Producer beware: “Work Made For Hire” agreement creates a “statutory employee” relationship.

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Recently, employment practices in the entertainment industry have been under closer scrutiny, as several major studies have been targeted in class-action lawsuits by interns who believe they should've been paid minimum wage, received overtime, benefits, etc., as employees. Using interns as unpaid labor is a long-established practice around Hollywood, so these recent lawsuits have everybody paying close attention.

Another common practice in Hollywood is to treat many of the creative personnel in the film, television and music business as Independent Contractors, but requiring that the creative work they do belong to those who hire them, under the copyright act's definition of “work made for hire”. (see Title 17 United States Code, Section 101)

For the past few years, however, California State law has presented a sticky little problem with this approach. So far, there hasn't been much discussion about it, but I think it's only a matter of time.

Did you know?

Under California law, a party transferring rights to any work made under a work for hire agreement is an employee for purposes of workers’ compensation and unemployment insurance.

The Employment Development Department of the State of California (EDD) has taken the position that “work made for hire” language included in an agreement that otherwise provides for consultant or independent contractor services, nonetheless renders the contractor a statutory employee. In support of this, the EDD references California Unemployment Insurance Code Sections 686 and 621(d) and California Labor Code Section 3351.5(c), which provide as follows:

“‘Employer’ also means any person contracting for the creation of a specially ordered or commissioned work of authorship when the parties expressly agree in 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 U.S. Code, and the ordering or commissioning party obtains ownership of all of the rights comprised in the copyright in the work. The ordering or commissioning party shall be the employer of the author of the work for the purposes of this part.” Cal. Unemp. Ins. Code Section 686.

“‘Employee’ means all of the following:… (d) Any individual who is an employee pursuant to Section 601.5 or 686.” Cal. Unemp. Ins. Code Section 621(d).

“‘Employee’ includes:… (c) 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 U.S. Code, and the ordering or commissioning party obtains ownership of all the rights comprised in the copyright in the work.” Cal. Lab. Code Section 3351.5(c).

What it means

What this means for producers and businesses in the Entertainment Industry is that if a writer, director, performer, or anyone else working on your project is otherwise an independent contractor, and if the contract with that person provides that any “results and proceeds” are considered “works made for hire” (thereby vesting ownership of copyrights in the producer or company) each of those “contractors” would be deemed a statutory employee, and the Producer would be required to satisfy Unemployment Insurance, Disability and Worker Compensation requirements. Failure to comply with state law in this regard could subject the company to substantial penalties

So, just get an assignment of copyright instead, right? Not so fast.

Some commentators have advocating just eliminating the “work made for hire” language from contracts where maintaining the Independent Contractor relationship is important. Many of those taking this view have suggested that the solution to the copyright ownership problem is to have the contractor execute a simple copyright assignment. And that's a workable solution… for some businesses, but not for entertainment companies.

You see, another wrinkle in copyright law is the termination of transfers provision that gives authors who've assigned their copyrights another bite at the apple. For a 5-year long window between the 35th and 40th year after the assignment, the author can terminate the assignment, thereby opening up the opportunity to negotiate a more favorable deal, or to “pull” the rights altogether. For many businesses, 35 years may exceed the useful life of their copyrights, so this doesn't matter. But the entertainment industry relies heavily on exploiting its “back catalog” as a way to generate revenue. Imagine the turmoil if films and TV shows made 35 years ago suddenly became unavailable for TV, Cable, Netflix, to distribute, or if record labels could no longer exploit albums released in 1988, for fear that they'd be sued by the songwriters and recording artists.

What's the solution?

Well, as I pointed out earlier, there hasn't been much notice taken of this issue just yet. When it becomes a problem, I have no doubt that California's law will be challenged on grounds that it is preempted by the U.S. Copyright Act. (Under the Supremacy Clause of the U.S. Constitution, Federal Statutes that occupy a field of law preempt contradictory state statutes). Unfortunately, until the Courts have ruled on the issue, there can be no certainty for producers.

Get thee to Washington (and Sacramento)

The Entertainment industries are certainly no stranger to lobbying, and efforts to change the law at the California Legislative level are certainly in order. Also appropriate is an effort to get clarification from Congress that it intends to occupy the field, thereby solidifying the preemption arguments. It should also be noted that the concept of “statutory employee” is addressed in both Federal and State tax codes. So, care should be taken to anticipate unintended consequences for both employers and contractors.

Get some advice in the interim

Meanwhile, including “work made for hire” language in contracts shouldn't be a foregone conclusion. The wise producer will seek advice from an experienced entertainment lawyer. Due consideration must be given to all of the factors, risks and benefits before a final decision is made to hire someone as an independent contractor.

 

One Response to Producer beware: “Work Made For Hire” agreement creates a “statutory employee” relationship.

  1. The way to avoid California statutory unemployment insurance and other Labor code employer obligations and still acquire works from independent contractor as “works made for hire’ (avoiding the 35 year termination of transfer problem) is simply to require every independent contractor contributing copyrightable content to an audio-visual work (movie)under a work made for hire agreement to contract as sub-S corporation, LLC, joint venture, or other legal entity. Entities are not employees and are not entitled to any of the statutory employee benefits accorded individuals under California state Unemployment Insurance and Labor codes.

    No preemption by federal law because these employee rights are not equivalent to any right accorded under title 17 or any other Federal law.

    For a complete discussion of the subject see, Victoroff, Greg, “Poetic Justice: California ‘Work Made for Hire’ Laws Invite Stet Regulation of Parties to Copyright Contracts” Hastings Communications/Entertainment Law Journal, Vol. 12:453, 1990.

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