Here’s a common scenario:
A start-up software company is formed to solve a pressing problem. The founder (Susan) shares her vision with family and friends, and they get excited about what she is doing. They tell more people, who also get excited.
Susan starts the company on a shoe-string. She keeps her full-time job, working on the start-up during nights, weekends and holidays.
Tom, a software developer, finds her vision compelling. He offers to help Susan for free by creating the software architecture. She gratefully accepts!
They work well together. He quickly develops the architecture and creates an innovative new method in the process.
Susan is very successful at finding customers for the software. She signs licensing agreements with a large number, taking the company from zero to $1M in revenue almost overnight.
Tom congratulates Susan on her success, and hands her an invoice for all of the time he has spent developing the architecture. The invoice is from his software development business, Coding by Tom, LLC.
Does Susan have to pay this “volunteer?”
Yes. The Fair Labor Standards Act requires employers to pay people who perform work for the company. Susan must pay Tom at least minimum wage for every hour or fraction of an hour he worked on her architecture.
What about Tom’s agreement that he would be a volunteer?
Unenforceable. People can’t contract to do something that is illegal.
What are Susan’s financial exposures?
She owes at least minimum wage for all the time that Tom can credibly claim. She also owes the state and federal government for unpaid taxes, unemployment insurance contributions, etc. She almost certainly faces fines, penalties and interest to the government.
Does she face intellectual property ownership issues?
Yes. The U.S. copyright laws consider software to be a work of art. Independent contractors who create software typically own the copyright, which means Susan is probably going to need to pay to purchase the copyright from Tom’s company. Tom may also have the right to file a patent on the process he invented.
The moral of the story? There is no such thing as a free lunch (or a free coder).
Entrepreneurs need to get guidance on the basics of business law before they start a business.
Please note: the above post contains educational information. It is not intended as legal advice. Engage an attorney who is licensed in your state to get advice on dealing with any specific legal issue.
© 2018 Michael S. Oswald