California is a state known for being exceptional and its labor code is no different. While it is commonplace throughout the country for employers to engage independent contractors to produce work on their behalf, under California labor law these contractors are deemed employees for specific purposes. This gives these contractors new right. Although it remains unsettled exactly what this means, it is clear that there are significant issues businesses must consider when engaging an independent contractor. How does this law affect the many creative industries in California that rely on independent contractors?
National Standard: Federal “Work for Hire” Standard
Under the Copyright Act of 1976, the creator of a work owns its copyright. However, the act also includes a provision for “works made for hire”, whereas an employer owns the copyright of works created by its employees. This provision also applies to works created by independent contractors that a business engages to create such works when an independent contractor signs a work made for hire agreement. These contractors are usually individuals with skills the business’ employees may not possess. In this instance, the company owns the copyright. Thus, the work made for hire provision allows businesses to engage independent contractors to create products like its website and freely use them because they own the copyright.
There are various benefits that the provision affords. First and foremost, it allows businesses to engage in brief relationships with independent contractors, allowing both parties a greater deal of flexibility. For example, in filmmaking, some projects can last a few months and require hundreds of copyrighted works. The work made for hire provision allows production companies and various other businesses to fill the needed roles while bypassing the costs and complications of the employer-employee relationship. Generally, by engaging independent contractors businesses are not obligated to provide disability insurance, worker’s compensation insurance, as well as various other employee rights that they would normally afford an employee.
Additionally, the work made for hire provision also allows for longer copyright protection in which the author is given copyright protection for 120 years after creation or 95 years after publication. This is particularly useful for the entertainment industry when so much of its revenues are reliant on archived works, syndication, and licensing.
Work made for hire is therefore a crucial cog in the California economy. Yet, the California Labor Code delivers a blow to one of the provision’s major functions.
How Is California Different?
In California Labor Code Section 3351.5, various guidelines are established to define an employee. Section 3351.5(c) states that:
Any person while engaged by contract for the creation of a specially ordered or commissioned work of authorship in which the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire, as defined in Section 101 of Title 17 of the United States Code, and the ordering or commissioning party obtains ownership of all the rights comprised in the copyright in the work.
These persons mentioned by the subsection include both employees and independent contractors. Pursuant to this section, independent contractors become statutory employees, despite any language in the contracts to the contrary. (Note: All works created by employees while employed are generally considered works made for hire even in the absence of a work made for hire agreement). As such, businesses in California are obligated to providing these independent contractors with various employee rights, specifically disability insurance and workers compensation.
This provision specific to California opens up employers to a host of liabilities that few are aware of. Though this law does not negate work made for hire, it increases the costs of such engagements and further complicates them. Combined with the California the unsettled nature of this law, it becomes clear that it is most sound for employers to consider other means of engaging contractors.
What Now: A Work Around Doctrine
The most vigilant of employers may choose to exclusively engage independent contractors that are entities (i.e. corporations or LLCs) because the Section 3351.5 only applies to independent contractors that are individuals. This solution provides safety, but it is also has limitations. For example, it is unlikely that many of these up and coming talented independent contractors have formed their own entities. In the entertainment industry, much weight is given to up and coming talent, be they music producers, photographers, or on camera talent. These new and often young individuals may not have the means or knowledge to form such entities. Consequently, these individuals become legal risks. This type of talent exists across various different industries as well.
Another popular alternative is to have the creator of the work assign the copyright to the company. This process entails replacing work made for hire language in a contract with an assignment clause that clearly states transfer of ownership. Nonetheless, an assignment clause is only ideal for works that a company will use for a finite period. This is because under Section 203 of the Copyright Act of 1976, the author may terminate the assignment between the 35th and 40th year following the the assignment. Section 203 provides an opportunity for renegotiation of terms of the assignment. Further, the rights under Section 203 cannot be waived by agreement. For the entertainment industry, assignment an option that should be considered with Section 203 in mind since so much of the entertainment industries revenue is based relies on the back catalog of the countless films and television shows of the past. Often these works still generate money after 35 and 40 years. For example, I Love Lucy has been on the air for well over half a century. If I Love Lucy were subject to Section 203, CBS could have potentially lost its rights to the show, or at a minimum would have had to negotiate terms that were much less friendly. Either scenario would be very costly as, based on the number of reruns that are aired, the show surely continues to generate significant revenues between syndication and merchandising.
With these facts in mind, it is important to weigh the costs and benefits of each option prior to entering any agreements between you, as an employer and your next contractor.
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