Beware of the 'Work for Hire' Language in CA Independent Contractor Agreements

Problem: Best IP protection available makes your outsourcer your employee

Naturally, when you pay somebody to create any IP for you (software code, articles), you then want to own that IP but without having your independent contractors magically reclassified as your “employees.” Designating outsourcer’s work product as “work for hire” (WFH) gives you the best IP protection but if you are in California or a similar jurisdiction, it automatically makes the outsourcer an “employee” for the purposes of unemployment insurance, workers' compensation and other tedious, potentially expensive consequences. This is so even if the agreement explicitly states they are independent contractors. See below: California Unemployment Insurance Code Sections 621(d) and 686; California Labor Code Section 3351.5(c).

Most of the independent contractor agreement templates out there contain a “work for hire” designation which basically means that your company automatically owns intellectual property rights to outsourcer’s work product. WFH clause gives the business the best IP protection because without the WFH designation the outsourcer may claim the copyright back after 35 years of assigning it even if the assignment agreement was for “permanent” copyright assignment. Most templates contain the WFH language because in the vast majority of states the WFH clause is not a problem but it is a problem in states like California because it transforms contractors into employees.

Special note re Elance: professional relationships on that site are governed, among other things, by the Elance Independent Contractor Services Agreement which states that the contractor’s work product is normally “work for hire” (Section 5 "Intellectual Property Rights"). The aforementioned Elance Agreement also states that it is governed by California law (Sec. 14), and the California law quoted above states that “work for hire” = “employee.”

Solutions

There are several options to get adequate IP protection without having outsourcers reclassified as employees.

Option #1. NOT a Work for Hire – 35 years of copyright protection. The easiest option is not to designate the assigned work product as WFH, to cut all "work for hire" language out of the independent contractor agreement. This way the hiring party will have full copyright for at least 35 years, and chances are the software code will become obsolete in 35 years anyway.

Option #2. Work for Hire but Governing Law is NOT California – 95/120 years of copyright protection. What to do if the work product is not software but something that might still be valuable after 35 years (e.g. a book)? Designating it as WFH may lead to employer-employee classification if your business is in California or a similar jurisdiction. To avoid the “employee” classification, you can choose the contractor’s state or country as governing law but the drawback of that is that in case of any problems you will then have to litigate in that other state/country. Some foreign jurisdictions do not have strong IP protections and are biased towards the locals. For example, asking an Indian court to issue some IP injunctions against an Indian party sounds difficult.

Option #3. Incorporate. Have the freelancer contract in the name of their company. Companies cannot be “employees” like individuals can. If the deal is significant enough to worry about IP protections past 35 years, both parties will save more money in the long run than they will spend on forming a Delaware LLC, which will then act as a sort of insurance policy for both the outsourcer and the hiring party.

Relevant law:

CA UNEMPLOYMENT INSURANCE CODE

621.  "Employee" means all of the following:
...
(d) Any individual who is an employee pursuant to Section 601.5 or
686.

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686.  "Employer" also means any person contracting for the creation
of a specially ordered or commissioned work of authorship when the
parties expressly agree in a written instrument signed by them that
the work shall be considered a work made for hire, as defined in
Section 101 of Title 17 of the United States Code, and the ordering
or commissioning party obtains ownership of all of the rights
comprised in the copyright in the work. The ordering or commissioning
party shall be the employer of the author of the work for the
purposes of this part.

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CA LABOR CODE

3351.5.  "Employee" includes:
...
   (c) Any person while engaged by contract for the creation of a
specially ordered or commissioned work of authorship in which the
parties expressly agree in a written instrument signed by them that
the work shall be considered a work made for hire, as defined in
Section 101 of Title 17 of the United States Code, and the ordering
or commissioning party obtains ownership of all the rights comprised
in the copyright in the work.

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Emphasis added

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