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Digital media and technology companies frequently outsource talent, and this outsourcing critically impacts copyright rights in the provided services and developed work product.

 

In a typical situation, a consumer facing company, perhaps even an exciting venture-backed unicorn (“UniCo”), hires an app development, branding, software design, or similar contractor to develop products that will represent UniCo to its customers. UniCo looks to a slick app developer (“BrandMaven”) to create an interface with UniCo’s customers that will drive sales, generate valuable data, and create intangible goodwill for UniCo. UniCo may not be fully aware that the 40 faces on BrandMaven’s website are nearly all 1099 contractors, spread around different states and even countries, and that BrandMaven is using a hodgepodge contracting system patched together from online samples to manage these contractors. When UniCo demands all copyright rights from BrandMaven in a service contract, BrandMaven may not legally have those rights to promise, and in some cases by accepting UniCo’s terms the individuals performing the work may inadvertently become employees of BrandMaven or UniCo.

So what? Isn’t this just a bunch of handwringing by attorneys trying to justify their existence? Only a little, and only in the sense that in all cases transactional law is a risk analysis. Maybe nothing ever comes of the above scenario. But maybe a BrandMaven contractor (“Rogue”) recycles UniCo’s fancy tricks for a UniCo competitor, or worse holds copyrightable works ransom for more pay or a running royalty. Maybe Rogue builds a platform on top of a third party’s protected intellectual property (“Mad Suing Competitor”), or uses open-source building blocks that attach commercially limiting terms. You don’t want to be anywhere near a Mad Suing Competitor targeting a UniCo based upon Rogue behavior.

So, apart from the above scenario, what kinds of services do companies outsource? Most often, outsourcing occurs in the IT sector (like cloud computing services, web hosting, and cybersecurity) and business process outsourcing (like HR, accounting, customer service, and logistics). If we follow the money trail, the global outsourced IT market alone was worth an estimated $413 billion in 2021 , with global spending on outsourcing generally projected to hit as much as $731 billion in 2023 Just follow the trail of VC investment in cybersecurity and digital productivity tools to further confirm.

We’re willing to bet that a shocking amount of businesses believe that because they paid an outsourced vendor or independent contractor, they indisputably own the copyright to the work created. But, that is not always the case. In fact, it is frequently NOT the case. To help companies think through their contracting strategies, here is a breakdown of the “work made for hire” doctrine and some potential liabilities and limitations from not properly prioritizing copyright rights in contractor workflows.

 

What is copyright & “Work Made for Hire?”

Copyright is a unique type of intellectual property in that protection of an original work kicks in as soon as the work takes some tangible medium of expression. Generally, an author (i.e., creator) of a creative work—from poetry to computer software to architecture—owns the copyright rights in a work. However, when a work is a “work made for hire, the party that commissions a creator for a work is considered the author and copyright owner (not the creator). The idea in a business context is that when a company contracts with someone to specifically create something for its business, the company should own what it contracted for and be able to determine how it is used going forward. However, there are multiple factors that determine whether something will be considered a “work made for hire”—just slapping on a “work for hire” label on the agreement is not enough.

 

When does something qualify as a “work made for hire?”

The Copyright Act, 17 U.S.C. § 101, governs what does and does not qualify as a work made for hire. Essentially, something is a work for hire if it:

  • Is a work prepared by an employee in the scope of his/her employment; OR
  • Is a work specifically ordered or commissioned within one of the nine specific categories of work within the statute (more on that below), AND the parties expressly agree in a signed written document that the work should be considered a “work made for hire.”

This means that if the hired party is an employee, then the work must only be in the “scope of employment” for the work to belong to the employer (and not the employee creator). However, if the hired party is an independent contractor (which is often the case with web developers and other technology), then the work must fall within one of the nine categories and there must be a signed agreement to qualify as a “work for hire.” Only then will the “work for hire” exception to the general rule kick in, allowing copyright rights to belong to the company instead of the contractor/creator.

In the Copyright Act, the nine specific categories of works are:

  • a contribution to a collective work
  • part of a motion picture or other audiovisual work
  • a translation
  • a supplementary work
  • a compilation
  • an instructional text
  • a test
  • answer material for a test
  • an atlas

The Copyright Act is clearly showing its age with this list. NO reference to computer software or programs at all. And to top it off, despite the demonstrated need to meet the moment, there is NO update in sight by Congress. This is where the pain point is on works for hire and modern tech.

Some courts have craftily found that computer programs fit into the “collective work” or “compilation” categories (mainly in federal New York courtrooms), thus qualifying as a “work for hire” with copyright ownership in the company. However, you do not want to have to rely on that argument in protecting something as integral to your business as software or other numerous modern works that fall outside of the text of the Act.

So, if software is not included in the Act’s list, but you want your company to still use independent contractors and still own the copyright in works they create for you, what can you do? Well, let’s start with identifying who you are contracting with to create the work.

 

Is the person creating the work actually an employee or independent contractor?

 Designation as an employee or independent contractor is an integral first step. But that designation must be reflective of the real situation. In other words, calling someone an independent contractor does not make true. Just ask Uber, who settled in a high-profile case for $8.4 million with drivers who allege they were misclassified, XPO Logistics, who settled for $30 million with port truck drivers, and DoorDash, who agreed to a $5.3 million settlement with its Dashers in San Francisco.

If a company controls the contractor’s work to an extent that makes it more like an employer-employee relationship, the law protects them as an employee. While this may be a benefit in the work for hire context since the work would be more likely to belong to the company, mischaracterization of an employee as a contractor can result in other liabilities, like: heavy tax consequences (federal and state taxes, interest on those taxes, retroactive payroll taxes); unemployment insurance consequences; and harsh penalties/possible prosecution. In other words, give the web developer you’re hiring some space. You can still dictate deadlines and the quality of work that you expect them to produce through a comprehensive independent contractor agreement, but don’t micro-manage or overly-control the project.

 

How to determine whether a worker is an employee or independent contractor?

Unfortunately, there is not a uniform approach to classifying an employee/independent contractor, but there are two main approaches: majority common law approach and economic realities approach.

The common law approach comes from Supreme Court case CCNV v. Reid, 490 U.S. 730 (1989). In that case, both a sculptor who had been hired by an organization to create a statue and the organization itself filed for copyright rights in the statue. The Court ultimately found that the sculptor was an independent contractor and that the sculpture did not otherwise qualify as a “work for hire” under the Copyright Act, so the organization could not be the sole author.

While the facts match up nicely with the remainder of our article, the main takeaway from the case is actually the Court’s process that it used to reach the decision.

First, the Court used the principles of agency law to distinguish whether a person is an employee or independent contractor, focusing on the hiring party’s right to “control the manner and means” of work. The Court then listed a number of factors to consider, including: skill required; source of tools to perform work; location and duration of the work relationship; whether hiring party can assign additional projects; hiring party’s discretion over work hours; method of payment; whether the work is in the regular business of hiring party; whether the worker is in business for himself; and any employee benefits and tax treatment. No one factor determines the relationship; instead, it is applied in each situation case-by-case. This is the approach that applies for purposes of copyright and “works for hire.” See Reid, at 751-52.

The other approach for making an employee/IC distinction is called the Economic Realities test, and it comes into play when employee or IC classification results in protections, like minimum wage and overtime protections under the Fair Labor Standards Act (FLSA). Generally, this test focuses on whether the worker is economically dependent on the business to which services are being rendered, or are effectively in business for themselves. This test may apply in other contexts of your business, but for the purposes of this article, the focus is “control” and the Reid factors.

While we can’t advise specifically on what factors will be used in your state, here are some general questions to ask when classifying a worker as an employee or independent contractor:

  • What skill was required to create the work? More specialized skill leans toward IC.
  • Did the hiring party provide the space, materials, or tools to create the work? Company-provided materials leans toward employee.
  • How long was the relationship between the parties? Did the hiring party have the right to assign other projects besides the one under review? Short-term or set-term relationship based on finishing a project favors IC. Long-term or continuous relationship favors Employee.
  • Could the hiring party direct the creator when and how long to work? Company control over work hours favors Employee. Dictating own work hours favors IC.
  • How was the creator paid? Did the hiring party offer employee benefits? Did the hiring party remove taxes from the creator’s pay? Lump sum payment favors IC. Hourly or salary favors employee. Any benefits and/or tax treatment favors employee.
  • Does the creator have his or her own business? Was the creator able to hire and pay assistants? Having an independent agency/biz favors IC.

Now that you know which type of worker you’re contracting with, let’s look at the copyright implications for each type:

 

If the worker is an employee…

If a worker is an employee, your business most likely owns the copyright. Copyright in the works created by an employee developer frequently belongs to the company if it is in the scope of the developer’s employment. See, e.g., Le v City of Wilmington (employee developer’s program was “work for hire” within the scope of employment, even when supervisor made him work on it exclusively at home); Miller v. CP Chemicals (employee developer’s program was “work for hire” within scope when work was created from home because it furthered employer’s goals).  The Copyright Act doesn’t specifically define “scope of employment,” but agency law does, and courts often use agency law definitions in this area (like in Reid and cases cited just above, for example).

In agency law, conduct is in the scope of employment if it is “of the kind” that the worker is employed to perform, occurs “substantially within time and space limits,” and the work is motivated, at least in part, by a “purpose to serve” the employer. Restatement (Second) of Agency § 228 (1958). The Comments within the Restatement and case law clarifies that the scope of employment is broad—including not only authorized acts, but also “incidental” acts that the employer may not expect the worker to perform, but nonetheless furthers the employer’s purposes.

Thus, if a worker qualifies as an employee and they complete work that furthers the employer’s purposes, especially if it is work related to what they were hired for, then the works that result likely are “works for hire” with copyright rights belonging to the employer. However, to combat any ambiguities in the scope of employment (like in this case where computer software developed by an employee was found to be outside the scope, despite helping the company), it is important to include the employee’s scope of work and a copyright assignment provision in all employment contracts.

 

If the worker is an independent contractor…

If a worker is an independent contractor, there are a few more considerations before you can determine who owns the copyright.

As mentioned above, if the work falls outside of those 9 listed (and outdated) categories in the Copyright Act, then the work is not a work for hire, even if an agreement labels it as such. So, these frequent situations, you must ensure you have a strong, signed independent contractor agreement in place. This means clearly show that work is being commissioned or specifically ordered. Detail what the commissioned work is. Designate that work as a “work made for hire” specifically. And importantly, ensure that you include a specific assignment that clearly states that should the work be found not to be a work for hire under the Copyright Act categories, that the contractor unequivocally and irrevocably assigns any work created during the contract period to the company. This is the best way to protect works, like software and other tech, that fall outside of the Copyright Act categories.

An additional consideration that you must determine is where the hired party is working from. Depending on their location, an independent contractor may be characterized and treated as an employee even if you meant to hire them as a contractor.

 

If an independent contractor is in/has ties to California…

In California Labor Code, Section 3351.5(c), any person who enters into a contract with a company that designates “work for hire” in the agreement is treated as an employee. This means that you are on the hook for California payroll taxes, worker’s compensation insurance, and other costly penalties for any mischaracterization of one or more contractors in the past. If you decide to contract with a web developer in California, or when California law otherwise governs an independent contractor agreement, consult knowledgeable counsel and do not classify something as a “work for hire” in the independent contractor agreement as you would in other situations.

To summarize, here is a flow chart inspired by the U.S. Copyright office materials, that you can use to identify when something will be considered a work for hire.

 

Question 1: Was the work created by an employee?

Yes? Proceed to Question 2.

No? Proceed to Question 3.

 

Question 2: Did the employee create the work while acting within the scope of employment?

Yes? The work is a work made for hire.

No? Proceed to Question 3.

 

Question 3: Is there a written agreement between the commissioning party and the creator of the work that was signed by both parties?

Yes? Proceed to Question 4.

No? The work is not a work made for hire.

 

Question 4: Did the parties expressly agree that the work is a “work made for

hire”?

Yes? Proceed to Question 5.

No? The work is not a work made for hire.

 

Question 5: Does the work fall into one or more of the 9 Copyright Act categories?

Yes? The work is a work made for hire.

No? The work is not a work made for hire.

 

Remember, if something is a work for hire, then the party who is commissioning the work gets the copyright. If something is not a work for hire, then without certain language in the agreement, the creator/contractor gets the copyright.

The best way to hire an independent contractor—like a software developer—while also maintaining your copyright rights in the work is to consult legal counsel about the best language for your situation—ideally before entering into a binding agreement—which will include “work for hire language” and assignment language should any work fall outside of the 9 Copyright Act categories.

 

About Alex Smith

Meet Alex

Alex is an associate attorney at Rockridge, focusing on branding, e-commerce, and ESG. She can be reached at alexandra@rockridgelaw.com.

 

About Kevin Christopher

Kevin is the founder and principal of Rockridge®, a 4x B Corp Best For The World and Real Leaders Top 150 global impact company. He is annually recognized as a SuperLawyer, and has received numerous professional awards ranging from Conscious Company Magazine’s Top Business Leader to the Federal Lab Consortium’s technology license Deal of the Year. He has been profiled in B the Change, Forbes, the Los Angeles Times, Sustainable Brands, and many other media outlets highlighting sustainability and technology leaders. He is widely recognized for his thought leadership and initiatives at the nexus of impact and innovation.

Impact + Innovation Credentials

An entrepreneur-attorney, Kevin’s recently founded Quantiscope, a BARDA DRIVe accelerator launched AI company advancing ML enterprise models for drug discovery, as well as climate tech Calliope Bio, a computational synthetic biology company launched from the Nucleate Activator and advanced through the Berkeley Skydeck accelerator. Kevin’s entrepreneurship career began with Resolute Therapeutics, a CARB-X awardee developing a novel class of broad spectrum antibiotics.

As an ESG leader, Kevin is a 2050 Fellow at the Yale Center for Business and Environment (CBEY), and select member of the World Economic Forum’s Crypto Sustainability Coalition. Kevin  founded Tennessee’s local B Corp network B Tennessee and served as sponsoring counsel to B Academics.

With a background in public-private partnerships, Kevin is a National Institutes of Health (NIH) RadX faculty member, and National Science Foundation (NSF) program evaluator for the Center for Bioplastics and Biocomposites (CB2) as well as the Carnegie Mellon Center for Quantum Computing and Information Technologies (Q-CIT).

Practice Areas

Kevin’s practice areas include:

  • patent and trademark prosecution, licensing and litigation;
  • corporate law, with an emphasis on benefit corporations, socially responsible businesses and high-growth emergent companies;
  • government contracts, with an emphasis on innovation funding;
  • corporate and investor financing; and,
  • technology commercialization.

Contact

To meet with Kevin Christopher, schedule an appointment through Calendly or email him directly at kevin@rockridgelaw.com.

 

 

 

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