For early stage technology companies the definitions of independent contractor and employee for determining copyright ownership may have changed. In a case that could alter the landscape as to who is considered an employee when it comes to "work for hire" and copyright ownership in the world of technology based start-ups, the United States Court of Appeals for the Ninth Circuit relaxed the rules on who is considered an employee versus an independent contractor for the purposes of considering where work is considered a "work for hire." In JustMed, Inc. v. Byce, 2010 U.S. App. LEXIS 6976 (9th Cir. Apr. 5, 2010), the Ninth Circuit was asked to decide whether JustMed, Inc., a small technology start-up company, or Michael Byce, a software developer working remotely, owned the source code that Byce engineered while working for JustMed.

The Court's analysis distinguished between technology start-up businesses, which are well known for the informal manner in which they are formed and operate -- a handful of people working in a garage and programming their computers -- and more established companies, where formalities regarding employment tend to be more rigorously observed. The Court found that Byce qualified as an "employee" of JustMed, and his work belonged to them, despite the fact that he:

  • worked from home in Idaho,
  • worked on his own computer, and
  • worked without much direction from Oregon-based JustMed.

Ordinarily, those factors would favor finding Byce to be an independent contractor. In addition:

  • Byce and JustMed had no written employment agreement,
  • Byce never filled out an I-9 employment form,
  • Byce filed his first W-4 tax withholding form in 2005 - a year after beginning full-time work on the source code in 2004,
  • JustMed did not issue a W-2 for Byce,
  • JustMed did not withhold taxes, pay workers' compensation, or pay unemployment insurance for Byce, and
  • JustMed did not provide any employment benefits for Byce, or report his employment to the state.

Byce was nevertheless deemed an employee because:

  • he was not hired for a specific term,
  • he was not hired to work on a discrete project,
  • he worked with JustMed on projects other that the source code,
  • he updated the company's Web site,
  • he demonstrated the company's product at trade shows,
  • he was listed in the company's brochure,
  • he was issued a business card, under the title of either "Director of Research and Development" or "Director of Engineering," and
  • he asked for a cash salary (after initially being paid in company stock), even though he never deposited his paychecks.

The Court explained the imbalance between the evidence that Byce was an independent contractor and the evidence that he was an employee by finding that technology start-up companies typically operate differently than more established companies, and that an employment relationship simply looks different in that context. The Court said that, "[i]n particular, the contemplated duration of the relationship, the tasks Byce did for JustMed, the fact that Byce earned a salary from JustMed, and the nature of JustMed's business all support the finding that Byce was an employee."1 The Court went on to state that, "[w]hile no one factor is decisive, we draw some guidance in weighing the factors from JustMed's status as a technology start-up company."2 The Court said that it gave less weight to the facts that would have established Byce as an independent contractor because of "the way JustMed conducts its business" as a start-up technology company.3

What this means:

The Ninth Circuit's decision essentially creates a higher burden for engineers and programmers who are part of the team working for start-up technology companies to assert their independent rights to the intellectual property they develop. For start-ups the traditional factors for determining an employment relationship will no longer carry the same weight as for established businesses.

To avoid these issues always remember to do the following when hiring any employees or independent contractors:

  • Lay out ownership rights in writing, specifically, in an employment agreement or some other form of agreement;
  • Obtain an assignment of rights and an agreement to assign rights not yet created, that clearly apportions rights between the parties;
  • Have all parties that perform work for the company sign confidentiality, non-compete agreements, and agreements to disclose work product to the company; and
  • Make sure that all software that is being developed is stored in a secure location and that updates are periodically obtained.

For independent contractors working with start-up companies, be sure to protect the rights to your intellectual property, and particularly the intellectual property that you bring to the engagement.