"Work Made for Hire" is little known trap for the unwary in California Independent Contractor Agreements

Independent Contractor Agreements will almost always contain an IP ownership section that provides that the services are a "work made for hire" under the U.S. Copyright Act. This magic language vests copyright ownership in the employer for all work produced by the contractor. That's fine and as it should be, normally.

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HOWEVER, California Unemployment Insurance Code Section 686, provides that if that if those magic words appear in an Independent Contractor Agreement then the contractor will be treated as an employee for unemployment and state disability taxes purposes, regardless that the contractor relationship would clearly be an independent contractor under federal tax law, namely, the contractor works under own direction, pays for own equipment, hired on project basis, etc.  

What are the consequences if “work made for hire” is referenced in an Independent Contractor Agreement?

If you are audited by the California Employment Development Department you will have to pay back taxes, penalties and interest. 

Solutions?

(1) Revise your Independent Contractor Agreements to provide for an assignment of copyright,

(2) only hire independent contractors through a corporation or LLC, or

(3) hire independent contractors from other states. This will still vest ownership in the employer – but without the tax consequences. 

See the law for yourself - it's pretty clear: http://law.onecle.com/california/unemployment-insurance/686.html

Bottom Line

So, you should review and, if necessary, revise your Independent Contractor Agreements.  

 

If you want to discuss this post or any other legal issue with the author,  contact him using the contact form below or via inquiries@galkinlaw.com or by calling (410) 484-2500. We'd like to hear from you!

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William Galkin manages GalkinLaw. Mr. Galkin has dedicated his legal practice to representing Internet, e-commerce, computer technology and new media businesses across the U.S. and around the world. He serves as a trusted adviser to both startup and multinational corporations on their core commercial transactions.

   
                                                                                                         
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