The Perils of Employee Classification
An ounce of prevention and all that…
One of the battles employment attorneys constantly struggle with is raising
awareness about the consequences of misclassifying workers that are technically
employees as independent contractors. While these attorneys are concerned about
possible penalties from the government or lawsuits from employees, IP attorneys
are concerned with a possibly more serious issue – who owns potential “crown
jewel” assets of the company.
At the start, it may seem simple and less costly to hire someone as an
independent contractor. Classifying someone as an independent contractor versus
an employee is enticing to small employers in particular, as the company is not
responsible for paying the employers’ share of Social Security taxes, state and
local payroll taxes, unemployment, overtime and potentially offering the
workers benefits equal to the company’s other “employees.” However,
misclassification of employees is costly and not necessarily reserved for small
employers: Time Warner, Microsoft and FedEX have all paid millions, if not
hundreds of millions, due to incorrectly labeling workers as independent contractors.
As if potential fines and damages are not compelling reasons to pay
attention to this issue, there could also be catastrophic effects on a
company’s intellectual property rights. We’ve discussed (in a previous column)
the issues a company can face when they have another company create or develop
creative works on behalf of the company (logos, website content and design, and
source code for software developed for the company are examples).
These same issues are present when a company labels a worker as an
independent contractor versus an employee. Under copyright law, when an
employee creates a creative work in the course of their employment, the
employer is automatically considered the author of the work and holds the
rights to the work.
The opposite is true if an independent contractor created the works, that
is, the independent contractor is the author and holds the rights to the works.
Furthermore, the rights can only be transferred by a written assignment
document signed by both parties. If the independent contractor agreement
between the company and worker (assuming a written agreement exists) does not
contain provisions assigning the ownership of the copyrights to works created
by the worker, the company is most likely out of luck. Additionally, even if
the worker is clearly an employee under the law, the company will most likely
be estopped from arguing that the worker is anything other than an independent
contractor.
This can be of serious consequence for a company that treats workers that
probably should be employees as independent contractors, especially when the
workers are responsible for creating intellectual property that is protected
under copyright law, such as computer software or the copyrights to the
company’s logo. A decision to save a few bucks on taxes could very well mean
that a company is not the owner of key technology that its business is based
upon or potentially worse — in certain situations the contractor may be able to
license the works to the company’s competitors.
None of this confusion or potential loss of valuable intellectual property
need ever happen, of course. Have this conversation internally and with a
well-versed IP attorney at the start of hiring and staffing; revisit it when
replacing personnel, particularly creative personnel.
Time Warner’s and Microsoft’s experiences illustrate that the time-worn
adage remains true: An ounce of prevention and all that.
Peter Lemire is a founding member of the
intellectual property law boutique, Leyendecker & Lemire. Leyendecker &
Lemire specialize in patents, trademarks and related complex civil litigation.
Peter Lemire can be reached directly at 303.768.0641 or peter@coloradoiplaw.com. Visit www.coloradoiplaw.com for further information.