Work-for-hire Agreements versus Knowledge Partnerships
Work-for-hire agreements are legally defined in copyright law as work arrangements in which the hiring party owns all the rights to the work created in exchange for remuneration. In the past this concept has worked well for particular situations. For example, artists worked on specific designs for a company and sold off their property rights to another company. Musical composers may write a song and sell it to a music company which then can hire musicians or an orchestra to perform it. These are examples for the receiving party paying for the result of the knowledge worker’s work. There are many examples where knowledge workers are performing an act and get paid for. Traditionally, lawyers give advice and represent in court and medical practitioners help patients and find ways to cure them. What is common in all these examples is the fact that these settings were mostly involving individual knowledge workers working autonomously and, more importantly, the knowledge remained with the knowledge worker. What was sold off or paid for were the property rights to a work result, such as a sculpture, or a service, such as the representation in court by a lawyer.
In today’s Knowledge Age, however, there are many more situations in which knowledge workers perform such work but the line separating the performer and the receiver of the work is no longer as clear. In addition, the above examples show how the benefit of creating the knowledge always remained with the expert and not with the hirer. For example, the lawyer can use the knowledge created by her intensive research and apply it to her next client. After a while she can become a specialist in a particular field of law by servicing clients who need advice in specific subsets of the law. Nobody would expect the lawyer to give up her ownership rights to the knowledge she created simply because she was paid for legal representation. Similarly, it would seem ridiculous for a patient to claim ownership of a medical cure that his physician invented to cure him, just because he paid for the treatment. Unfortunately, in other more modern settings today organizations try to impose such extremely one-sided bargaining on their employees.
Some may argue the quest of companies to collect and protect “their” knowledge seems unconscionable. In many situations, however, this has been pushed pretty far and created outcomes that are detrimental to society and the free market. For example, it is common practice for employment agencies to impose non-competes on their employees. Granted, employment agencies spend their money on establishing networks of contacts with other organizations and this effort and value created needs to be respected because it helps matching company with candidate. Apart from the scenario where the agency receives a one-time fee for its service, many contingent workers employed by agencies effectively agree to pay the agency a percentage on their hourly rate.
While this is fine for short-term assignments, the question arises of what effect non-competes have in the long-term. Assume the same contingent worker changes work every three months. It is then to be expected that such workers will effectively lock themselves out of their local labor market because the non-compete will apply to every potential company on the local market. Even if workers make contacts on their own within their current workplace, the non-compete clause will prohibit them from doing so. The rationale is that because the agency brought that worker in, it has a claim to the proceeds of future projects, even if those were not arranged by the agency. Ergo, agencies have created a legal leach protection designed around a seemingly legitimate business interest. Unfortunately, the organization hiring the worker pays a higher price, the worker receives less than fair pay, and the customer of the organization ultimately overpays for the final product or service. Non-competes can therefore come to the detriment of society and are an active area of current legal disputes. Moreover, non-competes show how knowledge assets can be abused and how knowledge workers may not be compensated fairly for their work.
The problem with the current situation of knowledge workers is that knowledge workers hardly ever have a claim or ownership to the knowledge they created. As an incentive to work harder and become more productive, organizations should consider a shared ownership constellation by having the knowledge worker co-own the knowledge. From an economic perspective the market would benefit from such a regulation because companies do not add value if they act solely as tradesmen, such as in the case of employment agencies. The resulting increase in competition would benefit society as a whole by reducing prices and constantly advancing technology.
Many knowledge intensive organizations are severely damaged when workers leave because the knowledge workers take their knowledge with them and the company has no way of using it. A legal prohibition of knowledge workers to continue using their work therefore effectively destroys economic value because knowledge is wasted. For example, if an engineer designs a new motor for company X but that company does not want to build that particular motor for political reasons, the design is effectively wasted. The market would be better off if the engineer could leave and market the design at a different company which sees more potential in the design. In work constellations were knowledge workers are given ownership of their work, they are more likely to put more emphasis and exert more effort. This truth about human nature is also reflected and exploited in the inheritance law of Western countries. Individualist societies believe that it is more beneficial for society when individuals are allowed to pass on their wealth to their children. A co-ownership for the knowledge created by the worker and the organization would therefore align well with this ideology and probably result in a better outcome.
An example of a co-ownership scenario is the following. An architect receives an order to plan a house. He could make a simple plan and cash in $50,000 with relatively little effort or he could spend more effort and come up with a very creative plan of a house that saves 50% energy; however, a work-for-hire agreement would be detrimental in this case and counterproductive because the fruits of the additional effort and knowledge created would go to the client who would have been satisfied with the simple plan. Ergo, a work-for-hire arrangement places the architect in a dilemma. He is not using his fullest creative potential because he is not being rewarded for it and the client does not receive the best plan possible. Without a work-for-hire restriction, the architect could offer his new design to many other clients, help them save energy, and make a good return on his additional effort. This very simple example of a lose-lose situation illustrates the common practice in today’s knowledge intensive organizations. Organizations argue they have a claim to the knowledge because they put teams of people to work together, finance their efforts, and hence create value that way. While this is true, knowledge workers do not have to cooperate and communicate, or they can chose to minimize the quantity and quality of their communication if they do not feel they get their fair reward for their efforts.
The standpoint of organizations in their treatment of knowledge created is similar to how communist/socialist countries handle inheritance: all value created is usually returned to the state. The opposite strategy as practiced in the West is generally acknowledged to have motivated the public to work harder. Shared ownership in the form of shared ownership rights to knowledge created between the organization and the knowledge worker would therefore motivate to build intellectual capital as well asskills. The co-ownership of knowledge would also spur open and share innovation as a result. In addition, people would invest much more and much greater work results when they know they are building capital for themselves as well as for the organization.
The problem with the knowledge ownership sharing strategy is that knowledge-intensive firms provide resources with which knowledge is created. On the other hand, knowledge workers also contribute with their own resources, for example with the skills and experiences from the past. In reality, the investment is hence actually shared because knowledge workers have invested many years in education and other career building activities for which they are not directly reimbursed. While it is true that salaries are generally raised in exchange for seniority, higher salaries do not offer the same incentives as shared ownership.
Another problem is that presently knowledge workers are still in an inferior bargaining position compared to organizations, even though it improved over the years. Apparently knowledge is not yet as liquid as cash and it seems that cash nonetheless remains more powerful than knowledge assets. Given that knowledge is such an important asset, why does society put so much emphasis on cash? Should not more weight be placed on cash rather than knowledge, especially when cash is more easily replaced than knowledge?
After World War II, the industry transcended from manufacturing to service. During that transition the creation and management of knowledge became new challenges for management practitioners. At the same time, capital requirements to establish companies have lessened and the emphasis on knowledge has given workers more bargaining power. Because knowledge workers are no longer simple “helping hands” but instead actively engaged in the creating and managing valuable company assets, knowledge workers need different managerial treatment than traditional manufacturing employees.
Technological advances have also brought favorable work and business environments, even to individual entrepreneurs. The Internet offers now access to worldwide markets at very little costs and enables employees to work from remote sites without supervision. All these developments pose a challenge to contemporary managers because technological progress frequently surpassed that of management science. As technology and knowledge intensive organizations become more powerful, their future depends mainly on the management discipline.
The future will bring an even larger wave towards knowledge work and human resource management teams will need to prepare for it; however, traditional recruitment and incentive schemes do not seem to work with knowledge workers who demand more flexibility and power. Human resource departments are also just starting to realize that command-and-control and hierarchical structures are unsuitable for creative knowledge exchange. Dynamic team models and various knowledge management systems can be deployed to facilitate work processes; however, ultimately knowledge workers need to be motivated very differently from other types of staff.
This paper defended the thesis that work-for-hire agreements have a tendency to create counterproductive work arrangements because they cause knowledge workers to legally abandon their knowledge when they complete an assignment and leave an organization. Through various market effects this can often result in economic waste because knowledge is not utilized to the fullest extent possible. One way of motivating knowledge workers to increase their effort is to minimize the use of work-for-hire arrangements and instead offer shared ownership of knowledge. Realizing that they can own the knowledge they create beyond the boundaries of their organization, knowledge workers are likely to see this as an incentive to build long-lasting, quality knowledge assets and secure their future careers. At the same time, this measure would offer superior value to the present and future employer as well as to the general economy due to better utilization of intellectual capital.