Hiring employees and contractors in the United States

• 1. When hiring locally in the United States (US), Canadian companies need to weigh the requirements and impact of hiring employees versus contractors even though they may do similar work.
  • For example, if a company hires employees, they must abide by employment and labour laws and employers must withhold income tax, social security and Medicare as well as paying unemployment tax, whereas these do not need to be paid in the case of independent contractors.
  • There are different tests used to determine whether an individual is considered an employee vs. a contractor. On a high level, the difference is based on the amount of control an organization has over the individual. Further information on whether an individual is classified as an employee or contractor can be found on the Internal Revenue Service (IRS) website.  It is also important to note that each state has further criteria that influence whether an individual is considered an employee or a contractor.  Further information can be found at the State Labour Offices.
  • If you are unsure, whether an individual will be an employee or contractor under state rules, recruit the help of an expert.
• 2. Critical to a company’s ownership of Intellectual Property (IP) is a written ownership clause which assigns the IP an individual creates during their tenure to the company. Without an agreement, the employee or contractor may have ownership of the IP even if the individual was hired to innovate. Therefore, regardless of whether the individual is considered an employee or contractor, intentional management of IP rights and ownership is paramount. 
• 3. For employees, our factsheet on Employment Contract and IP Ownership describes considerations to take into account when developing employee agreements regarding IP ownership and management.
• 4. There are some scenarios where employees retain ownership of their IP.  Whether the IP falls within the scope of innovations to be owned by the company will depend on whether it was developed in the course of employment and how it relates to the company’s current and future research and development and the employee’s involvement in that.
• 5. It is best practice to regularly perform IP mining sessions with employees to identify and capture IP that will be developed and/or assigned to the company. In the same vein, it is good practice to regularly obtain a list of the IP that the employee believes they own to avoid (future) disagreements.
• 6. For contractors, IP generated may be owned by the contractor even if developed within the scope of the engagement. Therefore, IP assignment clauses included in the engagement agreement are recommended, and that IP developed under the engagement (foreground IP) be owned exclusively by the company, free of any royalty fee or license.
• 7. It is important to discuss and clearly define IP and how it will be treated.  There are different types of intellectual properties that should be considered. 
  • Background IP is pre-existing IP that is relevant to the engagement and is supplied by the parties at the start of the project.
  • Foreground IP is relevant and produced during the engagement.
  • Sideground IP could be relevant to the engagement but is produced outside of the project and is usually excluded from assignment.
  • Postground IP is relevant to the engagement and produced after the engagement. An example would be improvements to the products made after the engagement.
• Usually, it is foreground IP that is transferred from contractor to the company. Therefore, it is important to identify what falls within what category.
• 8. If the contractor is retaining the rights to the IP, licensing may be an option.  Licensing terms that should be intentionally considered are exclusivity, royalty terms, scope of IP covered, and entity responsibility.  For example,
  • Exclusivity: Is the license exclusive or non-exclusive?  Is the license limited to specific industries?  Is it limited to specific jurisdictions?
  • Royalty Terms: Is the royalty a lump sum payment(s) or percentage (gross or net revenue)?  What is the timing of payments? Are there conditions when the royalties would no longer be required (e.g., if a trade secret is disclosed)?
  • Scope of IP covered: Will trade secrets developed as part of the foreground IP be conveyed? How will background and postground IP be treated?
  • Entity Responsibility: does the contractor have the responsibility to maintain the IP rights? Or can they abandon it (e.g., allow patents to lapse or disclose trade secrets)? 
• 9. Within copyright there is the concept of “work for hire”.
  • Usually, a copyright is attributed to the author for the author’s life plus 70 years.  With “work for hire” the copyright is transferred to the employer.  The term of protection then becomes 95 years from the date of publication or 120 years from date of creation, whichever expires first. 
  • Section 101 of the Copyright Act considers a composition to be “work made for hire” if it falls under two categories. 
    • a) A work prepared by an employee within the scope of his or her employment
      or
    • b) A work specially commissioned for use 
      1. as a contribution to a collective work,
      2. as a part of a motion picture or other audiovisual work,
      3. as a translation,
      4. as a supplementary work,
      5. as a compilation,
      6. as an instructional text,
      7. as a test,
      8. as answer material for a test, or
      9. as an atlas,
         if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.”
  • Note that the definition of employee determines if Part A applies for work for hire copyright purposes and is under the general common law of agency.
  • If it is a commissioned work (not done by an employee), it must satisfy Part B AND include a written agreement by both parties indicating that it is a work for hire. 
  • Further information can be found in the United States Patent and Trademark Office summary document (pdf).
• 10. It is recommended that companies include clauses in their contracts describing if there is misappropriation or infringement of IP rights. This could contain remedies and relief provisions.

Key considerations for Canadian companies:

• There are key differences between hiring employees versus contractors in the US even though they may do similar work.  Determining the status of the individual being hired also varies state by state. 
• Whether you are hiring employees or contractors, intentional management of Intellectual Property (IP) rights and ownership is paramount.  Do not assume that the company will own the IP asset automatically.
• Communicate, communicate, communicate. Whether it is through negotiating how different types of IP will be handled (background, foreground, sideground, and postground) or maintaining lines of communications with employees on what they believe to be their own IP. This will help prevent misunderstandings and disagreements.
• According to Myriam Davidson, Director of Engagement at Stratford Intellectual Property, “When hiring locally in the US, it is important to understand whether you are hiring an employee or a contractor and manage the IP intentionally based on the differences between them”.

Additional information:

• For information about IP protection in the US, please see the Canadian Intellectual Property Office’s publication on Doing business abroad: Protecting your IP in the United States
• For more material relating to the export of goods to the US, please see the Doing Business in the United States page
• For more information on going global with your IP, visit Canada.ca/export-ip