Independent Contractors or Employees: California’s “Work For Hire” Contracts

Much has been written (including by me) on the topic of how to distinguish an independent contractor from an employee. I have also written about the importance of "work for hire" or "freelancer" agreements when working with independent contractors to ensure that all intellectual property they create while working on a project is owned by the client rather than the independent contractors themselves.

I recently came across a notable exception to the "work for hire" agreements, and would like to share it with you. It relates to California law, and since I am not licensed there, I urge you to consult with a California-licensed attorney if you think this situation might affect you personally.

In California, if a person enters into a "work for hire" agreement, such person (typically, an independent contractor in New York) is considered to be an employee, and therefore, the employer has to pay appropriate unemployment insurance and workers' compensation. This comes from two local laws, California Unemployment Insurance Code Sections 686 and 621(d) and California Labor Code Section 3351.5(c).

This concept seems to contradict the United States Copyright Act of 1976, which specifically states that the copyright immediately becomes the property of the author who created the work. There are two exceptions. One is if the work is created by an employee within the scope of his or her employment, then the authorship vests in the employer. The other exception is if the work is part of "work made for hire." This second exception is the one used daily across the United States to allow people hiring freelancers to obtain rights to their work. There are two conditions, though: (1) the work comes within one of the nine categories of works listed in the Act (see my earlier post on this topic) and (2) there is a written agreement between the parties specifying that the work is a work made for hire.

So, in practice, in California, the second exception discussed above just doesn't work. As soon as you see a "work for hire" agreement, as required by the Copyright Act, the independent contractor becomes an employee. Does it mean that there are NO independent contractors in California? How does everyone deal with a provision like this? One way is, of course, to treat the independent contractors as employees for the purposes of unemployment insurance and workers' compensation. Another way is to omit the "work for hire" language from the independent contractor agreements altogether, and instead include an assignment provision, whereby the independent contractor agrees to assign all intellectual property created as part of the project to the client. A third way is to ask the independent contractor to form an LLC, and then enter into a "work for hire" agreement with that LLC instead of with an individual. LLCs cannot be employees, so the relationship would be that of an independent contractor.

State laws may differ drastically, and this is a good example of why hiring an experienced local lawyer can be important.

Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.

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