California Law Focus
California has unique laws governing employment, contractor relationships, and IP ownership that significantly impact how you structure team contracts. Ignoring these can make your agreements unenforceable.
California Labor Code Section 2870 - Employee Invention Rights
California law protects employees' rights to inventions created on their own time. Your IP assignment clauses MUST include statutory notice language or they are void as to personal inventions.
(1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.
Business & Professions Code 16600 - Non-Competes Void
Non-compete agreements are void in California for both employees AND independent contractors, with very narrow exceptions (sale of business, dissolution of partnership).
Impact: Do NOT include non-compete clauses in any California contractor or employee agreement. You can protect confidential information through NDAs and may have limited ability to restrict employee solicitation.
ABC Test (Dynamex Operations West, Inc. v. Superior Court)
California's ABC test, codified in AB5, presumes workers are employees unless all three prongs are satisfied:
Prong B - Outside Usual Course of Business: The worker performs work that is outside the usual course of the hiring entity's business. (This is the hardest prong for dev agencies - if you're a software development company, having contractors do software development may fail this test.)
Prong C - Independent Business: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
17 USC 101 - Software Is NOT Automatic Work-for-Hire
Under federal copyright law, work-for-hire automatically applies only to (1) employees, or (2) specially commissioned works in nine specific categories. Software is NOT one of those categories.
(1) a work prepared by an employee within the scope of his or her employment; or
(2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or 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: Software, mobile applications, and custom code do NOT fall into any of these nine categories for commissioned works.
Impact: For independent contractors, you MUST have an explicit IP assignment clause. Calling it "work-for-hire" in the contract does not make it so - you need a belt-and-suspenders approach with both work-for-hire language AND explicit assignment.
Independent Contractor vs Employee
Misclassifying employees as contractors creates significant legal liability in California. Understanding both the IRS factors and California's ABC test is essential.
IRS 20-Factor Test (Federal Standard)
The IRS uses these factors to evaluate control vs. independence:
| Factor Category | Employee Indicators | Contractor Indicators |
|---|---|---|
| Instructions | Must follow company procedures | Controls how work is done |
| Training | Company provides training | Uses own methods/skills |
| Integration | Services merged into operations | Provides discrete deliverables |
| Personal Services | Must personally perform work | Can hire helpers/subcontract |
| Work Hours | Set by company | Sets own schedule |
| Location | Works at company location | Works from own location |
| Tools/Equipment | Company provides | Provides own tools |
| Payment Method | Regular salary/hourly | Per project/milestone |
| Profit/Loss Risk | No financial risk | Can profit or lose money |
| Other Clients | Works exclusively for company | Has multiple clients |
California ABC Test Application
Even if someone passes the IRS test, they may still be an employee under California's stricter ABC test. Key issues for dev agencies:
Documentation Requirements
- Written independent contractor agreement with classification recitals
- Business license, insurance certificates, and W-9 from contractor
- Evidence of contractor's other clients (portfolio, references)
- Contractor provides own equipment, software licenses, workspace
- No company email address, business cards, or integration into org chart
IP Ownership Models
Who owns the code, designs, and other intellectual property created during development? There are three common models:
Client Ownership (Most Common)
The client owns all deliverables outright. The agency/contractor assigns all IP rights.
- Pros: Clean ownership, client has full control, no licensing complexity
- Cons: Agency cannot reuse code, higher pricing justified
- Best for: Custom enterprise software, competitive advantage projects
Agency Ownership with License
Agency retains ownership but grants client a perpetual, royalty-free license to use the deliverables.
- Pros: Agency can reuse/resell code, lower pricing possible
- Cons: Client lacks full control, complexity in license terms
- Best for: Template-based projects, SaaS implementations
Joint Ownership
Both parties co-own the IP with rights to use, modify, and license independently.
- Pros: Both parties can build on the work
- Cons: Accounting nightmares, either party can license to competitors
- Best for: Rarely advisable; usually for research collaborations
Work-for-Hire + Assignment (Belt and Suspenders)
Because software does not qualify for automatic work-for-hire status under 17 USC 101, you need a two-pronged approach:
The Belt-and-Suspenders Approach
- Work-for-Hire Clause: State that the work is intended as work-for-hire. This provides protection IF the work somehow qualifies (e.g., employee relationship).
- Explicit Assignment: Regardless of work-for-hire status, contractor explicitly assigns all IP rights. This covers the gaps where work-for-hire fails.
- Waiver of Moral Rights: Waive any "moral rights" (attribution, integrity) that might survive assignment.
- Power of Attorney: Grant client power of attorney to sign IP documents if contractor is unavailable.
Assignment Scope
A proper assignment should cover:
- All copyrights, including source code, object code, documentation
- All patent rights in inventions and improvements
- All trade secrets and know-how
- All trademark rights in project names, logos
- All moral rights and rights of attribution
- All rights in all media now known or later developed
- Worldwide, perpetual rights
Subcontractor Flowdown Provisions
When you hire subcontractors to help deliver client work, you need to ensure IP rights flow from subcontractor to you to client. This requires proper "flowdown" clauses.
The IP Chain
- Subcontractor creates work - Subcontractor initially owns it
- Subcontractor assigns to Agency - Your subcontractor agreement
- Agency assigns to Client - Your MSA/SOW with client
Essential Flowdown Provisions
- IP Assignment: Same belt-and-suspenders approach as your client agreement
- Confidentiality: Subcontractor bound by same NDA terms as you
- Representations: Subcontractor warrants no infringement, no prior encumbrances
- Pre-existing Materials: Subcontractor must disclose any pre-existing code
- Indemnification: Subcontractor indemnifies you for IP claims
- Audit Rights: Right to verify subcontractor compliance
Practical Tips
- Get signed subcontractor agreement BEFORE they start work
- Maintain a registry of all subcontractors per project
- Include project-specific exhibits listing what each subcontractor created
- Consider requiring subcontractors to sign client's IP assignment directly
Pre-Existing Materials Handling
Contractors often bring existing code libraries, frameworks, and tools to projects. Properly handling these "pre-existing materials" prevents IP disputes.
What Are Pre-Existing Materials?
- Code libraries and frameworks created before the project
- Proprietary tools and utilities
- Templates, boilerplate code, starter kits
- Third-party open source components
- APIs, SDKs, or integrations you've built for other clients
The Disclosure Requirement
Your agreement should require contractors to disclose all pre-existing materials BEFORE the project starts, typically in an exhibit. This includes:
- Description of each pre-existing component
- Ownership status (contractor's own IP, open source, third-party license)
- License terms that will apply (e.g., MIT, Apache, proprietary)
- Any restrictions on use, modification, or distribution
License Structure
For contractor-owned pre-existing materials incorporated into deliverables:
- Grant: Contractor grants client perpetual, royalty-free, worldwide license
- Scope: Right to use, modify, create derivatives, sublicense
- Exclusivity: Usually non-exclusive (contractor can use elsewhere)
- Source Code: Include right to access and modify source
Sample Contract Clauses
Below are California-compliant clause templates you can use as starting points. Always adapt to your specific situation and have an attorney review before use.
INTELLECTUAL PROPERTY OWNERSHIP (a) Work Made for Hire. Contractor acknowledges and agrees that all Work Product (as defined below) created by Contractor in connection with the Services shall be considered "work made for hire" as defined in 17 U.S.C. Section 101, and all right, title, and interest therein shall vest in Client from the moment of creation. (b) Assignment. To the extent any Work Product does not qualify as work made for hire, Contractor hereby irrevocably assigns to Client all right, title, and interest in and to such Work Product, including all copyrights, patents, trade secrets, trademarks, and other intellectual property rights therein. This assignment includes all rights in all media now known or hereafter developed, throughout the world, in perpetuity. (c) Moral Rights. Contractor hereby irrevocably waives any and all "moral rights" or other similar rights (including rights of attribution and integrity) that Contractor may have in the Work Product, to the fullest extent permitted by applicable law. (d) Further Assurances. Contractor agrees to execute any documents and take any actions reasonably requested by Client to perfect, evidence, or enforce Client's rights in the Work Product. Contractor hereby irrevocably appoints Client as Contractor's attorney-in-fact to execute such documents on Contractor's behalf if Contractor fails to do so within ten (10) business days of request. (e) "Work Product" means all deliverables, inventions, discoveries, developments, improvements, software, code, documentation, designs, specifications, and other works of authorship created by Contractor, alone or jointly with others, in connection with the Services.
EMPLOYEE INVENTION ASSIGNMENT 1. Assignment of Inventions. Employee hereby assigns to Company all right, title, and interest in and to all Inventions (as defined below) that Employee makes, conceives, reduces to practice, or contributes to, alone or jointly with others, during Employee's employment with Company, except as provided in Section 2 below. 2. Limited Exclusion Notification - California Labor Code Section 2870. THIS ASSIGNMENT DOES NOT APPLY TO AN INVENTION THAT QUALIFIES FULLY UNDER THE PROVISIONS OF CALIFORNIA LABOR CODE SECTION 2870 (attached hereto as Exhibit A). Specifically, this assignment shall not apply to any Invention that Employee develops entirely on Employee's own time without using Company's equipment, supplies, facilities, or trade secret information, UNLESS the Invention either: (a) Relates at the time of conception or reduction to practice to Company's business, or actual or demonstrably anticipated research or development of Company; or (b) Results from any work performed by Employee for Company. 3. Disclosure. Employee agrees to promptly disclose in writing to Company all Inventions, whether or not Employee believes they are subject to assignment under this Agreement. The purpose of this disclosure is to permit a determination of rights. 4. Prior Inventions. Employee has listed on Exhibit B all Inventions that Employee made prior to employment with Company that Employee wishes to exclude from this Agreement. If no prior inventions are listed, Employee represents that there are none. EXHIBIT A - CALIFORNIA LABOR CODE SECTION 2870 "(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer. (b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable." Employee acknowledges receipt of this notification and the attached copy of California Labor Code Section 2870. Employee Signature: _________________________ Date: _______________
INDEPENDENT CONTRACTOR STATUS - RECITALS WHEREAS, the parties intend that Contractor shall perform the Services as an independent contractor and not as an employee of Client, and the parties agree as follows: A. Freedom from Control and Direction (Prong A). Contractor shall have sole control over the manner and means of performing the Services. Client shall not control or direct Contractor's work, except to specify the desired results. Contractor shall determine Contractor's own work schedule, work location, and methods of performance. Contractor is not required to attend Client's meetings, follow Client's personnel policies, or receive training from Client on how to perform the Services. B. Outside Usual Course of Business (Prong B). The Services to be performed by Contractor are outside the usual course of Client's business. [DESCRIBE SPECIFICALLY: e.g., "Client is a marketing agency, and Contractor is providing specialized database optimization services that Client does not offer to its customers and does not perform as part of its regular business operations."] C. Independently Established Trade or Business (Prong C). Contractor is engaged in an independently established trade, occupation, or business of the same nature as the Services. Contractor: (i) Maintains a separate business location at: [ADDRESS]; (ii) Holds a business license issued by: [JURISDICTION]; (iii) Has own business insurance including general liability and professional liability; (iv) Regularly performs similar services for other clients; (v) Advertises services to the public through: [WEBSITE/OTHER]; (vi) Sets own rates and negotiates terms with each client individually. D. Additional Factors. Contractor: (i) Provides own tools, equipment, and software necessary to perform the Services; (ii) Bears Contractor's own business expenses; (iii) Is not eligible for Client's employee benefits; (iv) Is responsible for Contractor's own taxes, including self-employment tax; (v) May hire assistants or subcontractors with Client's prior written consent; (vi) Is free to accept or decline specific projects. Contractor represents and warrants that the foregoing statements are true and accurate. Contractor shall indemnify Client against any claims, liabilities, or expenses arising from a determination that Contractor is an employee of Client.
SUBCONTRACTOR INTELLECTUAL PROPERTY FLOWDOWN 1. Subcontractor IP Assignment. Subcontractor hereby assigns to Agency all right, title, and interest in and to all Work Product created by Subcontractor in connection with the Services, including all intellectual property rights therein. This assignment is made on the same terms as Agency's assignment to its end client, and Subcontractor acknowledges that such Work Product will be further assigned to Agency's client. 2. Work Made for Hire. To the extent any Work Product constitutes a "work made for hire" as defined in 17 U.S.C. Section 101, it shall be the sole and exclusive property of Agency (or Agency's client, as applicable). 3. Flowdown of Confidentiality. Subcontractor agrees to be bound by the same confidentiality obligations that bind Agency under Agency's agreement with its client. Subcontractor shall not disclose any Confidential Information of Agency's client to any third party and shall use such information solely for performing the Services. 4. Pre-Existing Materials Disclosure. Prior to commencing Services, Subcontractor shall disclose in writing on Exhibit A all Pre-Existing Materials that Subcontractor intends to incorporate into the Work Product. For any Pre-Existing Materials so incorporated, Subcontractor grants to Agency (and Agency's client) a perpetual, royalty-free, worldwide, irrevocable license to use, modify, reproduce, distribute, and create derivative works of such Pre-Existing Materials as part of the Work Product. 5. Third-Party Materials. Subcontractor shall not incorporate any third-party materials into the Work Product without Agency's prior written consent. If consent is granted, Subcontractor shall ensure that Agency (and Agency's client) receives all licenses necessary to use such third-party materials. 6. Representations and Warranties. Subcontractor represents and warrants that: (a) Subcontractor has full authority to make the assignments and grants in this Agreement; (b) The Work Product will be original and will not infringe any third-party rights; (c) No Pre-Existing Materials or third-party materials are incorporated except as disclosed; (d) Subcontractor has not previously assigned or encumbered any rights in the Work Product. 7. Indemnification. Subcontractor shall indemnify, defend, and hold harmless Agency and Agency's client from any claims arising from Subcontractor's breach of the representations in Section 6.
EXHIBIT [X] - PRE-EXISTING MATERIALS The following materials are Pre-Existing Materials owned by Contractor that may be incorporated into the Deliverables. Contractor retains ownership of these Pre-Existing Materials and grants Client a perpetual, royalty-free, worldwide, non-exclusive, irrevocable license to use, modify, reproduce, distribute, publicly display, publicly perform, and create derivative works of these Pre-Existing Materials solely as incorporated into the Deliverables. 1. CONTRACTOR-OWNED MATERIALS -------------------------------------------------------------------------------- | Name/Description | Type | License Grant to Client | |---------------------------|----------------|--------------------------------| | [DataSync Library v2.1] | Code Library | Perpetual, royalty-free, | | | | non-exclusive license | |---------------------------|----------------|--------------------------------| | [API Toolkit Framework] | Framework | Perpetual, royalty-free, | | | | non-exclusive license | |---------------------------|----------------|--------------------------------| | [Form Validation Module] | Component | Perpetual, royalty-free, | | | | non-exclusive license | -------------------------------------------------------------------------------- 2. OPEN SOURCE COMPONENTS -------------------------------------------------------------------------------- | Name | Version | License | Copyleft? | Link | |---------------------------|---------|--------------|-----------|-------------| | [React] | 18.x | MIT | No | [URL] | |---------------------------|---------|--------------|-----------|-------------| | [Express.js] | 4.x | MIT | No | [URL] | |---------------------------|---------|--------------|-----------|-------------| | [PostgreSQL] | 15.x | PostgreSQL | No | [URL] | -------------------------------------------------------------------------------- 3. THIRD-PARTY LICENSED MATERIALS -------------------------------------------------------------------------------- | Name | Licensor | License Type | Restrictions | |---------------------------|----------------|----------------|---------------| | [Stock Images - Adobe] | Adobe Stock | Extended Lic. | No resale | |---------------------------|----------------|----------------|---------------| | [Font Family - Inter] | Google Fonts | OFL | None | -------------------------------------------------------------------------------- Contractor certifies that the licenses for all Pre-Existing Materials listed above permit their incorporation into the Deliverables and the license grant to Client described herein. Contractor shall promptly notify Client of any additional Pre-Existing Materials to be incorporated and shall obtain Client's written consent before incorporation. If this Exhibit is blank or states "None," Contractor represents that no Pre-Existing Materials will be incorporated into the Deliverables. Contractor Signature: _________________________ Date: _______________ Client Acknowledgment: ________________________ Date: _______________
NON-SOLICITATION OF EMPLOYEES
During the term of this Agreement and for a period of [twelve (12) / twenty-four (24)] months following termination or expiration of this Agreement, Contractor agrees not to directly solicit for employment any employee of Client with whom Contractor had material contact in connection with the Services.
For purposes of this Section:
(a) "Directly solicit" means Contractor personally contacts the employee to recruit them for employment or engagement with Contractor or Contractor's other clients. This restriction does not apply to:
(i) General job postings or advertisements not targeted at Client's employees;
(ii) Responses to unsolicited inquiries from Client's employees;
(iii) Use of recruiting firms, provided Contractor does not specifically direct them to target Client's employees.
(b) "Material contact" means regular, direct interaction in the course of performing the Services, such as working on the same project team, attending the same meetings, or direct communication regarding the Services.
IMPORTANT CALIFORNIA NOTICE: This provision restricts only the solicitation of employees and does not restrict Contractor's ability to engage in any lawful profession, trade, or business. Nothing in this Agreement shall be construed as a covenant not to compete, which would be void and unenforceable under California Business and Professions Code Section 16600.
Client acknowledges that should Client's employee independently seek employment with Contractor without solicitation, this provision shall not apply.
CONFIDENTIALITY 1. Definition. "Confidential Information" means any non-public information disclosed by one party (the "Disclosing Party") to the other party (the "Receiving Party") in connection with this Agreement, including but not limited to: technical data, trade secrets, know-how, source code, algorithms, software designs, business plans, customer lists, financial information, and any other information that is designated as confidential or that reasonably should be understood to be confidential given the nature of the information and circumstances of disclosure. 2. Exclusions. Confidential Information does not include information that: (a) Was publicly known at the time of disclosure or becomes publicly known through no fault of the Receiving Party; (b) Was rightfully in the Receiving Party's possession prior to disclosure; (c) Is rightfully obtained by the Receiving Party from a third party without restriction; (d) Is independently developed by the Receiving Party without use of or reference to the Confidential Information; or (e) Is required to be disclosed by law, provided the Receiving Party gives prompt notice to the Disclosing Party and cooperates in seeking a protective order. 3. Obligations. The Receiving Party agrees to: (a) Hold Confidential Information in strict confidence using at least the same degree of care used to protect its own confidential information, but no less than reasonable care; (b) Not disclose Confidential Information to any third party without prior written consent; (c) Limit disclosure to employees, contractors, and agents who have a need to know and are bound by confidentiality obligations at least as protective as these; (d) Not use Confidential Information for any purpose other than performing obligations under this Agreement. 4. Return of Materials. Upon termination of this Agreement or upon request, the Receiving Party shall promptly return or destroy all Confidential Information and certify such return or destruction in writing. The Receiving Party may retain copies required by law or internal compliance policies, subject to continued confidentiality obligations. 5. Duration. The obligations under this Section shall survive termination of this Agreement for a period of [three (3) / five (5)] years, except with respect to trade secrets, which shall be protected for as long as they remain trade secrets under applicable law. 6. Injunctive Relief. The Receiving Party acknowledges that a breach of this Section may cause irreparable harm for which monetary damages would be inadequate, and the Disclosing Party shall be entitled to seek injunctive relief in addition to any other remedies available at law or equity. 7. No License. Disclosure of Confidential Information does not grant the Receiving Party any license or right in or to such Confidential Information, except as expressly provided in this Agreement.
Contract Generators
Interactive tools to generate California-compliant team contracts. Fill in your details, preview in real-time, and download as Word documents.
Independent Contractor Agreement
California-compliant contractor agreement with ABC test recitals, IP assignment, and proper classification language.
Generate AgreementEmployee IP Assignment
Labor Code 2870 compliant invention assignment for California employees with required statutory notice.
Generate IP AgreementFrequently Asked Questions
That arrangement creates significant misclassification risk under California's ABC test. Working exclusively for one company, full-time hours, and on the company's core business functions all point toward employment. Even if you have a written contractor agreement, California courts and agencies will look at the actual relationship. Consider either hiring them as an employee or restructuring so they work part-time while maintaining other clients. If you must use a contractor, ensure they genuinely control how the work is done, work from their own location, use their own tools, and have an established independent business.
No, having an LLC does not automatically satisfy the ABC test. While it's one factor supporting Prong C (independently established trade), courts look at the substance of the relationship, not just the corporate form. If the LLC has only one client (you), doesn't advertise services publicly, and the individual works like an employee, the LLC entity may be disregarded. That said, engaging with an established LLC that has multiple clients, its own insurance, and a genuine business operation is stronger than engaging an individual.
Yes, California Labor Code 2872 requires that any employment agreement assigning invention rights must include a written notification to the employee of the provisions of Section 2870. Best practice is to include the full statutory text as an exhibit to the agreement and have the employee specifically acknowledge receipt. Failure to provide this notice may make your invention assignment provision unenforceable as to inventions that qualify for the Section 2870 exception.
California courts will likely still apply California law to non-compete provisions if the worker is based in California, regardless of what the contract says about choice of law. California public policy strongly disfavors non-competes, and courts have refused to enforce them even when contracts specified other states' laws. As of 2024, California law also prohibits employers from even requiring California-based employees or contractors to sign non-compete agreements, even if the employer is based elsewhere. Focus on confidentiality, trade secret protection, and limited non-solicitation provisions instead.
If GPL-licensed code is incorporated into your deliverables in a way that triggers GPL's copyleft provisions, your client may be required to make their source code available under the GPL. This can be a serious problem for proprietary software. Your subcontractor agreement should require disclosure of all open source components BEFORE incorporation, require your approval for any copyleft-licensed code, and include indemnification if undisclosed copyleft code creates problems. Conduct regular code audits and use tools to scan for open source license compliance.
This depends on how your agreement handles pre-existing materials and improvements. By default, if you've assigned all work product to the client, improvements to your library made during the project may become client property. To avoid this, you should: (1) list your library in the pre-existing materials exhibit, (2) specify that you retain ownership of the library and grant client a license, and (3) explicitly address who owns improvements - typically you retain improvements to the underlying library while the client owns the project-specific customizations. Get this in writing before the project starts.