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WORK MADE FOR HIRE AGREEMENTS UNDER CALIFORNIA LAW

Ivan Hoffman, B.A., J.D.

         Although this article is about California law, the said laws may have a wider reach than merely those parties actually located in California.  More about this below.  So before you click off, realize that this situation may apply to you no matter where you are located. 

          Here is the situation: 

          Party 1 wants to engage the services of a graphic artist, book illustrator, song writer, recording artist, web designer, writer, ghostwriter, editor or other such party creating copyrightable work.  For the sake of simplicity, all these parties will be referred to as “the creator.” 

          Needless to say, it is imperative that Party 1 have a valid, thorough, written and signed agreement, signed before any work is done and any money paid.  Without such an agreement, Party 1 cannot acquire exclusive rights to the work of the creator and without exclusive rights, all parties have a legal mess on their hands.  Read “The Fundamental Principle Under the United States Copyright Law,” “A Legal Nightmare: The Unwritten License” and “A Legal Nightmare: The Unwritten License- Further Issues” on my site.   

          There are 2 choices for this kind of agreement: an exclusive transfer of all rights to Party 1 or a work made for hire agreement, assuming the work qualifies as a work made for hire.  Read “Work Made for Hire Agreements” on my site.  (see more below)  

          However, under California law (Labor Code section 3351.5 (c) and Unemployment Insurance Code sections 621 (d) and 686), if a party enters into a work made for hire agreement, that party, the creator in this example, is treated as Party 1’s employee for purposes of workers compensation laws and for unemployment insurance laws.  

         This means that Party 1 must, underscore “must,” have workers compensation insurance covering the creator and otherwise comply with the Labor Code before the agreement is signed and before any work is done or any payment made.  Party 1 must also comply with all the provisions of the Unemployment Insurance Code. 

          The failure to obtain workers compensation insurance or otherwise comply with the Labor Code and failure comply with the Unemployment Insurance Code is a crime under California law.  The crime is committed when the work made for hire agreement is entered into and has nothing whatever to do with whether the creator is injured or dies or is fired during the engagement, except that for purposes of unemployment. 

Labor Code section 3700.5 provides in part:

(a) The failure to secure the payment of compensation as required by this article by one who knew, or because of his or her knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment of compensation, is a misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine of up to double the amount of premium, as determined by the court, that would otherwise have been due to secure the payment of compensation during the time compensation was not secured, but not less than ten thousand dollars ($10,000), or by both that imprisonment and fine.

          Similar provisions exist as to failure to comply with the Unemployment Insurance Code.    (Unemployment Insurance Code section 2101 and following sections) 

          There are substantial fines and penalties in addition to possible criminal violations for failure to have workers compensation insurance.  According to the Department of Industrial Relations https://www.dir.ca.gov/dlse/FAQ-Workers%20Compensation.pdf: 

Q. Do I have to have Workers’ Compensation Insurance?  

A. Yes, every California employer using employee labor, including family members, must purchase Workers’ Compensation Insurance (Labor Code Section 3700). If you fail to have Workers’ Compensation Insurance for your employees, it can be expensive as the DLSE is required to issue and serve a stop order/penalty assessment prohibiting further use of employee labor until you do purchase Workers’ Compensation Insurance. Effective January 1, 2011, the penalty assessed for failure to have Workers’ Compensation Insurance is based upon the greater of (1) twice the amount the employer would have paid in workers’ compensation insurance premiums during the period the employer was uninsured, or (2) $1,500 per employee. However, there are exceptions for partnerships, if the only persons performing labor are the partners and corporations where the corporate officers are the sole shareholders; in which case, the corporation, officers and directors come under the Workers’ Compensation provisions only by election

           and

Such Stop Order shall inform the employer that failure to observe same constitutes a misdemeanor, and if the employer is convicted thereof, the court is required to impose a mandatory jail sentence in the county jail of not less than ten (10) days and a fine of not less than three hundred ($300) dollars. https://www.dir.ca.gov/t8/15572.html 

          Furthermore, according to the California Department of Insurance http://www.insurance.ca.gov/01-consumers/105-type/95-guides/09-comm/WorkersCompensation.cfm#whathappensifanemployerfailsto, 

What Happens If an Employer Fails to Purchase Workers' Compensation Insurance? 

Employers that fail to purchase workers' compensation insurance are in violation of the California Labor Code.  The Division of Labor Standards Enforcement (DLSE) has the authority to issue a stop order against any employer that is discovered to be unlawfully uninsured for workers' compensation.  A stop order closes down business operations until workers' compensation insurance is secured.  Besides issuing a stop order, the DLSE can assess fines based on whether an employer has been discovered to be unlawfully uninsured through normal investigation or through the filing of an injured workers' claim with the Uninsured Employers Benefit Trust Fund.  

Failing to have worker’s’ compensation coverage is a criminal offense. Section 3700.5 of the California Labor Code makes it a misdemeanor punishable by either imprisonment in the county jail for up to one year, a fine of up to double the amount of workers’ compensation premium that would have been necessary to secure coverage during the illegally uninsured period (in an amount not less than $10,000), or both. Additionally, the state issues penalties of up to $100,000 against illegally uninsured employers. If an employee gets hurt or sick because of work and the employer is not insured, the employer is responsible for paying all bills related to the injury or illness. Employers may want to contact the Information and Assistance officer at their local DWC office for further information. Workers’ compensation benefits are the exclusive remedy for injuries suffered on the job only when the employer is properly insured. 

If an employer is illegally uninsured and an employee  gets sick or hurt because of work, the employee can file a civil action against the employer in addition to filing a workers’ compensation claim. 

Employers that fail to pay required benefits may also be liable to reimburse the Uninsured Employers’ Benefit Trust Fund. Employers can be prosecuted for insurance fraud for the willful failure to secure workers’ compensation insurance as required by law. The CDI works closely with other agencies to investigate potential instances of fraud and also works with local district attorneys’ offices to prosecute those caught violating the law.

          Similar provisions exist as to failure to comply with the Unemployment Insurance Code.    (Unemployment Insurance Code section 2101 and following sections) 

          Further, a party, a creator in this example, granting rights under a work made for hire agreement may be an employee for other purposes as well including but not limited to matters related to taxes and the withholding of the same and other potential liability issues under California law as well as under federal law and perhaps under other laws. 

          The sum of all this is that if the agreement is a work made for hire agreement, Party 1 is the creator’s employer for purposes of both workers compensation insurance and unemployment insurance and perhaps other purposes as well and Party 1 must have the required workers compensation insurance and must comply with all the provisions of the Labor Code and Unemployment Insurance Code
 

Why It Matters 

          The material functional importance of work made for hire versus exclusive transfer not as a work made for hire relates to the ability of the creator to terminate the transfer of rights at a time some 35 or 40 years down the road.   So the issue for Party 1 is whether the work of the creator will have value at that time.  Some work will not likely have such value at that time, such as programming or web design work.  However, some work, such as logos including those used for trademark purposes, illustrations for children’s books, and other works may have great value at that time. 

          If a work is done as a work made for hire, the creator has no rights to terminate the transfer. 

          The term of copyright is somewhat longer for a work made for hire. 

          Therefore, the issue becomes a significant one. 

My Opinion 

          It appears that these laws do not appear to protect the creator, the party for whom the laws were ostensibly designed to protect, and indeed appear to put the creator in a competitive disadvantage.  In the world of the Internet, creators of all sorts are in abundant supply.  There is no reason to engage a creator living in California (see discussion below about the potential reach of these statutes) when Party 1 can shop the job everywhere including in other countries.  So given that competition and given the added expense and trouble and time consumption to get workers compensation insurance and comply with all the provisions of the Labor Code and Unemployment Insurance Code just for this one job, Party 1 would be foolish to engage the creator living in California. 

The Long Arm Reach of These Laws 

         Clearly these laws apply to Party 1 and the creator if both are located in California.  But the laws may also apply to: 

         1. Party 1 located in California engaging the services of the creator residing in another state or even another country. 

 

         2.  The creator located in California being engaged by Party 1 located in another state or even another country. 

          See http://www.insurance.ca.gov/01-consumers/105-type/95-guides/09-comm/WorkersCompensation.cfm#whoisrequiredtopurchase (as but one example as to the workers compensation statute) 

          The reach of such laws is not clear and thus the very lack of clarity should make Party 1, no matter where located, hesitant to engage a California creator.  And if Party 1 is located in California, Party 1 should be hesitant to engage a creator anywhere. 

Conclusion 

Never enter into a work made for hire agreement without consulting an attorney with experience in these matters. 

Read: AB5 This is an essential part of this discussion.

Copyright © 2008, 2019 Ivan Hoffman.  All Rights Reserved. 

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States laws but the laws of other countries may be different.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation. 

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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.

 


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