In California, a Person Who Enters Into a Written Agreement to Produce Works Made for Hire Is an Employee

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by Matthew Swanlund WORK MADE FOR HIRING In California, a person who enters into a written agreement to produce works made for hire is an employee

CALIFORNIA BUSINESSES face a choice advantage of the benefits afforded by the likely only a matter of time until the focus when hiring consultants and independent work-made-for-hire doctrine of the Copyright lands on the practice of hiring independent contractors to create or develop intellectual Act but be treated under California law as contractors to create works made for hire. property. A conflict between federal and state an em ployer, or they may sacrifice the benefits Generally, under the Copyright Act, the law could have critical operational and legal of the work-made-for-hire doctrine yet main- creator of the creative work is the author of consequences. The use of work-made-for- tain the independent contractor status of its that work and therefore the owner of the hire agreements by businesses engaging cre- creative workers. Whichever decision the busi- copyright in that work.4 However, if the creative independent contractors is well estab- ness makes could have lasting legal and prac- ator is an employee of the business and acting lished. However, California businesses may tical consequences. within the scope of employment when the be violating California state law when engag- Oddly, this conflict of law is not a new creator creates the work of authorship, then ing creative independent contractors in work- issue. In fact, it was raised in legal journals the employer owns the copyright by operation made-for-hire agreements. Similarly, artists, in 1984 and 1995.2 However, there appears of federal law.5 The Copyright Act also pro- designers, programmers, and other creative to be very little of record in the past 20 years. vides a specific, limited mechanism in which individuals may be unknowingly waiving There is a dearth of federal and state case an independent contractor can be treated important rights and remedies granted to law interpreting this conflict, and there are similarly to an employee with regard to the them under California state law. no California Labor Department opinions creation of intellectual property. If an inde- In 1982, the California legislature enacted indicating any intent to enforce the California pendent contractor creates the work of au - Labor Code Section 3351.5(c) and Unem - laws. This has led to a general ignorance of thorship as a work made for hire, the business ployment Insurance Code Sections 686 and the laws in both the creative and legal com- 621(d), which directly address the express munities. With the increasing scrutiny on the Matthew Swanlund is the founder and principal terms of the U.S. Copyright Act regarding classification of independent contractors and of Aesthetic Legal, a boutique Los Angeles business creative works made for hire.1 California employees under California law, as evidenced law firm representing creative businesses, indi- businesses face a critical decision in dealing by the recent decisions involving Uber drivers vidual artists, performers, designers, advertisers, with this potential conflict. They may take and unpaid interns at Fox Searchlight,3 it is and creative entrepreneurs.

Los Angeles Lawyer March 2016 25 that engages the creator is deemed to be the the work, 3) to distribute copies of the work, comprised in the copyright in the work. author of the work and therefore owns the 4) to perform the work publicly, and 5) to The ordering or commissioning party underlying copyright in the work.6 display the work publicly.8 This list makes shall be the employer of the author of For works created after January 1, 1978, clear why it is imperative that the business the work for the purposes of this part. the Copyright Act defines a “work made for obtain and retain copyright ownership in the Unemployment Insurance Code Section hire” as, among other things, a work specially creative work product that independent con- 621(d) defines “employee” with reference to ordered or commissioned for use as a contractors create or develop. Section 686. Similarly, Section 3351.5(c) of tribution to a collective work, as a part of a the Labor Code contains a similar definition California Labor and Unemployment motion picture or other audiovisual work, of “employee” to include someone entering Insurance Codes or as a compilation if the parties expressly into written agreements to produce works agree in a written instrument that the work In California, however, there are state statutes made for hire. Therefore, if a California busi- is a work made for hire. A work created by that effectively negate the work-made-for- ness engages an independent contractor, yet an independent contractor can be a work hire provision of the Copyright Act.9 Under has a written agreement stating that any intel- An employer under California law has an afﬁrmative legal obligation to secure workers’ compensation insurance covering employees before any agreement is even commenc ed. This law is deemed to be violated at the moment the work-made-for-hire agreement is executed without having the insurance. made for hire only if it falls within one of California Labor Code Section 3351.5(c), a lectual property created by the independent the listed categories and there is a written person who creates a work of authorship contractor is a work made for hire, the busi- agreement between parties specifying that under a contract that expressly provides that ness will be deemed under California law to the work is a work made for hire.7 A work- the work is to be considered a work made be an employer, and the independent con- made-for-hire contract provision serves to for hire, is an employee.10 Similarly, under tractor will be deemed to be an employee. transfer copyright to the business that engages Cal ifornia Unemployment Insurance Code What are the practical ramifications if an the independent contractor without the re - Sections 68611 and 621(d),12 a party com- independent contractor is deemed to be a quirement to formally hire the independent missioning a work under a contract that ex - statutory employee, and the business is deemed contractor as an employee. This would apply pressly provides that the work is to be con- to be a statutory employer, under California to an actor hired by a production company sidered a work made for hire, is an em ployer.13 law? First, employers must register with the to act in a film or to a studio musician hired Most businesses engage independent con- Employment Development Depart ment (EDD) by a record producer to play on a song record- tractors in work-made-for-hire engagements within 15 days after paying an employee in ing. However, this also applies to graphic to secure copyright ownership of the work excess of $100 in wages.14 Second, employers designers hired to create company logos, of authorship without affording the creator must report new employees within 20 days marketing materials, or websites; or to pro- the job, wage, or benefit security of a formal of the employee’s start-of-work date. Third, grammers or software developers hired to employee. employees must be provided with pamphlets create computer code or design apps or wid- California businesses may well continue on employee with holdings, unemployment gets. Extending this even further, it could to take advantage of the work-made-for-hire insurance (UI), state disability insurance (SDI), also include photographers, set designers, benefits of the Copyright Act and secure and paid family leave (PFL).15 State and federal visual artists and camera operators. copyright ownership in the creative work regulations require employers to display var- Because copyright ownership is initially product. However, the California Labor and ious posters and notices to inform their established at the time the creative work of Unemployment Insurance Codes are clear— employees of certain laws and regulations authorship is created, creative businesses businesses that do so will be deemed employ- pertaining to employment and working con- need to be vigilant in ensuring that copyright ers of the independent contractors who create ditions such as UI,16 SDI,17 and PFL18 claims is properly secured. Customarily, a business works made for hire. Section 686 of the and benefits information. Employers must acquires the work of authorship created by California Unemployment Insurance Code then make UI, employment training tax the independent contractor because it intends specifically defines “employer” as: (ETT), SDI, and California personal income to integrate it into a motion picture, television [A]ny person contracting for the cre- tax (PIT) payroll tax deposit (DE 88) pay- show, internet product, software program or ation of a specially ordered or com- ments. Subsequently, employers must file a application; or incorporate it into marketing missioned work of authorship when Quarterly Contribution Return and Report materials, websites, and logos. Therefore, the parties expressly agree in a written of Wages (DE 9) form to reconcile the tax having the ability to reproduce, sell, distribute, instrument signed by them that the and withholding amounts with the DE 88 or license these materials is of utmost impor- work shall be considered a work made deposits for the quarter.19 Finally, employers tance to a business. The Copyright Act grants for hire, as defined in Section 101 of must file a Quarterly Con tribution Return owners of copyright five distinct exclusive Title 17 of the United States Code, and and Report of Wages (Contin uation) (DE 9C) rights: 1) to reproduce the copyrighted work, the ordering or commissioning party form to report total subject wages paid, PIT 2) to prepare derivative works based upon obtains ownership of all of the rights wages, and PIT withheld for each employee

26 Los Angeles Lawyer March 2016 MCLE Test No. 255 MCLE Answer Sheet #255 WORK MADE FOR HIRING The Los Angeles County Bar Association certifies that this activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of 1 hour. You may take tests from back Name issues online at http://www.lacba.org/mcleselftests. Law Firm/Organization 1. Without a written work-made-for-hire agreement, ployee as an independent contractor is that the em - the hiring business is the author of the creative work ployer may wind up paying all the back employment Address and the owner of the underlying copyright. taxes, including the employee’s share, plus interest City True. and penalties. False. True. State/Zip 2. If the creator of a work is an employee of the business False. E-mail and acting within the scope of employment when the 11. Copyright ownership can be transferred or assigned Phone creator creates the work, then the employer automati- orally or in a written document. State Bar # cally owns the copyright by operation of federal law. True. True. False. INSTRUCTIONS FOR OBTAINING MCLE CREDITS False. 12. A work of authorship generally created after January 1. Study the MCLE article in this issue. 3. For works created after January 1, 1978, the Copyright 1, 1978, by a single author is protected by copyright for 2. Answer the test questions opposite by marking Act defines a “work made for hire” as a work specially an initial term of 28 years, with one extension of 28 the appropriate boxes below. Each question ordered or commissioned for use as a contribution to years. has only one answer. Photocopies of this a collective work, as a part of a motion picture or other True. answer sheet may be submitted; however, this audiovisual work, or as a compilation, if the parties False. form should not be enlarged or reduced. expressly agree orally that the work is a work made 13. The Copyright Act of 1976 allows certain authors 3. Mail the answer sheet and the $20 testing fee for hire. who have transferred copyright by contract or otherwise ($25 for non-LACBA members) to: True. to terminate the copyright transfer and regain those Los Angeles Lawyer False. transferred rights after 35 years. MCLE Test 4. A work created by an independent contractor can True. P.O. Box 55020 Los Angeles, CA 90055 be a work made for hire only if it falls within one of the False. listed categories and there is a written agreement 14. The copyright termination of transfer right can be Make checks payable to Los Angeles Lawyer. between parties specifying that the work is a work made waived only in a written contract by the author. 4. Within six weeks, Los Angeles Lawyer will for hire. True. return your test with the correct answers, a rationale for the correct answers, and a True. False. certiﬁcate verifying the MCLE credit you earned False. 15. Corporations and limited liability company entities through this self-assessment activity. 5. Under California law, an independent contractor who are not considered employees under the California 5. For future reference, please retain the MCLE creates a work of authorship under a contract that statutes for the purposes of works made for hire as the test materials returned to you. expressly provides that the work is to be considered a creators must be individuals. ANSWERS work made for hire is an employee of the business. True. True. False. Mark your answers to the test by checking the appropriate boxes below. Each question has only False. 16. Congress intended to preempt the California statutes one answer. 6. Under the California Unemployment Insurance Code, with the Copyright Act of 1976 regarding works made a business commissioning a work under a contract that for hire. 1. n True n False expressly provides that the work is to be considered a True. 2. n True n False work made for hire is an employer. False. 3. n True n False True. 17. There is an extensive and conflicting history of False. federal and state case law interpreting the conflict 4. n True n False 7. Under California law, employer businesses are not between the Copyright Act and the California statutes 5. n True n False required to make unemployment insurance, employ- regarding works made for hire. 6. n True n False ment training tax, state disability insurance, and True. 7. n True n False California personal income tax, and payroll tax deposit False. 8. n True n False payments for their independent contractors. 18. Copyright ownership consists of the two distinct True. exclusive rights to reproduce and distribute a creative 9. n True n False False. work. 10. n True n False 8. An employer under California law has an affirmative True. 11. n True n False legal obligation to secure workers’ compensation insur- False. 12. n True n False ance covering employees after services have com- 19. The provisions of the California Labor Code only 13. n True n False menced. apply to California residents who have relationships 14. n True n False True. with California-based businesses. False. True. 15. n True n False 9. Only a labor commissioner has the authority to issue False. 16. n True n False a stop order against any business that is discovered to 20. There are only civil penalties for a business’s failure 17. n True n False be unlawfully uninsured for workers’ compensation. to secure workers’ compensation insurance for its 18. n True n False True. employees. 19. n True n False False. True. 10. The primary problem with misclassifying an em - False. 20. n True n False

Los Angeles Lawyer March 2016 27 for each quarter. Failure to complete these the independent contractor relationship with for-hire doctrine while maintaining inde - steps on time may result in penalty and inter- its workers? Under the Copyright Act, own- pendent contractor status for its creative est charges.20 ership of the copyright in any work of author- work ers? A novel argument that has yet to An employer under California law has ship created by the independent contractor be tested would be to have the business en - an affirmative legal obligation to secure work- would immediately vest in the independent gage the creator in a formal work-made-for- ers’ compensation insurance covering employ- contractor. This is problematic if the business hire engagement but to specify that the cre- ees before any agreement is even commenc - ultimately desires to use the intellectual prop- ator retained some limited rights in and to ed.21 This law is deemed to be violated at erty in a way that involves the display, repro- the copyright interest. Section 3351.5(c) of the moment the work-made-for-hire agree- duction, distribution, performance, or cre- the Labor Code specifically defines “em - ment is executed without having the insur- ation of derivative works of the copyrighted ployee” to include: ance.22 Injury to an employee during the term work of authorship. [a]ny person while engaged by contract of engagement is not the trigger for the insur- In an attempt to secure copyright owner- for the creation of a specially ordered ance requirement. Failure by an employer ship in the creative work product of its inde- or commissioned work of authorship who knew, or because of knowledge or expe- pendent contractors, some businesses have in which the parties expressly agree rience should be reasonably expected to have started inserting a provision in the independent in a written instrument signed by them known, of the obligation to secure the pay- contractor agreement that assigns all copyright that the work shall be considered a ment of compensation, is a misdemeanor created in the work of authorship to the busi- work made for hire, as defined in Sec- punishable by imprisonment in the county ness. Copyright ownership must be transferred tion 101 of Title 17 of the United States jail for up to one year, or by a fine of up to in a written document and can be transferred Code, and the ordering or commis- $10,000, or both.23 to the business as an alternative means of sioning party obtains ownership of all Further, the California Department of ensuring that the business obtains copyright the rights comprised in the copyright In surance provides that employers that fail ownership.30 A business could also elect to in the work. to purchase workers’ compensation insurance insert a license provision which would transfer Strictly interpreted, this appears to require are in violation of the California Labor a limited right to the business to use the cre- that the business obtain all the copyrights in Code.24 The director of the Department of ative work product for a specific limited pur- and to the creative work product. As copy- Industrial Relations has the authority to issue pose or duration of time. These options are right consists of a bundle of five distinct a stop order against any business that is dis- both effective in transferring the copyright, exclusive rights,35 it may be possible to have covered to be unlawfully uninsured for work- or a portion thereof, from the independent the creator retain ownership or a license in ers’ compensation. A stop order will close contractor to the business. A work of author- a limited copyright interest as a means to down business operations until workers’ com- ship generally created by a single author is keep the business in compliance with the pensation insurance is secured. In addition protected by copyright for the life of the orig- Labor Code as well as obtaining copyright to issuing a stop order, the director can assess inal author plus 70 years,31 so there could be in the creative work from the independent fines based on whether a business was unlaw- sufficient benefits for a business to secure the contractor. For example, the terms of the fully uninsured through normal investigation copyright by virtue of an assignment or license. work-made-for-hire agreement could provide or through the filing of an injured worker’s If the original creator were to die a day after that the creator retains a license to reproduce claim with the Uninsured Employers Benefits making the assignment, the copyright would his or her contribution to the work for non- Trust Fund.25 Failure to comply with a stop still last for 70 years, which may or may not commercial promotional purposes. As yet no order can result in a $10,000 fine, and the be sufficient. case law interprets this approach; it is un- fine for failure to carry workers’ compensation However, the significant risk with this c lear if a business would be successful with insurance is $1,000 per employee. Businesses approach is that copyright law provides that this approach. can also be prosecuted for insurance fraud assignments of copyright and licenses granted Businesses could attempt to make the con- for willful failure to secure workers’ com- in a work made by the author can be termi- tract subject to the law of a state other than pensation insurance as prescribed by law.26 nated under certain circumstances.32 The California. That could give rise to the argu- If a business elects not to purchase workers’ Copy right Act of 1976 allows certain authors ment that neither the Labor Code nor the compensation insurance, the business opens who have transferred copyright by contract Unemployment Insurance Code applies to itself up to potential liability lawsuits from or otherwise to regain those transferred rights the parties of the contract. However, these injured employees. Further, a creative inde- after 35 years.33 If an independent contractor laws may apply when either the creator or pendent contractor may be deemed to be an is able to regain the copyright in the creative business are located in California.36 They employee for other purposes, including matters work after 35 years, it could serve a severe would apply if the business is located in Cali - related to payroll taxes.27 The business may blow to a business if the work turns out to fornia and engaging the services of a creator also potentially find itself exposed to claims be highly valuable or critically integrated residing in another state or even another by such employees for benefits offered by the into the intellectual property of the business. country, or if the creator is located in Cali - business to its other employees.28 The primary Furthermore, this termination of transfer fornia and the business is located in another problem with misclassifying an employee as right cannot be waived in a contract, so a state or even another country.37 This approach an independent contractor is that the employer business cannot include a waiver clause in does not appear to give comfort to California may wind up paying all the back employment its contract with an independent contractor.34 creative businesses. taxes, including the employee’s share, plus While businesses may believe they are achiev- Businesses could also make the argument interest and penalties.29 ing the same end result as having a work- that the supremacy clause would appear to made-for-hire agreement, they are only guar- apply, which would rule in favor of the Copy - Maintaining Independent Contractor anteeing control of the copyright for 35 years. right Act.38 The clause establishes that the Status U.S. Constitution, federal laws made pur- Compliance What if a business merely removes the work- suant to it, and treaties made under its made-for-hire language from the independent Is it possible for a business to secure copy - authority constitute the supreme law of the contractor agreement in an effort to maintain right through the benefits of the work-made- land.39 Preemption can be either express or

28 Los Angeles Lawyer March 2016 implied. If Congress expressly preempts state by an independent contractor, and maintain .hollywoodreporter.com/blogs/thr-esq. law, the only question for courts becomes independent contractor status for the creative 4 17 U.S.C. §201(a). 5 17 U.S.C. §201(b). determining whether the challenged state worker. One effective method to accomplish 6 Id. law is one that the federal law is intended this is for a business to require any indepen- 7 Id. to preempt. In this case, the current Copy - dent contractor to enter into the work-made- 8 See 17 U.S.C. §106. right Act was en acted in 1976.40 The Cal - for-hire agreement as a limited liability com- 9 See LAB. CODE §3351.5(c); see also UNEMP. INS. ifornia Labor and Unemployment Insurance pany or corporate entity, and not in an in - CODE §§621(d), 686. 10 Codes were enacted in 1982.41 Therefore, dividual capacity. Custom arily, an artist or LAB. CODE §3351.5. (The definition of “employee” includes a person engaged by contract for the creation there does not appear to be any intended creative individual will enter into agreements of a specially ordered or commissioned work of author- pre emption by Congress. Implied preemption in its corporate capacity, which then agrees ship in which the parties agree in writing that the presents a more difficult issue because the to provide the services of the individual pur- work shall be considered a work made for hire as state laws in question do not appear to suant to the independent contractor agree- defined in 17 U.S.C. §101.). 11 directly conflict with federal law. To borrow ment. Corporations and limited liability com- UNEMP. INS. CODE §686 (definition of “employer”). 12 UNEMP. INS. CODE §621 (definition of “employee”). a phrase from Pennsylvania v. Nelson, we pany entities are not considered employees 13 Id. must then look to whether Congress has under the California statutes for the purposes 14 See 2016 California Employer’s Guide, available “occupied the field” in which the state is of works made for hire, as the creators must at http://www.edd.ca.gov/pdf_pub_ctr/de44.pdf. attempting to regulate, or whether a state be individuals.45 Therefore, the terms of the 15 Id. 16 law directly conflicts with federal law, or California Labor and Unemployment Ins ur - Notice to Employees: Unemployment Insurance/ Disability Insurance Benefits (DE 1857A) (poster ad - whether enforcement of the state law might ance Codes relating to works made for hire vising employees of their rights to benefits). 42 frustrate federal purposes. Federal occu- do not apply to limited liability companies 17 Disability Insurance Provisions (DE 2515) (brochure pation of the field occurs when there is no and corporations.46 While many creative pro- regarding nonwork-related illness, injury, pregnancy, room left for state regulation. Courts will fessionals already operate loan-out companies, or childbirth), available at http://www.edd.ca.gov look to the pervasiveness of the federal reg- it may pose a burden to require smaller inde- /pdf_pub_ctr/de2515.pdf. 18 ulation, the federal interest at stake, and the pendent contractors to form a limited liability Paid Family Leave Benefits (DE 2511) (brochure), available at (http://www.edd.ca.gov/pdf_pub_ctr danger of frustration of federal goals in mak- company or corporation as a precondition /de2511.pdf). ing the determination as to whether a chal- to being awarded an independent contractor 19 Id. lenged state law can stand.43 engagement. How ever, in light of the risks 20 Id. As there is no case law that addresses this associated with either lack of complete own- 21 LAB. CODE §3700. 22 issue, it is unclear how a court may rule. A ership or copyright or the obligations of treat- Id. 23 Id. case could be made that the purpose of the ing the creative worker as an employee, this 24 Id. work-made-for-hire doctrine under the precondition may be a necessity. 25 Id. Copyright Act is to provide businesses with California businesses face a difficult choice 26 Id. a mechanism to obtain copyright ownership when it comes to hiring consultants and inde- 27 See 26 I.R.C. §§3101-3128. 28 in a work of authorship without the require- pendent contractors, especially if those con- Id. 29 Id. ment to formally hire the creator as an sultants and independent contractors are cre- 30 17 U.S.C. §204. employee. Under that argument, the state ating or developing intellectual property as 31 17 U.S.C. §302(a). laws would frustrate that purpose because part of their services. California businesses 32 17 U.S.C. §203. it eliminates the possibility of a business face a critical decision in dealing with this 33 Id. engaging a creative independent contractor conflict. Whichever decision the business 34 Id. 35 See 17 U.S.C. §106. in a work-made-for-hire agreement. A case makes could have lasting legal and practical 36 Narayan v. EGL, Inc., 616 F. 3d 895 (2010) (pro- could also be made that the state laws only consequences. As unpleasant and daunting visions of the Labor Code may apply to California add certain employment obligations on a as it may appear, California creative businesses residents who have relationships with out-of-state business and otherwise do not affect copyright are best served to enter into work-made-for- companies). ownership in the work of authorship. When hire agreements only with corporate or limited 37 UNEMP. INS. CODE §§602, 603 (tests to determine rules or regulations do not clearly state liability company entities. This will ensure if services of employees are considered subject to California law for unemployment insurance, employ- whether or not preemption should apply, the that the business obtains the entire copyright ment training tax, and state disability insurance). U.S. Supreme Court has tried to follow leg- ownership interest in any intellectual property 38 U.S. CONST., art. VI, §2. islative intent and shown preference for inter- created by the contractor or employee for the 39 Id. pretations that avoid the preemption of state full term of the copyright interest and will 40 Copyright Act of 1976, PUB. L. NO. 94-553, 90 laws.44 Until a court rules on this potential not trigger compliance requirements under Stat. 2541 (Oct. 19, 1976). 41 See LAB. CODE §3351.5(c); See also UNEMPLOYMENT preemption issue, the uncertainty for Cali - California employment law. n INS. CODE §§621(d), 686. fornia creative businesses will continue. 42 See Pennsylvania v. Nelson, 350 U.S. 497 (1956). 1 See LAB. CODE §3351.5(c); UNEMP. INS. CODE 43 Id. Loan-Out Company §§621(d), 686. 44 Id. 45 In the case of many creative professionals, it 2 See Peter H. Karlen, Artists Rights Today, 4 CAL. UNEMP. INS. CODE §623 (The term “employee” LAWYER 23 (1984); Joseph B. Anderson, The Work does not include any member of a limited liability is not unusual to have a loan-out shell com- Made for Hire Doctrine and California Recording company that is treated as a partnership for federal pany, either a limited liability company or Contracts: A Recipe for Disaster, 17 HASTINGS COMM. income tax purposes.); UNEMP. INS. CODE §621(f) corporation, for tax and liability purposes. & ENT. L.J. 587 (1995). (“Employee” includes any member of a limited liab - This loan-out company provides limited lia- 3 See, e.g., Heather Somerville, Former Uber driver i l ity company that is treated as a corporation for bility and tax advantages to the creative pro- was an employee, rules California department (Sept. federal income tax purposes.) UNEMP. INS. CODE §622 fessional, but it could also resolve this conflict 9, 2015), available at http://www.reuters.com; (“Employee” does not include a director of a corpo- Glatt v. Fox Searchlight Pictures, No. 13-4478 (2d ration or association performing services in his or her of laws by providing creative businesses with Cir. July 2, 2015); Eriq Gardner, Interns’ Big Vic - capacity as a director.). an opportunity to obtain complete copyright tory Against Fox Vacated by Appeals Court, 46 Id. See also LAB. CODE §§3354, 3351(d), 3715 ownership of a work of authorship created THR, ESQ. (July 2, 2015), available at http://www (b).

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