Independent Contractors and Employees: A Trap for the Unwary

December 2004

An issue that often arises for technology companies is whether to hire someone as an independent contractor or an employee—and if a person is hired as an independent contractor, whether that person will be viewed by the IRS or State Department of Labor as an employee. A related issue is whether a person hired as an independent contractor will claim a right to employee benefits. In addition to these considerations, the hiring party needs to ensure that its intellectual property rights are protected whether the individual is hired as an independent contractor or employee. Technology companies are not the only types of businesses that face these issues, but they must be particularly cognizant of the implications for intellectual property rights.

In ascertaining whether someone should be hired as an independent contractor or an employee, the most important consideration is the degree of control the hiring party will exercise over that individual. Various states have different tests for independent contractor status, but they all hinge on whether the worker is truly “independent” of the hiring party. If the worker is paid by the job and accountable only for the final results, then he or she will be considered an independent contractor. The IRS test for independent contractor status includes such factors as the right to control and direct services, the right to discharge (or fire), and the furnishing of a workplace and equipment. Another important factor under either the state or IRS tests is whether the individual has other jobs and works for other clients.

Although having a written agreement with an independent contractor that confirms independent contractor status and disclaims any liability for employee benefits is a good idea, it is not determinative. Similarly, hiring someone through an employment agency will not necessarily isolate the hiring party from liability. In the case of Vizcaino v. Microsoft Corporation, 120 F.3d 1006 (9th Cir. 1997), cert. denied, 522 U.S. 1098 (1998), a group of independent contractors claimed that they were entitled to participate in Microsoft’s Employee Stock Purchase Program (ESPP). The court sided with the plaintiffs, despite the fact that many of them had been hired through employment agencies, and most of them had signed Independent Contractor Agreements stating that they were not entitled to employee benefits. According to the court, the right to employee benefits is not a right that can be waived, particularly if the individual is unaware of his or her right to employee benefits at the time of signing.

Microsoft is not the only high-profile company to have been penalized for mischaracterizing individuals as independent contractors rather than employees. Honeywell and AT&T have been involved in similar lawsuits.

With respect to intellectual property rights, the hiring party’s ownership of such rights will differ based on whether the individual is an employee or an independent contractor. If the individual is an employee, then in the absence of a written assignment agreement, the employer will own the copyright but not the patent rights to that individual’s work. The only exception in this regard is if the employee was “hired to invent” the particular invention that he or she developed. The “hired to invent” standard is highly fact-specific and turns on the employer’s ability to produce evidence that the individual was hired to solve a particular problem and that the invention relates to that problem.

If the individual is an independent contractor, then the hiring party will not own either the copyright or the patent rights to that individual’s work, unless the contractor has signed a written assignment agreement. The “work for hire” doctrine applies only in the context of copyright law, and it only applies to certain specific statutory categories (like an atlas, test material, audiovisual work, etc.). Even if the work falls within one of these statutory categories, there must be a written “work for hire” agreement. The vast majority of copyrightable works are excluded from the statutory definition of a work for hire. Software programs and photographs, for example, cannot be “works for hire” because they do not fall within the statutory definition. If the hiring party wants to own the copyright and/or patent rights in works generated or inventions developed by an independent contractor, the hiring party must have the contractor sign a written assignment agreement. The best time to present the contractor with such an agreement is before the engagement begins.

For any company facing these issues, and particularly for technologies companies, it is important to consult with an attorney who understands the distinction between copyright and trademark protection, whose knowledge of the law is current, and who can prepare agreements that will ensure that the hiring party’s interests are protected. Before these agreements can be prepared, the issue of whether the individual is an independent contractor or an employee will have to be resolved.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.