THE STUPIDEST LAW EVER ENACTED
IVAN HOFFMAN, B.A., J.D.
All right, all right. Maybe not the stupidest law but well up there in the top ten.
Although this article is about California law, the said laws have a wider reach than merely those parties physically located in California. More about this below. So before you click off, realize that this situation may apply to you no matter where you are located.
Here is the situation:
Party 1 wants to engage the services of a graphic creator, book illustrator, actor, movie director, song writer, web designer, author, ghostwriter, editor or other such party creating copyrightable work. For the sake of simplicity, all these parties will be referred to as “the creator.”
Needless to say, it is imperative that Party 1 have a valid, thorough, written and signed agreement, signed before any work is done and any money paid. Without such an agreement, Party 1 cannot acquire exclusive rights to the work of the creator and without exclusive rights, all parties have a legal mess on their hands. Read “The Fundamental Principle Under the United States Copyright Law,” “A Legal Nightmare: The Unwritten License” and “A Legal Nightmare: The Unwritten License- Further Issues.”
There are 2 choices for this kind of agreement: an exclusive transfer of rights to Party 1 or a work made for hire agreement, assuming the work qualifies as a work made for hire. Read “Work Made for Hire Agreements.” For reasons having to do with lack of understanding, the creator often has a knee jerk reaction to work made for hire agreements. There is no functional difference between a work made for hire agreement and an exclusive transfer agreement for the first approximate 35 years after the agreement is entered into (see below). Even under a work made for hire, the creator can be paid royalties and receive credit, although those factors are looked at in determining whether it is a valid work made for hire agreement. But if the agreement is drafted by a knowledgeable attorney, it can be a valid work made for hire agreement even with royalties and credit.
But, and here is where California has passed this misguided law, under California law, (Labor Code 3351.5 (c)) if a party enters into a work made for hire agreement, that party, the creator in this example, is treated as Party 1’s employee for purposes of workers compensation laws (and for unemployment insurance laws as well but I will not burden this article with these unemployment insurance issues).
This means that Party 1 must, underscore “must,” have workers compensation insurance covering the creator before the agreement is signed and before any work is done or payment made.
The failure to obtain workers compensation insurance is a crime under California law. The crime is committed when the work made for hire agreement is entered into without having the insurance in effect and has nothing whatever to do with whether the creator is injured or dies during the engagement.
Labor Code section 3700.5 provides:
But it goes on and gets worse. According to the California Department of Insurance,3700.5. The failure to secure the payment of compensation as required by this article by one who knew, or because of his or her knowledge or experience should be reasonably expected to have known, of the obligation to secure the payment of compensation, is a misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine of up to ten thousand dollars ($10,000), or by both that imprisonment and fine.
Further, a party, a creator in this example, granting rights under a work made for hire agreement may be an employee for other purposes as well including but not limited to matters related to taxes and the withholding of the same and other potential liability issues under California law as well as under federal law and perhaps under other laws.Employers who fail to purchase Workers Compensation insurance are in violation of the California Labor Code. The Director of the Department of Industrial Relations has the authority to issue a stop order against any company who is discovered to be unlawfully uninsured for Workers Compensation. A stop order closes down business operations until Workers Compensation insurance is secured. Besides issuing a stop order, the Director can assess fines based on whether a company has been discovered to be unlawfully uninsured through normal investigation or through the filing of an injured workers claim with the Uninsured Employers Fund. Failure to comply with a stop order can result in a $10,000 fine, while the fine for failure to carry Workers Compensation insurance is $1,000 per employee. Employers can be prosecuted for insurance fraud for willful failure to secure Workers Compensation insurance as prescribed by law. Also, if Workers Compensation is not purchased, an employer opens himself/herself up to liability lawsuits from injured employees. Exclusive remedy protection does not apply if Workers Compensation insurance is not in force at the time of employee injury.
The sum of all this is that if the agreement is a work made for hire agreement, Party 1 is the creator’s employer for purposes of both workers compensation insurance and unemployment insurance and perhaps other purposes as well and Party 1 must have the required workers compensation insurance.
Why It Matters
The functional importance of work made for hire versus exclusive transfer not as a work made for hire relates to the ability of the creator to terminate the transfer of rights at a time some 35 or 40 years down the road. So the issue for Party 1 is whether the work of the creator will have value at that time. Some work will not likely have such value at that time, such as programming or web design work. However, some work, such as logos including those used for trademark purposes, illustrations for children’s books, psychedelic concert lobby posters (such as is the subject of claims regarding the Fillmore and other “San Francisco” concert venues from the 60s) and other works may have great value at the time.
If a work is done as a work made for hire, the creator has no rights to terminate the transfer.
The term of copyright is somewhat longer for a work made for hire.
Therefore, the issue becomes a significant one.
Why Are These Such Stupid Laws?
1. These laws are stupid because they do not protect the creator, the party for whom the laws were ostensibly designed to protect.
Initially, most creators do not even know about this law and so fail to gain any benefits from the law. Although the law may be punitive insofar as Party 1 is concerned, since neither Party 1 or the creator know about these requirements, the law does not provide any coverage for the creator since there is no insurance taken out.
2. These laws are stupid because they put the creator in a competitive disadvantage.
In the world of the Internet, creators of all sorts are in abundant supply. There is no reason to engage a party living in California (see discussion below about the potential reach of these statutes) when Party 1 can shop the job everywhere including in other countries. So given that competition and given the added expense and trouble and time consumption to get workers compensation insurance just for this one job, Party 1 would be foolish to engage the creator living in California.
The Long Arm Reach of These Laws
Clearly these laws apply to Party 1 and the creator if both are located in California. But the laws may also apply to:
1. Party 1 located in California engaging the services of the creator residing in another state or even another country.
2. The creator located in California being engaged by Party 1 located in another state or even another country.
The reach of such laws is not clear and thus the very lack of clarity should make Party 1, no matter where located, hesitant to engage a California creator. And if Party 1 is located in California, Party 1 should be hesitant to engage an creator anywhere.
Add the above reasons to the “Why Are These Such Stupid Laws?” section.
Write your California elected representatives to repeal these laws, no matter whether you are Party 1 or the creator. No one is helped by this, except the workers compensation insurance companies.
But mostly, never enter into a work made for hire agreement without consulting an attorney with experience in these matters.
Copyright © 2008 Ivan Hoffman. All Rights Reserved.
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. You should not rely on this article in any manner whatsoever and you should not draw any conclusions of any sort from this article. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on United States laws but the laws of other countries may be different. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.