An article in today's New York Times notes the disjuncture between the record labels and many musicians (and similarly between directors and screenwriters on the one hand and film producers on the other) on the whole file-sharing issue. Sadly, this is not just a matter of abusive contracts, or questionable accounting practices, or inept sales efforts, or any other behavioral aspect of the music business. It's not just a bad idea—it's the law. Even if all of these industry practices were changed today, retroactively, there would remain a serious problem to overcome: a definition in the Copyright Act.
The Copyright Act defines a "work made for hire" in part as
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… if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.
17 U.S.C. § 101. Things would have been even worse under § 1011(d) of the Intellectual Property and Communications Omnibus Reform Act of 1999, which would have defined "phonorecordings" as works made for hire regardless of the contractual terms.
In any event, there is an "impairment of contracts" problem with changing music industry practices. At the moment, the work made for hire clause allows a definitional clause to effect the transfer of the copyright from the actual creator to a commissioning party. That gives the commissioning party a property interest. If the work made for hire clause were to be retroactively corrected so that it did not automatically give the commissioning party such an interest, regardless of contractual language that was intended to make such a transfer, it would "impair" the contracts that depend upon those clauses. That is a no-no. See, e.g., Trustees of Dartmouth College v. Woodword, 17 U.S. 518 (1819). Prospective relief, however, will not solve the file-sharing problem, because it would not influence any existing recording (and quite possibly not some recordings that do not yet exist but have already been contracted). That would leave an immense proportion of material under the current system, which rewards not the creator—as intended by the Intellectual Property Clause—but investors.
The intellectually dishonest aspect of US "work made for hire" law is that it defines the "author" as the commissioning (investing) party. In other words, for legal purposes the author of Galaxy Quest is DreamWorks LLC, not David Howard and Robert Gordon (the scriptwriters) or Dean Parisot (the director) or any other natural person. Similarly, the legal author of Bridge Over Troubled Waters (the album) is Columbia, not Simon & Garfunkel (the performers) or Paul Simon (the songwriter). This is all very much like Humpty Dumpty's definition of "glory" as "a good knock-down battle." Whether Congress has the power to redefine common language used in the Constitution in a fashion that undermines the stated rationale is open to question; whether it was intellectually honest to do so is not.
But why define the author from the beginning? Can't there just be a transfer of copyright? Well, yes. But it is a transfer that could be time-limited (17 U.S.C. §§ 203, 304), and would be subject to the vagaries of state contract law. Then there's that whole awful droits morale ("moral rights") thing to which the Europeans, and particularly the French, pay so much attention. A WFH's actual creator, not being the legal author, cannot claim any droit morale when, say, the studio cuts a scene from a film at the last moment to avoid an NC–17 rating, over the protests of the director, screenwriter, actors, and every other creative person involved with the film. <SARCASM> But that never happens. </SARCASM>
There are several simple ways out of this morass. However, all of them would result in some harm to large corporate interests in exchange for enhancing creators' rights and the purposes of the Intellectual Property Clause. In this era of political action committees, outright purchase (or at least long-term lease) of elected officials, and campaign finance "reform" that does nothing of the sort, I doubt that any of these reforms could be adopted. I can dream, though.