Four Pitfalls to Avoid with Independent Contractor Agreements

Many small businesses utilize independent contractors because they offer certain advantages over hiring employees, like reducing overhead costs and avoiding headaches such as payroll taxes and employment-related claims. Others may hire independent contractors for discreet one-time services. In either case a written agreement is a must, but beware: there are pitfalls related to the language of your contract that must be avoided to ensure it is airtight and works to your advantage.

1.  Avoid “Work Made for Hire” Language…

There are a couple of reasons to get rid of “work made for hire” language in your contract. First, unless an independent contractor’s work falls into one of the nine categories of “specially commissioned” works under §101 of the Copyright Act, the work is not a “work made for hire.” Second, using such language may have unintended consequences under state law. For example, in California, Labor Code §3351.5(c) and Unemployment Code §686 make the parties to a written agreement utilizing “work made for hire” language “statutory” employees and employers, thus opening up the possibility that you may be on the hook for worker’s comp and unemployment insurance if you include such language in your agreement.

2. …But Include an Assignment of Rights

But then how, you ask, can a small business owner own the rights to the independent contractor’s work product without a “work made for hire” clause? The answer is to include an assignment of rights clause, with you as the assignee and the contractor as the assignor. A written assignment can also lay the groundwork for copyright registration of the work, in which case the independent contractor is technically still the “author,” but you are the owner and registrant who has acquired rights “by written agreement.” The contract would thus satisfy 17 USC §204(a),  which requires a signed “instrument of conveyance” for valid transfers.

3. Don’t Claim Ownership Over Too Much

Avoid language that is too broad and claims ownership over everything an independent contractor creates while under contract with you; such language can nullify your agreement. Overbroad language regarding work product ownership can run afoul of state laws like California’s Labor Code §2870, which prohibits assignments of inventions developed on a worker’s own time and without the company’s resources unless they relate to the company’s business.

4. Preserve Confidentiality, But Discard Non-Competition Clauses

Confidentiality clauses that prohibit one party from disclosing a company’s trade secrets (secret processes, customer lists, etc.) are generally enforceable and should be included in your agreement if applicable. In contrast, non-competition clauses (whether temporal, geographic, or industry-specific) purporting to take effect after severance are unenforceable in many jurisdictions (such as California) and should be left out of your independent contractor agreements depending on the laws of your state.