Background. It is common for church employees to compose music or write books or articles in their church office during office hours. What is often not understood is that such persons do not necessarily own the copyright in the works they create. While the one who creates a work generally is its author and the initial owner of the copyright in the work, section 201(b) of the Copyright Act specifies that “[i]n the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author … and, unless the parties have expressly agreed otherwise in a written instrument signed by them, owns all of the rights comprised in the copyright.”
The copyright law defines “work made for hire” as “a work prepared by an employee within the scope of his or her employment.” There are two requirements that must be met: (1) the person creating the work is an employee, and (2) the employee created the work within the scope of his or her employment. Whether or not one is an employee will depend on the same factors used in determining whether one is an employee or self-employed for federal income tax reporting purposes (see chapter 2 of Richard Hammar’s Church & Clergy Tax Guide). However, the courts have been very liberal in finding employee status in this context, so it is possible that a court would conclude that a work is a work made for hire even though the author reports his or her federal income taxes as a self-employed person.
The second requirement is that the work must have been created within the scope of employment. This requirement generally means that the work was created during regular working hours, on the employer’s premises, using the employer’s staff and equipment. This is often a difficult standard to apply. As a result, it is desirable for church employees to discuss this issue with the church leadership to avoid any potential misunderstandings. Section 201(a), quoted above, allows an employer and employee to agree in writing that copyright ownership in works created by the employee within the scope of employment belongs to the employee. This should be a matter for consideration by any church having a minister or other staff member who creates literary or musical works during office hours, on church premises, using church staff and church equipment (e.g., computers, printers, paper, library, secretaries, dictation equipment).
Example. Rev. B is senior minister of his church. He is in the process of writing a devotional book. Most of the writing is done during regular church office hours, in his office in the church, using church equipment and a church secretary. Rev. B’s contract of employment does not address the issue of copyright ownership in the book, and no written agreement has ever been executed by the church that addresses the matter. Under these facts, it is likely that the book is a “work made for hire.” The result is that the church is the “author” of the book, it is the copyright owner, and it has the sole legal right to assign or transfer the copyright in the book.
Example. Rev. T is minister of music at her church. She has composed several songs and choruses, all of which were written during regular office hours at the church, using church equipment (piano, paper, etc.). The church has never addressed the issue of copyright ownership in a signed writing. It is likely that the songs and choruses are “works made for hire.” The result is that the church is the “author” of these materials, it is the copyright owner, and it has the sole legal right to assign or transfer the copyright in these works.
Example. Same facts as the preceding example, except that Rev. T composes the music in the evening and on weekends in her home. While she is an employee, she did not compose the music “within the scope of her employment,” and therefore the music cannot be characterized as “works made for hire.” The legal effect of this conclusion is that Rev. W owns the copyright in the music, and is free to sell or transfer such works in any manner she chooses without church approval.
Example. Same facts as the previous example, except that Rev. T composes many of her works both at home and at the church office. Whether or not a particular work is a work made for hire is a difficult question under these circumstances. The answer will depend upon the following factors: (1) the portion of the work that is composed at the church office, compared to the portion composed at home; (2) the portion of the work created with church equipment, compared to the portion created with Rev. T’s personal equipment; (3) the portion of the work created during regular office hours, compared to the portion created after hours; and (4) the adequacy of Rev. T’s personal records to document each of these factors. Unfortunately, a staff member’s records may be inadequate. In such a case, work made for hire status will depend upon the staff member’s own testimony, and the testimony of other witnesses (such as other staff members).
A second concern—the church’s tax-exempt status. If a church transfers the copyright in a work made for hire to an employee, this may be viewed by the IRS as “private inurement” of the church’s resources to an individual. If so, this could jeopardize the church’s tax-exempt status. Neither the IRS nor any court has addressed the tax consequences of such an arrangement to a church. Here are some options:
1. The church transfers copyright ownership to the staff member. This may constitute private inurement. The IRS construes this requirement as follows:
An organization’s trustees, officers, members, founders, or contributors may not, by reason of their position, acquire any of its funds. They may, of course, receive reasonable compensation for goods or services or other expenditures in furtherance of exempt purposes. If funds are diverted from exempt purposes to private purposes, however, exemption is in jeopardy. The Code specifically forbids the inurement of earnings to the benefit of private shareholders or individuals …. The prohibition of inurement, in its simplest terms, means that a private shareholder or individual cannot pocket the organization’s funds except as reasonable payment for goods or services.
When a church employee writes a book during office hours at the church, using church equipment, supplies, and personnel, the copyright in the work belongs to the church. If the church chooses to renounce its legal rights in the book, and transfers the copyright back to the employee, then it is relinquishing a potentially valuable asset that may produce royalty income for several years. Few if any churches would attempt to “value” the copyright and report it as additional taxable compensation to the employee, and as a result it is hard to avoid the conclusion that such arrangements result in inurement of the church’s assets to a private individual. The legal effect is to jeopardize the church’s tax-exempt status. This risk must not be overstated, since only a few churches have had their exempt status revoked by the IRS in the last fifty years, and none because of a transfer of copyright to an employee who created a work made for hire. But the consequences would be so undesirable that the risk should be taken seriously.
2. The church retains the copyright. The risk of inurement can be minimized if not avoided if the church retains the copyright in works made for hire, and pays a “bonus” or some other form of compensation to the author.
Example. Rev. G is senior pastor of his church. He writes a devotional book in his office at the church during office hours and using church equipment. He reads an article about works made for hire, and is concerned about the legal implications. He discusses the matter with the church board. In order to eliminate any risk to the church’s tax-exempt status, the church board decides that the church will retain the copyright in Rev. G’s book. The publisher is contacted, and agrees to list the church as the copyright owner on the title page and to pay royalties from sales of the book directly to the church. The church board agrees to pay Rev. T a “bonus” in consideration of his additional services in writing the book. The bonus is added to Rev. T’s W-2 at the end of the year. This arrangement will not jeopardize the church’s tax-exempt status.
3. The church urges employees to do “outside work” at home. Do you have a writer or composer on staff at your church? If so, it is possible that this person is doing some writing or composing on church premises, using church equipment, during office hours. One way to avoid the problems associated with work made for hire status is to encourage staff members to do all their writing and composing at home. Tell staff members that (1) if they do any writing or composing at church during office hours, their works may be works made for hire; (2) the church owns the copyright in such works; and (3) the church can transfer copyright to the writer or composer, but this may constitute “inurement” of the church’s assets to a private individual, jeopardizing the church’s tax-exempt status. By urging staff members to do all their personal writing and composing at home, the church also will avoid the difficult question of whether works that are written partly at home and partly at the office are works made for hire.
4. Sermons. Are a minister’s sermons “works made for hire” that are owned by the employing church? To the extent that sermons are written in a church office, during regular church hours, using church secretaries and equipment, it is possible that sermons would be considered works made for hire. However, this issue has never been addressed directly by any court, and so it is difficult to predict how a court would rule. A professor’s lecture notes provide a comparable example. College professors often prepare their lecture notes in their office on campus, using campus equipment. Are these notes, and the lectures themselves, works made for hire? If so, the college owns the copyright in the notes and lectures, unless it has transferred the copyright back to the professor in a signed writing. One court has ruled that a professor’s lectures were not works made for hire, and did not belong to the university. Williams v. Weisser, 78 Cal. Rptr. 542 (1969). This case certainly can be used to support the position that a minister’s sermons are not works made for hire.
A third concern—excessive compensation. Staff members who retain ownership of a work made for hire because of a written transfer signed by the church may be subject to intermediate sanctions. Intermediate sanctions are excise taxes the IRS can assess against persons who receive excessive compensation from a church or other charity. The point is this—since the church is the legal owner of the copyright in a work made for hire, it is legally entitled to any income generated from sales of the work. By letting the writer or composer retain the copyright, and all rights to royalties, the church in effect is paying compensation to him or her in this amount. If the work generates substantial income, then this may trigger intermediate sanctions. This would expose the writer or composer to an initial excise tax of 25 percent of the amount of taxable compensation that exceeds what the IRS deems to be reasonable. There is an additional 200 percent tax that can be assessed against the writer or composer if he or she does not return the excess amount to the church. Board members who authorized a transfer of the copyright to the writer or composer may be collectively assessed a tax of 10 percent of the excessive compensation up to a maximum of $10,000.
Key point. Intermediate sanctions can be imposed only against “disqualified persons” and “managers.” IRS regulations define a disqualified person as any person who was in a position to exercise substantial influence over the affairs of the organization at any time during the five-year period ending on the date of the transaction. While a senior pastor ordinarily will meet this definition, other staff members may not. As a result, in many churches the risk of intermediate sanctions will be limited to senior pastors who create works made for hire and are allowed by their church to retain the copyright.
Key point. Church board members are exposed to an excise tax if they authorize a transfer of copyright in a work made for hire to the employee who created it, if the work generates substantial income.
Checklist of important points. Here are the points to keep in mind:
- a “work made for hire” is any book, article, or piece of music created by an employee in the course of employment
- a work is created in the course of employment if it is written or composed during office hours, on church property, using church equipment
- the employer owns the copyright in a work made for hire
- an employer, by a signed writing, can transfer copyright in a work made for hire to the employee who created it
- a church that transfers the copyright in a work made for hire to the employee who created it is jeopardizing its tax-exempt status, since this may constitute “inurement” of its assets to a private individual
- a church that transfers the copyright in a work made for hire to the employee who created it may be exposing the employee to intermediate sanctions
- sermons may not constitute a work made for hire, even if they are created in the course of employment