My recent article The importance of employment status, shared some thoughts on why you need to clearly and correctly identify the status of each individual involved with your business, whether they are employees, workers or self-employed. In that article, the focus was mainly on whether the payment and tax deductions you’re making would pass muster with HMRC.
This article is about the possible implications of employment status on the ownership of what may be the key assets of your business. That is, the intellectual property rights (IPR), which may be in your branding, your reports or other documents and/or in software you’ve paid to have developed by or for your business. There are other types of IPR, such as performance rights and patents, but we will look primarily at copyright here.
Who owns what?
In an increasingly virtual world, designs and coding matter. For some businesses, they are the only things that matter, as they are the main purpose and assets of the business.
When I talk to clients and potential clients about who owns their business assets, there is a fairly reliable hierarchy of confidence and accuracy about their answers.
It goes like this (from most to least likely to be both confident and correct):
- Cash: Client response is always 100% confident (and mostly right). They know it’s their own cash, or Julie’s cash, and they know who holds it.
- Licensed software (off-the-shelf branded): Clients respond correctly that the owner is the company behind the brand name. They know the software is owned by Microsoft or Sage, for example, and that their business has bought a licence or a periodic subscription to use it.
- Buildings: Clients can usually confirm there is a freehold, lease or licence to occupy their buildings, whether or not there is a mortgage, and the name of the owner, landlord or tenants.
- Machinery: Clients may be uncertain about whether there are any current hire purchase agreements. They’ll have to check the paperwork to see who owns the machinery they use.
- Stock: Clients might assume they own the goods they hold in stock, but that might not be the case. They may miss the fact many suppliers still own the goods until payment is made in full.
- Business IPR: This is where it can all fall apart. Clients are often utterly confident that they own all their business IPR – but are less often accurate in relation to all their basket of IPR.
Once upon a time, only a company’s cash, buildings, machinery and stock would have had a real value. Now, the IPR associated with a business has very significant value, both in a business that also has significant physical assets and even more so in a business (like many modern businesses) which provides services and has only a limited or no bricks-and-mortar presence or physical asset base.
Time and time again, I am told by a business owner or manager that the business owns all the IPR it is using, other than the licensed branded email/accounting or similar software.
When I ask how the business comes to own it, the answers are usually something like this: "We paid for it", or "Fred did it for us a few years ago and we have been using it ever since".
This is when I become a properly dull legal sort of person and ask a bunch of extra questions, such as: "Who did you pay/when/for what?", "Did you have a written agreement?" and of course: “Who is/was Fred anyway?"
I sometimes experience a bit of impatience at this point, but bear with me, there are good reasons for these questions.
Authors and owners
Section 11 of the Copyright, Designs & Patents Act 1988 states that the first owner of any newly created copyright will be the author – unless the author is an employee and the work is created in the course of their employment, in which case, the first owner is the author's employer.
This is the starting point of why employed or self-employed status has an important bearing on the ownership of what may be the most crucial assets of your business.
So, was the person who designed your logo an employee at the time? If not, was the logo developed for you by a person or company that then (in writing) transferred ownership of the IPR in the logo to your business on payment of their design fee invoice?
Either of these scenarios will work to show your business' ownership, but life is not always that simple.
Maybe an employee provided most of the new coding work for a piece of software and various temps provided the rest? Do you know the employment status of those temps who created code for your company? Were they temporary employees, or were they self-employed freelancers?
If the former, were they aware that the code they created was to be owned by your business, and have they respected that ever since or have they reused that same code elsewhere? If the latter, did they transfer the ownership of the code they created to your company when you paid their fee?
These are very lively and real questions in the current business environment. This was brought to life in a court decision issued on 15 February 2021 by the IP Enterprise Court in the case of Michael Penhallurick against MD5 Ltd.
Here’s a brief summary.
MD5 specialises in computing forensics, and employed Michael to develop virtual forensic computing techniques.
Over the years, he developed software to automate some of this process, by enabling an image to be retrieved from the hard drive (without writing on it) and placed on a virtual disk in order to investigate it.
Ultimately, both Michael and MD5 claimed ownership of the software and that the other party had breached their copyright.
The key issue for the court to decide was whether the work Michael had done in creating the software was “in the course of his employment”.
Michael gave lots of evidence that he’d done a vast amount of work in his own time at home on his own PC, and wasn’t conventionally working 9-5 in his employer’s office. (All this happened before the pandemic normalised working from home.)
The judge found that – in spite of Michael proving that he worked from home rather than in the workplace – the work he’d done fell within the work that his employer was paying him to do. The conclusion was that, although Michael had written the code he did so “in the course of his employment” so the “first owner” of the code he’d created was MD5 as his employer, rather than Michael himself.
Michael therefore lost his claim to ownership and MD5 established their claim to ownership.
What this means to you
If you were looking at the IPR in your business, could you clearly establish ownership of what has been created by your employees?
If you don’t have clear contracts with your staff, or you pay your team as self-employed, there is an inevitable risk of you losing your ability to treat them as employees for the purpose of IPR ownership.
This creates a potentially important tension for some modern gig economy businesses between the relationships they have with their team members as self-employed consultants and freelancers of any description, and what they might want in terms of IPR ownership.
It is therefore important to address IPR clearly in the agreements you have with each individual.
If you ever come to sell your business, and IP is a significant part of your business, you’ll need chapter and verse of documentary evidence of ownership. So, while you’re busy creating IP assets for your business you need at the same time to be busy recording proof of future ownership of those assets.
One final thought
The fact that you, as their employer, own your employees’ work needs to be clear to them. If you have a clear agreement with an individual about ownership of the work they do for you, it’s less likely that they’ll go off and share it with your competitors after they leave. If they are self-employed external contributors, you need a clear agreement stating that ownership of their work transfers to you once you’ve paid for it.
As with all such agreements, you want everything out in the open early on, agreed, confirmed, documented and nailed down.
This process is a lot easier at the project planning, work purchasing stage and/or while the work is new and fresh and usually until it is obvious that the work is, or might become, highly valuable. My experience leads me to the cynical view that, in most cases, once it becomes clear that your new logo or tagline or piece of software code is the new equivalent of the Tetrapak design or Fortnite app and people know it’s worth a fortune, it will usually be a lot harder to get them to generously confirm that you own it all.
Of course, we can help with this.