How to Protect Intellectual Property Rights When Hiring
Filed under: Copyright, Intellectual Property, Internet Law, Patents, Startups
Imagine that your company hires an independent consultant to develop your website or to do design work for marketing or branding purposes. Would you be surprised to learn that without a written contract that includes specific provisions, the consultant would retain ownership of the intellectual property created despite the fact that your company paid for the work? It’s true, and because it’s far from intuitive, this rule can create problems for businesses that do not take proper precautions. The contractor would likely have the right to reuse the work created and your rights to publicly use that work may, in fact, be quite limited. This post examines the relevant copyright and patent laws and provides practical advice for businesses when hiring independent contractors or employees who may create original works on behalf of the company.
Copyright. With respect to employee/employer relationships, the “work made for hire” doctrine provides an exception to the principle that copyright ownership remains with the person who created the work. In this situation, the employer, not the employee who created the work, will own exclusive rights to work created within the scope of the employee’s employment. Disputes can sometimes arise as to the scope of the employment, and unfortunately, it’s not always cut and dry that the relationship is one of employment and not one of partnership or an independent contract–it depends heavily on the facts surrounding the working relationship, and many ownership disputes have come down to this issue. (For more information on categorizing workers as employees or independent contractors, see our previous blog post, “Categorizing Workers: Employees or Independent Contractors.”)
If the creator of the work is not an employee but rather an independent contractor, then three requirements must be satisfied in order for the hiring party to own the original work under the work-for-hire doctrine. These requirements are as follows:
- prior to the commencement of the work, the parties must agree in writing that the work shall be considered a “work for hire”;
- the work must have been “specially ordered” or “commissioned” by the hiring party; and
- the work must fall within at least one of nine statutorily mandated categories of commissioned works listed in the Copyright Act.
These requirements necessitate that the parties have a written agreement in place with specific work-for-hire provisions. And since, particularly with websites and software, it’s not always clear that the work product falls into one of the nine specific categories authorized by the statute, a well-drafted independent contractor agreement will also include back-up language assigning all intellectual property rights associated with the work product to the company contracting for the work.
Patent. With respect to patent rights, companies can acquire invention from employees by one of three ways. To the extent that the employer specifically hires or directs an employee to exercise inventive faculties, the employed-to-invent doctrine holds that the invention is owned by the employee. Even if the employer does not have full rights to the employee’s invention, if the employee utilized company assets to develop the invention, the employer may still have limited so-called “shop rights” to use the invention. Because the application of these doctrines are not always clear, the safest way is to have in place a formal Invention Assignment Agreement in which the employee assigns inventions of the employee to the company. And if patent rights are involved, an Invention Assignment should always be in place when working with independent contractors.
In this era of fast-moving technology, startup companies are not always careful in this area. Intellectual property rights associated with works created by employees and independent contractors can be the source of expensive disputes if the company becomes successful and will be an important subject of review during any due diligence conducted for the purposes of financing and exit transactions. As a matter of general practice, and especially when the intellectual property being created is essential to the long-term growth potential of the business, well-drafted employment and/or independent contractor agreements should be in place and the working relationships should be reviewed by an attorney.
Categorizing Workers: Employees or Independent Contractors
It can be a huge money-saver for a small business to get into the practice of working with independent contractors. Using independent contractors will lower a companies tax bill, require less withholdings, and in some states, reduces the obligations under workers’ compensation requirements. As a result, many small businesses advantageously hire independent contractors and tell such contractors they are responsible for their own taxes.
Some companies push the line, however, and classify as independent contracts many workers who are in fact employees. The IRS is catching on and hoping to catch employers with discrepancies. A new IRS program, launched in early 2010, plans to randomly examine 6,000 companies over the next three years. The purpose of these examinations is to find misclassified employees. This new program makes the decision of how to categorize workers even more important.
In general the status of a particular worker is a product of the facts and circumstances surrounding the worker. A large factor in determining independent contractor status rests in the degree of control the worker has. An independent contractor would seemingly have more control over his or her hours, as well as the manner in which the work is performed. FindLaw, an internet website which compiles legal documents, publishes a twenty-factor checklist to help determine if a worker is an employee or independent contractor. To access this checklist click here.
Employers should think twice before classifying a worker as an independent contractor or employee, or risk writing a big check to the IRS for unpaid taxes, penalties and fines. In addition, an employer that misclassifies workers should be prepared to provide access to benefits retroactively for such misclassified workers. One example of this was the class action federal lawsuit filed against Microsoft Corporation, Vizcaino v. Microsoft Corp., the result of which was Microsoft having to pay approximately $ 97,000,000 to thousands of employees as well as the massive legal bill accumulated during the case.
The lesson is that employers cannot assume that independent contractors are necessarily “independent contractors” simply because that’s what their agreement states. The IRS and state agencies certainly will not be making this assumption. Employers should make an effort learn the rules in their respective state and on the IRS website or consult an attorney. If you want your independent contractor classification to be respected by the IRS, you need to tailor your relationship with your workers so that it meets the guidelines set forth by the IRS.
Looking to Hire?
Franklin County Job and Family Services is offering a Subsidized Employment Program covering between 65 and 100% of a qualified employee’s wages for a period of time (about 6 months). Here’s a link to their website; more information can be found on the PDF’s they link to on the home page.
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