25 Dec The California “Work Made for Hire” Trap: Your Consultant May Be Your Employee
By Satya Narayan
When was the last time you had legal counsel review the consulting or contractor agreement form you use to engage consultants? If it contains a “work made for hire” provision, as many consulting/contractor agreements do, it may create an employer-employee relationship exposing your company to employer-related obligations and liabilities with respect to your consultants in California.
Most consulting/contractor agreements will include a boilerplate provision that the work product created by the consultant for the company is protected as a “work made for hire” under the United States Copyright Act of 1976, as amended (the “Copyright Act”). There are benefits of including such a provision from a copyright law-perspective, including treating the company as the “author” and, therefore, under the Copyright Act, the first owner of the work made for hire for certain categories of works. It is also included to potentially obtain a longer copyright protection term for the work (“works made for hire” are entitled to U.S. copyright protection for 120 years after creation or 95 years after publication, whichever expires first; while the standard U.S. copyright term is life of the author plus 70 years).
A “work made for hire” provision, however, has serious consequences for companies with respect to consultants in California. Under California Labor Code section 3351.5(c), a person who creates a work under a contract that expressly provides that the work shall be considered a work made for hire, is an employee and similarly, under California Unemployment Insurance Code section 686 and 621(d), a party commissioning a work under a contract that expressly provides that the work shall be considered a work made for hire, is an employer. As an employer, your company will be required to maintain workers compensation and unemployment insurance for California-based consultants performing work under a contract that states that the work is a “work made for hire.” Failure to obtain workers compensation insurance for such consultants may be a crime under California law, as it is with respect to employees. Payroll taxes may be applicable to such consultants. The company may also potentially find itself exposed to claims by such consultants for benefits offered by the company to its employees. Note, however, that work made for hire references in agreements with contractor companies or entities is not an issue as companies or entities are not considered “employees” under the said California statutes for the purposes of their “works made for hire.”
While copyright-related reasons for including a “work made for hire” provision in consulting/ contractor agreements are generally sound, with respect to your California consultants, given the exposure to employer-related obligations and liabilities under California law, all “work made for hire” references in the consulting/contractor agreement should be removed. As to copyright issues that may result from removing the “work made for hire” provision, the most important issue relates to the transfer of copyright ownership to your company, which is easily addressed through an express present assignment clause.