permit as against a micro or small enterprise, and the excess simply does not stand.

“Day of acceptance” matters too. Where the buyer objects in writing within fifteen days of delivery, acceptance runs from when the objection is removed; where there is no objection within fifteen days, there is deemed acceptance. So a client cannot stop the clock by staying silent.

Compound interest at three times the bank rate

Three features of that provision are worth noticing, because together they are what give it teeth.

• It applies notwithstanding anything contained in any agreement. A contract that says interest will not be payable does not displace it.
• The interest is compound, with monthly rests — not simple.
• The rate is three times the Reserve Bank’s bank rate, which puts it far above ordinary commercial interest.

A freelancer whose contract simply states, accurately, that the engagement is with a registered micro enterprise and that statutory interest under the MSMED Act will apply to late payment has converted a polite reminder into an arithmetic problem on the client’s side.

The Facilitation Council and Samadhaan

Statutory interest is of limited use without a forum that will award it quickly. Section 18 supplies one.

A party to a dispute about an amount due under Section 17 may make a reference to the Micro and Small Enterprises Facilitation Council. The Council first attempts conciliation; if that does not succeed, it takes up the dispute for arbitration itself or refers it to an institution providing alternate dispute resolution services. Section 18(5) requires that every reference made to the Council be decided within ninety days from the date of making it.

References are filed through the Government’s Samadhaan portal, which is designed for exactly this — a small supplier chasing a larger buyer, without the cost of a civil suit. Ninety days is not a guarantee, but it is a statutory expectation, and it is a very different proposition from a recovery suit.

The seventy-five per cent deposit

And here is the provision that changes how a buyer thinks about the whole thing.

A buyer who loses before the Council and wants to challenge the outcome must first put down three-quarters of the money. That single requirement removes the usual advantage of the larger party — the ability to appeal simply because delay is cheaper for them than payment is.

The disclosure the buyer must make

Section 22 requires a buyer who is required to get its annual accounts audited under any law to furnish in those accounts, among other particulars, the principal amount and the interest due thereon remaining unpaid to any supplier at the end of each accounting year.

That is a quiet but real pressure point. An unpaid micro-enterprise invoice does not sit in a forgotten folder; it is a number that has to appear in the buyer’s audited accounts, where its auditors, lenders and board will see it. Mentioning the obligation, accurately and without threat, in a polite reminder is often the point at which a stalled payment moves.

Registering as a micro enterprise

All of the above runs in favour of a micro or small enterprise, and registration is how that status is established in practice.

For an individual freelancer the registration is quick and inexpensive, and it does not change how you work, what you charge or how you file your taxes. What it changes is what happens when somebody does not pay. Measured against the cost of one unpaid invoice, it is the cheapest legal protection available to a freelancer anywhere in the system.

We do it as a separate service — MSME registration — and for anybody who invoices businesses rather than individuals, we suggest doing it before the next contract rather than after the next dispute.

Payment terms that actually work

The stop-work clause and the assign-on-payment clause are the two that matter most, and they are the two most often missing. Together they mean that at no point in the engagement is the freelancer in the position of having delivered everything and being owed everything.

Scope creep and revision rounds

The most common way a freelancer loses money is not a bad debt. It is a job that was priced for six weeks and took fourteen, with nobody ever behaving badly.

The contract answer has four parts.

• Define the deliverables precisely. “A website” is not a deliverable. A stated number of page templates, a stated number of breakpoints, and a stated content management arrangement is.
• State the number of revision rounds included — and define a round as consolidated feedback delivered once, rather than a stream of messages.
• Define what is a revision and what is a new request. Changing a colour is a revision; changing the direction is a new request.
• State the rate for additional work, hourly or per round, so that the answer to “can you also just…” is a price rather than an argument.

Then enforce it politely from the first instance. A clause that is ignored for the first three requests cannot be invoked on the fourth.

Tax — GST and deduction at source

Two things to settle in the contract rather than in an email six weeks later.

Whether the fee is inclusive or exclusive of tax. One line. Written badly, it costs the freelancer the tax; written at all, it costs nothing. There is a registration threshold for services with a lower threshold for certain special category states, and exports of services are treated separately — because these rules change, we confirm your position rather than printing a figure that dates. We also handle GST registration where it is needed.

Tax deducted at source. Business clients deduct tax on professional fees and on contract payments, under different sections and at different rates. It is not a discount; it is tax paid on your behalf, credited to you, and visible in your annual tax statement. The contract should record that the client will deduct as required by law and furnish the certificate. Reconcile the statement against your own invoices before you file — mismatches are common and they are much easier to fix in the same financial year.

There is also a presumptive scheme available to professionals which treats a stated proportion of gross receipts as profit, subject to a receipts limit that has been revised. Whether it suits you depends on your actual expenses, and that is a question for your accountant rather than for a documentation service.

Are you a freelancer or an employee?

If you work for one client, at their hours, on their systems, under their direction, and cannot take other work, the arrangement may be employment however the contract is headed — with provident fund, gratuity, notice and statutory protections attached.

That cuts both ways. A freelancer in that position may have rights they did not know about. A company that engages people that way may have obligations it has not accounted for. We set out the test, and the Supreme Court’s approach to it, in the employment agreement guide rather than repeating it here.

If the arrangement is genuinely freelance, the contract should look like it: deliverables rather than duties, invoices rather than salary, your own equipment, and freedom to take other clients. A document that describes employment while calling it consultancy is the worst of both.

Foreign clients

A large share of Indian freelance work is for clients outside India, and a few things change.

• Governing law and forum. Agree them expressly. A contract silent on this is a contract that becomes very expensive to enforce.
• The MSMED route may not help. Its machinery is directed at buyers in India. Against a foreign client, your remedies are contractual, which makes the contract itself more important, not less.
• Payment mechanics. Currency, who bears the transfer charges, the exchange rate basis, and the documentation your bank will want for an inward remittance.
• Tax on export of services. Treated differently from a domestic supply; get the position confirmed rather than assumed.
• Practical leverage. With an overseas client, an advance and milestone payments are not a negotiating position — they are the only realistic protection you have.

What the agreement should contain

• The parties, with the freelancer’s registration details where they exist.
• The deliverables, defined in a schedule rather than a sentence.
• The timeline, and what happens when the client causes a delay.
• The fee, the milestones and the invoicing, with the due date.
• Late payment, including the statutory position where it applies.
• The stop-work right on an unpaid milestone.
• Revisions, with the count and the definition.
• Additional work, at a stated rate.
• Intellectual property, assigned on payment, with period, territory, carve-outs and portfolio rights.
• Confidentiality, mutual where the freelancer is also sharing methods.
• Third-party licences — who buys, who bears the risk.
• Termination, on notice and for cause, and what is payable for work in progress.
• Limitation of liability, proportionate to the fee rather than to the client’s turnover.
• Tax, inclusive or exclusive, and deduction at source.
• Governing law, forum and notices.

If a client does not pay

A sequence that works, in order, and each step is cheap.

• Send a clean statement. Invoice numbers, dates, amounts, what was delivered and when it was accepted. Not an argument — a reconciliation.
• Stop work if the contract allows it, and say so in writing. This is the moment the stop-work clause earns its place.
• Write a formal demand with a deadline, and mention the statutory interest and the disclosure obligation accurately if you are a registered micro enterprise. Accuracy does the work here; threats do not.
• File on Samadhaan if the amount justifies it and you are registered. The conciliation stage alone resolves a great many of these.
• Send a legal notice and take advice on a civil claim where the statutory route is not available. Our directory is free to search and we take no commission.

Two things to avoid throughout: do not hand over source files or final rights to buy goodwill, and do not stay silent for months out of politeness. Limitation periods run, and a debt chased promptly is a very different debt from one raised after two years.

If you are the client

We draft for both sides, so this section is written for the company on the other end of the invoice, and it is short because the points are simple.

• Take the assignment in writing, signed, perpetual, worldwide, all media. If you do not, you own a file and not the rights.
• Check who supplied the stock, fonts and plugins, and on what licence.
• Pay within the statutory period where the freelancer is a micro or small enterprise. The interest is punitive and it is not negotiable by contract.
• Get the deliverables defined as tightly as the freelancer does. It protects you from a vague result as much as it protects them from a vague brief.
• Do not draft it as employment. If the arrangement looks like a job, it may be treated as one, with everything that follows.

Where these go wrong

• No written agreement at all. A chat thread is not a contract, and it is certainly not an assignment.
• Assuming payment transfers copyright. It does not. Section 17 makes the author the first owner.
• An assignment with no period or territory. Five years, India only, by operation of law.
• Assigning rights on delivery instead of on payment. The freelancer gives up the only leverage they had.
• No stop-work clause. Delivering everything before being paid anything.
• No revision limit. The single biggest cause of unpaid hours.
• Not registering as a micro enterprise. Free leverage, left on the table.
• Silence on tax. One line, and the argument never happens.
• An unstamped agreement. A contract you cannot produce in evidence.
• Waiting months before chasing. Politeness is not a legal strategy, and time runs against you.

Time and cost

The agreement is drafted in 1 – 2 days. What we need from you first is the shape of the work: what you deliver, to whom, how you want to be paid, and what should happen to the rights. A template does not know any of that, which is why templates produce the disputes described on this page.

For anybody with repeat clients, the sensible structure is a master agreement signed once, with a one-page work order per project setting out deliverables, fee and dates. It is drafted once and it makes every later engagement a five-minute job.