In this day of a new app being developed every day, how does the company owner or management know who owns the code developed and when they could lose control over it?
Most issues of ownership for software code fall into areas of copyright (a form of intellectual property or IP), since they are usually “written works of authorship” and primarily covered by US copyright law. Copyright protection provides the author with protection from reproduction by others. There are times when works can be reproduced without violating a copyright under things such as the “fair-use doctrine,” such as when sample pages from a book are reprinted in a blog with commentary by the blog author about their thoughts or criticisms about what is being said in the book. The rights for copyright protection are generally given to the original author of the work for long periods of time (anywhere from 70 years to over 120 years depending upon all the facts). After that amount of time has passed, the work is considered in the public domain and others can copy it without worrying about infringement.
When an existing tech company or startup hires someone as a developer to work for them, they need to be cautious regarding who will own the code the developer is writing. One of the first questions to be answered is whether the developer was hired as an independent contractor or employee. Many people think that just because you call them an independent contractor, even in a written contract, or “1099” them by paying compensation hourly without deducting payroll taxes, the person is, in fact, an independent contractor. That is not the case for several reasons. The IRS has its main test for determining what classifies as an independent contractor and they don’t simply look at how you pay them or what you call them. Their are a number of factors involved such as who determines when they work, where they work, and how they work. Generally, the more control the company has over them, the more likely they will be an employee under the IRS test. There are other tests as well, such as in California, employees must be provided workers compensation insurance coverage by their employer. California tends to go beyond what the IRS requires to impose the added costs and obligation of getting workers comp coverage for what many would consider a contractor.
After determining whether they are an employee is to see whether the work created is a work made-for-hire. Normally a work made-for-hire arrangement is when the company hiring the developer makes it clear that any code written by the developer is owned by the company, not the developer. You are hiring them to make the work. If the developer is an employee, the creation of the work must be within the scope of what you hired them for and the company retains ownership. If they are a contractor, you need a clear written agreement that the work will be for hire to retain ownership. However, there are additional requirements beyond simply stating in a written agreement that it is for hire. The work you hire them for must also fit within the following categories defined by 17 U.S.Code Section 101: contribution to a collective work, part of an audiovisual work, translation, supplementary work, compilation, instructional text, test, answer material for a test, or an atlas. Again, similar to the tests for employee versus contractor, these categories are subject to certain tests or review by a court looking at existing statutes, case law, or other relevant factors. You can see that it is much easier to claim that something is within the scope of employment by hiring the employee and clearly stating what they are to do versus having to clearly fall within one of these categories and have a written agreement defining those duties.
So when looking at who owns software code or who may end up owning it, many issues need to be examined and it is not as simple just “1099-ing” someone for a few hours to coding. Even at the formation and startup stage, these issues must be addressed so that management or the founders can properly analyze and plan for how they will hire. Even if they choose to hire the developer as an employee with the increased company copyright protections, they still should have written agreements in place protection their existing or to be developed IP. If hiring the person as a contractor, it is crucial to have well written agreements in place. Simply downloading sample forms from the internet may seem like a quick and low cost solution, but if something is not done properly, a tech company could end up losing its ownership rights to what could be the most valuable asset they own. Laws not only vary by state or country, they change over time, so any form you may find may not comply with local law or be up to date for any recent changes. This is where looking for a local licensed attorney familiar with intellectual property (IP) protections, technology transactions, licensing issues, or copyright can be invaluable.