Using independent contractors (ICs) can give your company an edge in today’s thriving gig economy, but if you are not careful, contractors can also be a serious liability. In fact, working with ICs comes with a number of unique legal and financial risks that can be potentially ruinous to your business if not handled properly.

Beyond getting sued or hit with hefty fines for misclassifying an employee as a contractor, you must also be careful to properly secure ownership of anything an IC creates for you. This is particularly true when it comes to your intellectual property (IP).

And whether you know it or not, IP is one of your company’s most valuable assets. Indeed, a recent study found that up to 80% of the value of today's typical business is made up of different forms of IP.

Unlike employees, with whom you generally own automatic copyrights to everything they produce while working for you, ICs typically retain full copyrights to their work—unless they’ve signed a written agreement stating otherwise. Indeed, if you don’t have properly drafted agreements in place, you may not even own the work you pay ICs to produce for you.

Fortunately, it’s fairly easy to secure full ownership of these works by using the proper legal agreements. However, this is only possible if you actually put these agreements in place with every IC you work with—and yes, this means every single person, even those you have worked with for years without a single problem.

When it comes to using legal agreements to secure ownership of the work you hire an IC to produce, you have a couple of options. One option is to include a work-for-hire clause in their independent contractor agreement.

A work-for-hire clause states that you, not the IC, own all copyrights to the deliverables he or she produces for you under the agreement. Such a clause effectively makes it as if you created the work yourself, and as such, it allows you to use the work in any way you wish.

Just be sure to have the IC sign the agreement before he or she starts working. If not, it may be too late to acquire full ownership. Additionally, work-for-hire clauses only cover certain types of materials. According to the U.S Copyright Office, in order for a work-for-hire to apply, the work being created must fall into one of the following nine categories:

1. a contribution to a collective work, such as a magazine or anthology
2. a part of an audiovisual work or movie
3. a translation
4. a supplementary work, such as a forward, editorial notes, appendix, bibliography, or chart
5. a compilation created by selecting and/or arranging preexisting works
6. an instructional text
7. a test
8. answer materials for a test
9. an atlas

If the work you hire an IC to create does not fall into one of these categories, a work-for-hire clause would not give you full ownership. This catches many business owners by surprise, who falsely assume having such a clause is all they need. However, if the work you are paying for doesn’t fit into these categories, you will need a different type of agreement to secure ownership of the IP—and as you can see, the type of work covered by work-for-hire agreements is fairly limited.

For works that fall outside of the work-for-hire domain, you will need to include an assignment clause in the contractor’s agreement, in which the IC transfers some, or all, of their copyrights to your business. Without this clause, the IC would retain all rights to the work, even if the agreement contained a work-for-hire clause.

Adding an assignment clause to the IC’s agreement is fairly simple, and for maximum protection, you can even include such a clause alongside a work-for-hire provision. It’s as easy as simply adding a brief clause in the agreement stipulating that if the work is not deemed a work-for-hire, the IC assigns all copyrights to your company.

In addition to work-for-hire clauses and copyright assignment agreements, all of your agreements with contractors should also include non-disclosure and non-disparagement agreements, which would keep an IC from disclosing details about their work with you to outside parties, especially your competitors. A non-disclosure agreement could cover trade secrets, confidential business information, and financial information about your business, and even whether the IC worked with you.

Although you may not think of it this way, one of your most valuable items of intellectual property is your reputation. A non-disparagement agreement assures you that an IC is unlikely to tarnish your reputation after working with you.

Although work-for-hire, copyright-assignment, non-disclosure, and non-disparagement clauses and agreements are not difficult to create, because each project is unique, there is not a specific template or generic form that would cover every job. What’s more, the wording of each agreement is also important, and some states require specific language for work-for-hire agreements to be legally valid.

Given this, you should steer clear of generic legal agreements you find online, and always have us, your Family Business Lawyer™ review your IC agreements, even if they were drafted by another lawyer. Whether you need your existing agreements reviewed or need help creating new contracts, as your Family Business Lawyer™, we will support you in developing the proper legal agreements that will give you the most comprehensive ownership rights possible with every contractor you hire.

Furthermore, we can perform an IP audit for your company. This audit is a comprehensive, systematic review that identifies all of your IP assets, and evaluates all of the potential risks and opportunities associated with those assets. An IP audit will not only identify your IP assets, it can also help ensure you have all of the necessary IP protections, such as trademarks, copyrights, along with the proper legal agreements governing those projections to ensure you own the full spectrum of rights related to your IP. Contact us, your local Family Business Lawyer™ firm today to get started.

This article is a service of a Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

As more and more businesses take advantage of the benefits of using independent contractors (ICs) in lieu of full-time employees, the line between worker classification can get easily blurred. While understanding the difference between the two can be quite complex, getting it right can be one of the most important business decisions you’ll ever make.

This is true not only in terms of productivity and your bottom line, but misclassifying your workers can also cost you big-time in penalties, including fines, back taxes, and unpaid benefits. What’s more, the Department of Labor (DOL) recently rescinded a Trump-era rule that would have made it easier for employers to designate workers as independent contractors, rather than employees under the Fair Labor Standards Act (FLSA).

This move likely signals that the Biden administration will be more carefully scrutinizing independent contractor relationships with an eye toward classifying more workers as employees rather than contractors. In fact, as a candidate for president in 2020, Biden pledged to establish a federal standard for worker classification similar to the "ABC test, which was recently adopted in California. While we’ll cover the changes in legislation regarding worker classification in more detail in a future post, for now, you should make certain that you are taking every precaution to ensure correct classification.

Studies show that between 10% and 20% of employers misclassify at least one employee, and you can be penalized regardless of whether or not you did so intentionally. With misclassification happening so frequently, you should carefully scrutinize every member of your team, and make sure you have airtight employment agreements in place for every person you hire.

Fortunately, with the support and guidance from me, your Family Business Lawyer™, you can easily avoid these risks and stay totally compliant. That said, seeing that you can save a significant sum in labor costs by using ICs instead of employees, you may be tempted to take your chances and pass off some of your employees as contractors. But in doing so, you’re risking serious consequences, which have the potential to ruin your business.

It’s easy for the IRS to be alerted to potential misclassification. A team member can file an SS-8 form, alleging you’re in violation of the law, or he or she might simply receive a 1099 and W-2 in the same year. Beyond that, you can also get caught if one of your team tries to claim unemployment or disability, as this can result in an audit of your business.

Plus, because there’s no single test at the federal level to determine a worker’s classification and varying standards between states, it can be easy to misclassify someone by mistake. And regardless of whether or not the misclassification was intentional, if the allegation proves valid, you’re potentially on the hook for paying back taxes, benefits, and hefty fines.

If you misclassify an employee, you can face fines from the DOL, IRS, and state agencies that can total millions of dollars. Moreover, you can be held responsible for paying back taxes and interest on employee wages, along with FICA taxes that weren’t originally withheld. And failure to make these payments can result in even more fines.

You can also be held liable for failing to pay overtime and minimum wage under the FLSA as well as under state laws. Such claims can go back as far as three years if it’s found you knowingly made the misclassification. And if the IRS believes your misclassification was intentional, there’s also the possibility of criminal and civil penalties.

Outside of the fines paid to state and federal agencies, if an employee is misclassified, they’re eligible to claim employee benefits he or she missed out on. These can include healthcare coverage, stock options, 401(k) matches, PTO, and even unpaid break time.

Not to mention, if a worker is misclassified, the resulting audit and penalties can also seriously damage your company’s reputation. So even if the fines and penalties don’t destroy your business, the negative media coverage just might.

Utilizing independent contractors can give your company an edge in today’s “gig economy,” but if you are not careful, ICs can also be a serious liability. Consult with me, your Family Business Lawyer™ for trusted advice on the latest worker classification laws in your state and for support in creating airtight independent contractor agreements that protect both your business and its intellectual property. Reach out today to schedule your appointment.

This article is a service of Pantea Fozouni, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.