Worklife 2.0: Employers of record – the sky is the limit? Part 2 – intellectual property

As we have discussed previously in the Worklife 2.0 series (see our previous blog post here), employers of Record (EoRs) allow companies to tap into a pool of remote talent around the globe.

On paper, the EoR is the formal employer of an employee. However, in practice, the EoR employee reports to and is managed by the end user company. This means that by using an EoR, companies can hire skilled employees around the globe without the legal and tax complications that come with setting up a subsidiary or branch abroad. This global accessibility is particularly valuable in sectors, such as information technology, where intellectual property (IP) rights often become the focus of employment relationships.

This blog post explores some of the IP points to be considered when partnering with EoRs.

IP protection – Status quo

In England and Wales, IP rights created by an employee in the course of their normal duties are generally owned by the employer automatically. Different rules apply in other jurisdictions – it may be more difficult for an employer to argue that they automatically own certain kinds of intellectual property rights created by an employee in certain jurisdictions without an agreement containing suitable provisions.

An employment agreement will typically provide that the employee assigns all IP rights developed in the course of their employment to the employer by way of a present assignment.

There are certain issues that those drafting employment agreements should be mindful of:

• some employment agreements provide that the employee “shall assign” the relevant intellectual property rights. This risks a court taking the view that the employee has not actually assigned the rights under the employment agreement, and that they have only agreed that they intend to enter into an assignment agreement sometime in the future;
• some agreements do not define “intellectual property rights” or define this term too narrowly. This increases the risk that the employee may develop IP that is outside the scope of the assignment, meaning that the rights remain with the employee rather than the employer; and
• in some jurisdictions, such as England and Wales, employees cannot assign moral rights, so in those jurisdictions employment agreements should provide that the employee waives these rights. In other jurisdictions, it is not possible to waive moral rights.

Employers of Record and IP protection

IP assignment provisions

In a traditional employer / employee relationship, the risk that intellectual property rights will not be properly transferred from the employee to the employer is an issue to be addressed in the employment agreement. In an EoR arrangement, the point needs to be thought through in both (a) the employment agreement between the EoR and EoR employee, and (b) the commercial agreement between the EoR and the end user company.

The end user company should take an equal interest in the intellectual property provisions contained in both the EoR’s employment agreements with the EoR employees and the commercial agreement between itself and the EoR.

The employment agreement should contain an assignment of all of the EoR employee’s intellectual property rights to either the EoR or the end user company. Whether or not this assignment should be made in favour of the EoR or the end user company will depend on the governing law of the agreements.

In some jurisdictions, such as England and Wales, it would be possible for the end user company to benefit from the assignment even though it is not a party to the employment agreement. In other jurisdictions, the end user company may only receive the benefit of this assignment if it enters into the employment agreement as a party.

If the intellectual property rights are assigned from the EoR employee to the EoR, then the commercial agreement between the EoR and the end user company should contain a further assignment of these rights from the EoR to the end user company.

If the employment agreement is governed by the law of England and Wales or another jurisdiction where moral rights cannot be assigned, it should also contain a waiver or similar of the employee’s moral rights.

Confidentiality and misuse of IP

An employment agreement should contain customary restrictions on confidentiality and misuse of IP by the employee.

In an EoR arrangement, the employee will owe these duties to the EoR rather than the end user company. The EoR may be less likely to have an interest in preventing EoR employee misuse of the end user company’s existing intellectual property and enforcing confidentiality provisions. Without adequate motivation for the EoR to enforce confidentiality and misuse provisions, the end user company is exposed to an increased risk of breaches by the EoR employees without adequate remedy.

Consideration will need to be given to the terms of the commercial agreement between the EoR and the end user company to ensure that the EoR is suitably motivated to enforce confidentiality restrictions and restrictions on employee misuse of IP. 

Conclusion

An EoR provides organisations with the flexibility to hire talented, skilled employees capable of creating valuable IP. In order to optimize that potential, EoRs and end-user organisations should be alive to the potential complexities of ensuring that the IP and confidential information of the end-user organisation are sufficiently protected in the contractual documentation. Early discussions about this topic when negotiating the commercial arrangements between EoRs and end-users will ensure that IP and other forms of confidential information do not slip through the cracks.