It is not always easy to determine who a copyright owner is, particularly where a business hires someone to produce a “work of art” (such as software, logos or other graphic design or a web site). If the work is a “work-made-for-hire,” it is owned by the company commissioning the work.

Section 101 of the Copyright Act defines a “work made for hire” as:

• a work prepared by an employee within the scope of his or her employment; or
• a work specially ordered or commissioned for use:
  as a contribution to a collective work,
  as a part of a motion picture or other audiovisual work,
  as a translation,
  as a supplementary work,
  as a compilation,
  as an instructional text,
  as a test, as answer material for a test, or
  as an atlas,

if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

This is a rather esoteric list, and the upshot is that an independent contractor graphic artist or web designer may end up owning the software, logo or web site that was commissioned. Many companies assume since they paid for the work, they automatically own it. Other companies never even realize there is an issue. Complicating matters is that if an employee creates the work, the employer does automatically own it, but if a contractor creates the work, it is likely that the contractor owns it.

While there may be implied licenses, it is important for companies to address ownership issues up front via contract.

But companies need to be careful when hiring contractors and setting up the engagement structure. Just calling someone an “independent contractor” does not mean the person is a contractor and not an employee for Internal Revenue Service purposes. And if the IRS audits, a company that has mis-characterized a worker can face significant fines and penalties for failure to pay and withhold payroll taxes.

The IRS has significant guidelines on the difference between contractors and employees. The key issue is whether the company directs or controls the means and methods of producing the work, or just gives the contractor the job specifications and timelines and receives the results from the contractor. The more the company directs the sequence of how the work is performed, the more likely the contractor will be characterized as an employee. Other factors the IRS will consider are who provides the tools/supplies, where the work is done (at the company or at the contractor’s place of business) and whether the contractor has other clients.

Another downside to hiring contractors instead of employees is that you may not be their only client, and it may be difficult to schedule your projects.

Before you hire someone as a contractor, particularly if you are replacing an employee with a contractor, you should talk with your accountant and attorney about the nature of the work, the frequency of the work and the way in which the work is going to be performed.

After you set up the structure, a good enagement agreement is essential to set out the work specifications, timing, payment amounts and times, liability, insurance and ownership of work product. Companies generally assume that because they are hiring someone to create work product for them, they will automatically own the work. While employee work almost always is owned by the company, this is not often the case with a contractor.

U.S. Citizenship and Immigration Services (USCIS) announced last friday that it has delayed by 60 days, until April 3, 2009, the implementation of an interim final rule entitled “Documents Acceptable for Employment Eligibility Verification.” The new I-9 form, originally scheduled for implementation today, February 2, 2009, should not be used for employment eligibility verification until the final rule is implemented on April 3, 2009 (sans further delays).

For more information please see my previous blog post on this issue.