A Solicitor’s Red Flag – Independent Contractors and Information Technology Services

April 27, 2015

When drafting or reviewing a contract, you have to consider all the ways the terms of the contract could affect your client.  That goes without saying.  However when your clients are being hired to perform services for their clients, especially in the information technology realm, it is critical to consider how the contract makes your client liable for its independent contractors.

Independent Contractors in the field of Information Technology

It is typical for large and small companies in the information technology field to hire independent contractors for project specific roles.  Much like steamfitters and electricians are hired to perform certain work on a new building but the builder does not need (and it would not be economical) to hire them as employees, so also do many information technology services companies not need a staff of employees.

As those independent contractors are called upon more and more to perform certain services subject to detailed legislation, contracts have gotten more detailed in order to address their involvement in service delivery.  Needless to say, under a contract the actions of your client’s independent contractors will be the actions of your client.

Let us explore some of the ways the participation of independent contractors in contract delivery will affect the provisions of the contract.  When I refer to “your client” I mean the person who has hired the independent contractors.

1.    Intellectual Property

Different intellectual property laws say different things.  You cannot properly address the various intellectual property presumption of ownership rules with one catch-all phrase.

Under the Copyright Act the creator is the first owner of the copyrighted work, unless that person is an employee.  An independent contractor creating software (a literary work) will be the first owner of the software created.  Typically the contract will require your client to ensure that good title in the software can be transferred to the person who hired your client.  In any event it stands to reason that your client would want good title in the software it hired the contractor to develop.  You have to ensure all your contracts will permit you to obtain good title to copyrighted works including the ability to compel the transfer of such title.

Dissimilarly, the Patent Act has no presumption favouring the independent contractor inventor.  Rather, the rights must be worked out through provincial law.  Where a company hires an independent contractor to help with a problem, the company will usually own the benefit of any invention that the contractor develops as a solution.  This prima facie position may, however, be modified by express or implied agreement.

2.    Confidential Information

Independent contractors may often not be able to perform their work without being exposed to the confidential information of your client.  Many software solutions cannot be properly established unless they may be tested with the data for which the solution is built.  Using other kinds of data is usually a poor substitute and hinders the development of the software.

Your client will be asked to keep the confidential information secret.  Further your client will be asked to contractually confirm that your client has bound its independent contractors to maintain confidentiality to the same degree and standard that your client has.  In this case you had better ensure that your client’s contract with the independent contractor does indeed satisfy the same degree and standard.

3.    Personal Information

Companies collect and store vast amounts of customer personal information.  As per PIPEDA customer personal information may only be used in accordance with the terms to which the customer agreed and is aware.

As a result your client and any of the independent contractors of your client shall only be permitted to use the personal information of the customers according to the terms to which the customer agreed and is aware.  Independent contractors are regularly called upon to use the personal information of customers to carry out the contractual duties of your client.  It is the obligation of your client to ensure by way of its contract with its independent contractors that they are required to deal with the personal information only as specified by your client.

4.    Anti-Spam Law (“CASL”)

Your client may be hired to send our commercial electronic messages under a contract.  It is not unusual that your client will hire an independent contractor to carry out this kind of service.  As CASL will determine whether you properly sent out the messages and where fines of $1 million have been levied for breach of CASL, it is critical that your client has the protections it needs to ensure that its independent contractors do not breach CASL.

It should not be that your client will have to direct its independent contractors on how to comply with CASL.  If the independent contractors are in the business of sending electronic messages, they have to be able to represent and warrant that their actions will comply with CASL and to indemnify your client in case they do not.

5.    Non-Hire

Depending on how valuable the services are that the contractors perform, your client will want to ensure at least for a certain period of time that the party who hired your client cannot hire away your client’s contractors.  This becomes even more important where your contractors are needed to provide ongoing services, for example, maintenance and repair, after the first piece of work, such as design and software creation, has been completed.  Make sure that any provision preventing the hiring away of your client’s contractors remains in effect for as long as the contract is in force and for any period of time that additional services are provided, such as maintenance, expiring only after a certain number of years after your client has ceased providing all services to the hiring party.

6.    Termination

Because of the many obligations that contractors perform under your client’s contract, some hiring parties even draft the contract so that if a contractor fails to fulfill its obligations (that your client designated as a task or role for a contractor) that such failure can result in the termination of the contract.

The termination provisions of any contract should be carefully analyzed to determine whether the contractor could cause your client to be in breach of its contract with the hiring party.  In the case that the contract is drafted such that the contractor’s failure to fulfill its duties causes your client to be in breach, you may be able to negotiate a different remedy other the contract termination depending on the severity of the specific breach.

Conclusion

Find out whether your client will be delivering services with the aid of contractors.  Find out what services the contractors will be called upon to perform.  Consider the legal ramifications.  Then examine the contract so that your client is clear about its obligations in respect of its contractors.

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Ryan Smith is a lawyer and trade-mark agent at Feltmate Delibato Heagle LLP.  Ryan can be reached at 905-287-2215 and rsmith@fdhlawyers.com.