Often our clients are faced with the situation in which they intend to pay someone to create copyrightable content for them in connection with their businesses. This arises frequently in the entertainment industry and related tech businesses as well, as it is becoming a common practice to simply hire an independent contractor to create content where it is too expensive, burdensome, or impossible to create such content oneself. For example, companies frequently engage contractors to design their logos and other graphic elements for their company branding and websites. Other content creators, such as filmmakers, television producers, authors, and musicians, engage the services of others to create portions of their final artistic products (writing music, creating animation or illustrations, etc.).
In many of these instances, clients wish to enter into a work-for-hire arrangement with the contractor—that is, an arrangement under which the employer or commissioner of a work owns copyright in the work from its inception. This is contrary to the normal rules under the Copyright Act, where the person who creates the work is the “author” and owner for purposes of copyright. It is very important to understand that engaging an independent contractor on a work-for-hire basis in California has important implications for the contractor’s rights.
While typically, an employer does not have to comply with minimum wage, overtime, insurance, and other employment requirements for independent contractors (as it would with an employee), under California law, there is an explicit exceptions for independent contractors working on a work-for-hire basis. There are some California labor code and unemployment insurance code sections (See California Labor Code Section 3351.5(c)) stating that an independent contractor working on a work-for-hire basis is an “employee” (a so-called “statutory employee”) for certain insurance purposes, and, thus, the employer needs to pay worker’s compensation and unemployment insurance for that independent contractor as it would for the typical employee.
This really throws a wrench in the works of a typical work-for-hire relationship, as most parties hiring a contractor to create this kind of work envision a fairly brief exchange—payment for product—and do not know that they are technically supposed to be providing insurance benefits under the law. Because of this, most people do not provide worker’s compensation or unemployment insurance benefits for these “statutory employees” and we often see California Labor Code Section 3351.5 observed in the breach.
It should also be noted that this “statutory employee” re-classification may even extend beyond insurance requirements. There is disagreement among legal commentators about whether this California “statutory employee” re-classification imposed when an independent contractor signs a work-for-hire agreement in California only requires that the employer provide worker’s compensation and unemployment insurance, or whether the contractor may be entitled to other employment rights (such as minimum wage requirements, payroll taxes, etc.). The statutes in question do not expressly address rights beyond worker’s compensation and unemployment insurance, but some legal commentators seem to believe that statutory employees under this circumstance should be subject to withholding and tax payments just like employees.
A diligent party hoping to avoid violating the labor code and also avoid having to pay these type of employee benefits to their work-for-hire contractors should take care to hire only contractors that are a separate legal entity (for example, a corporation, an S-corp, or an LLC). This is because the Labor Code requirements only apply to individuals, not entities. For this reason, some commentators advise and, indeed, many entertainment companies and producers adhere to the practice of requiring all those who work on a work-for-hire basis to contract using a separate corporate or LLC entity. Alternatively, California parties wishing to engage contractors can use contractors from other states where this type of labor code does not apply. One final option is to use an assignment or exclusive license agreement with the contractor instead of a work-for-hire agreement. Be sure to consult with an attorney about the implications of an assignment agreement versus a work-for-hire agreement in your particular situation before deciding what route to take.
Lizbeth Hasse
Latest posts by Lizbeth Hasse (see all)
- Creative Industry Law Mentioned in The Hollywood Reporter - September 18, 2015
- Work for Hire and the Significance of California Labor Code Section 3351.5 - June 2, 2015
- Why Lawyers Should Not Sign NDAs with Clients - April 7, 2015
- What makes a good trademark? - March 4, 2015
- Business Entity Types — What Are They? - February 25, 2015
