Beware "Work Made for Hire" Language in Independent Contractor Agreements

Technology companies, particularly early-stage startups, often meet staffing needs with independent contractors rather than employees.  Such personnel are commonly hired via written independent contractor agreements that make clear that because they are not employees, they are not entitled to the benefits or privileges available to employees under California's employment laws, including unemployment insurance, health benefits, or the like.  Independent contractor arrangements can be mutually beneficial to the contractor and the startup, affording greater flexibility and ease of administration.  However, to the unwary and unitiated, such agreements can be problematic, particularly in the context of retaining individual software developers in California.

Naturally, the hiring company wants to ensure that the copyright to any work product the contractor creates belongs exclusively to the company.  To do so, it's common to include language like the following in the independent contractor agreement, consistent with the US Copyright Act's work for hire provisions:  "The parties acknowledge and agree that any work product Contractor creates as part of the Services provided under this Agreement shall be considered a work made for hire within the meaning of 17 USC 101 of the US Copyright Act, and therefore the copyright to such work product shall be owned exclusively by the Company ...."

There are two problems with this language in the context of hiring individual software developers as contractors in California: one arising under the Copyright Act, and another arising under California law.

Under the US Copyright Act, a "work made for hire" is defined as:

(1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

(17 U.S.C. § 101; emphasis added.)

For companies developing software, reliance on the work made for hire concept contained in the Copyright Act is problematic.  To qualify as a work made for hire outside of the employment context, the parties must expressly agree on the work made for hire status of the deliverables in writing, but more significantly for present purposes, the work must additionally fall into one of the nine enumerated categories of works.  Unless the software at issue can be captured by one of the categories of works above (not an easy argument), the software will not be considered a work made for hire. As such, the contractor would continue to own the code and may freely license that code to others.  At most, the company would have a nonexclusive license to use the commissioned software but could not prevent use by others licensed by the contractor.

For this reason, lawyers drafting contractor agreements typically will also include an assignment clause, as an additional measure of ensuring ownership; for example, "Contractor hereby assigns all right, title and interest, including all copyrights, patents, and any other intellectual property rights, in and to the work product Contractor creates for Company under this Agreement ...."  Taking a "belt and suspenders" approach, many lawyers will take solace in the perceived security of ownership enabled by both a work made for hire clause and an assignment clause.  Works that fall within the meaning of the "work made for hire" definition of the Copyright Act will be considered to be owned by the commissioning party from the inception of the work's creation, and no further assignments or other paperwork will be necessary.  In case further documentation is required, or in case the commissioned work at issue cannot qualify as a work made for hire within the meaning of the Copyright Act, the assignment clause provides an alternative means of securing ownership.

At this point, however, California's labor laws apply to spring a surprising trap.  California Labor Code section 3351.5(c) defines an "employee" as: "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."  Similarly, sections 621(d) and 686 of the California Unemployment Insurance Code contain essentially the same language, and reach the same result.  Thus, the mere inclusion of the magic words, "work made for hire" in the contractor agreement automatically renders the commissioned party an employee for purposes of unemployment insurance and other privileges of employment under California law.  (Note that this problem does not arise if the contractor is an entity, like a corporation or a limited liability company; entities are not regarded as employees under state labor law.)

Consequently, the best solution for companies in this situation is to rely solely on a present assignment clause, in which the contracting party presently assigns all right, title and interest in and to the commissioned work.  Any mention of the words "work made for hire" or invocation of 17 USC 101 should be strictly avoided.  In the software context, such work made for hire language may not be sufficient to vest ownership of the contracted work in the company, in any case, and including such language would render the commissioned party an employee under California labor laws.  This result would be contrary to the parties' expectations and intentions, but could nevertheless be used by the contractor as a weapon in the case of post-delivery disputes over payment or the like.

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