The New Law Disrupts How Non-Union Cast and Crew Are Employed. We Invited An Expert to Answer Questions from Filmmakers on Navigating the Changes.
by Carole Dean
Veteran entertainment attorney Mark Litwack’s practice includes work in the areas of copyright, trademark, contract, multimedia law, intellectual property and book publishing. As a producer’s representative, he assists filmmakers in arranging financing, marketing, and distribution of their films.
Mark has packaged movie projects and served as executive producer on many feature films. He has provided legal services or worked as a producer rep on more than 200 feature film. He’s the author of six books that are all invaluable for filmmakers. Mark has been a generous donor to the Roy Dean Film Grant for years.
I invited him on my The Art of Film Funding Podcast to help us understand the recently enacted California Assembly Bill AB-5. The bill went into effect January 1st, 2020 and will impact the employment status for many on nonunion film productions. It will restrict the use of 1099’s. Employers are now required to use what is called the ABC test to determine if an employee should be classified as an independent contractor.
Here are the edited highlights:
Can you give us some background and overview of the new law, please?
The California legislature passed this law to codify the principles of a recent 2018 court decision that’s referred to as the Dynamex case in which the Supreme court revised the prior test called Barrello for determining which workers are considered employees and which should be considered independent contractors.
The reason for this new law was to stop some labor practices that were considered abusive. Namely companies in the gig economy like Uber and Lyft who would hire drivers as independent contractors then deny them benefits that employees have, such as a minimum wage, overtime, rest breaks. In addition, employees compared to independent contractors have the right to form a union. Independent contractors must pay all the social security and Medicare costs. They are also not eligible for unemployment insurance.
Basically AB-5 creates an assumption for employers. Consider all workers as employees, unless the employer can prove the worker’s role is an independent contractor according to the state’s new criteria.
Most independent filmmakers, if they wanted to play it safe, would hire a payroll company and pay most, if not everyone, as an employee to avoid any potential penalties. The prior law SB -459, enhanced the penalty for employers who misclassify personnel penalties range from $5,000 to $15,000 per violation. Where there was a pattern or practice of violations, the penalty could increase from $10,000 to $25,000 per violation.
My guess is there’s an awful lot of independent filmmakers with people they hired as independent contractors when they should have been employees. It just never surfaced or came to light.
Much of the change has to do with government wanting to make sure taxes get collected.
The government is more likely to receive taxes if they were automatically taken out of an employee’s paycheck than if the gross amount is paid to an independent contractor. That’s why the IRS takes the position that, for most people working on film production, they should be classified as employees, not independent contractors.
They obviously want taxes withheld. If the person is being employed through a loan out company, then the loan out company will withhold taxes. This should not pose a problem for the producer. Moreover, if the person is being hired, not just for their time but, but also equipment is being supplied, it is more likely to pass muster as an independent contractor. But simply calling a person you hire an independent contractor or using an independent contractor form of contract does not by itself give you much protection.
How do you decide who is an employee and not an independent contractor?
In determining whether or not an individual is providing service as an independent contractor or an employee, it can be basically distilled down to what’s called a control test. Simply put, an employee is an individual who the employer has the right to exercise control over the manner and the means by which they perform their services. An independent contractor is sort of being hired for the end result.
So, if you hired a painting company to come and paint your house, they show up at your house. You will often supply the paint, although you often get to choose the color. They supplied the ladders, they supply the equipment, they supply the painters, and they paint your house. And maybe it takes a week and then they leave. And you, the homeowner, you’re not in the painting business and you can just pay them as an independent contractor. They’re in the painting business and that painting company, if they hire people, you know who worked for them, those people should be classified as employees.
So, in a movie, the director pretty much controls how everyone on the set does their job. Actors can’t change their role. They can’t decide when they want to show up. Everything is tightly, should be tightly choreographed, otherwise, you know, the shoot is going to be a disaster.
Exactly. Let’s go over that ABC test. Can you tell us what that is?
The ABC test requires that the hiring entity establish each of the following three factors to classify workers as independent contractors.
The first is “A”, that the worker is free from the control and direction of the hiring entity in connection with the performance of the work.
“B” is that the worker performs work that is outside the usual course of the hiring entity, the employer’s business.
“C” is that the worker is customarily engaged in an independently established trade occupation or business of the same nature as the work performed for the hiring entity.
This new law creates specific exceptions and says the law can be applied somewhat retroactively. The exceptions fall into several different categories. (There are) certain exempt occupations, contracts for certain professional services, specific businesses, certain business to business contracting relationships…
But there is no specific exemption for filmmakers or those who work in film or television.
We’re still out here trying to figure out how to work within these laws. Most of my questions I’ve taken from filmmakers and I so appreciate your helping us to get clarity on this. One filmmaker asks, how does AB-5 affect non-union films?
It affects both union and nonunion films, but union productions already pay 95% of their workers as employees, not as independent contractors. And for this reason, unions believe that this law does not affect them. The unions have also said that they don’t think this law affects using loan out companies, but some attorneys are not so sure. For nonunion employees who were paid as independent contractors, the employer can be liable. The filmmaker can be liable if they are misclassified.
The safest thing to do, frankly, is to hire a payroll company. And let the payroll company deduct taxes and social security.
Some of the filmmakers are wondering should they create their own loan out company like create an LLC or an S Corp or even a single member LLC. If they decided they wanted to become a loan out company, what would you suggest they consider? Which type of a corporation?
What are we talking about crew now? People being hired? Yes. Well, it appears that they can. They can set up a separate loan out company, which is considered a separate legal entity from them personally. And the purpose of loan out companies is basically to save on taxes.
When an actor sets up a loan out company, they usually own it 100%. When they get hired by a studio, they say to the studio instead of hiring me directly as an employee, I want you to contract through my loan out company for my services. So, the studio enters into a contract with the loan out company, which is 100% controlled by the artist. They also get the artist to sign what’s called an inducement agreement which binds the artists directly to the obligations. The studio can pay a flat fee to the loan out company. The loan out company hires you and pays you. But, the loan out company is your employer. They are the ones who should be deducting and paying taxes.
A lot of people want to, if they’re in the business, they want to set up a corporation or an LLC. That gives them some insulation. Because if things go bad, you could find yourself in a lawsuit. As a sole proprietorship, even if you founded it as DBA. A DBA is just a fictitious business name. It doesn’t give you any legal protections at all.
Let’s talk about labor versus gear rental fees. For freelance cinematographers, can they receive a 1099 for their gear rental and a W2 for labor on the same job?
Yes, they can. When you rent equipment, you’re not hiring someone. There’s no employment relationship there because you’re not hiring someone. These rules about whether you’re an independent contractor or an employee have to do with hiring people to provide services. When you’re renting equipment that’s totally different.
Right. Okay. Got it. Part of the law says collaborating with the same people often could demonstrate that you are dependent on that one job and therefore an employee. What if you’re working as an adviser and most of your work is for one company? But you have no call time and you can work when you set appointments. How would you classify this?
Well, this is gray areas here. And you know, one of the problems with this whole scheme of treating employees and independent contractors differently is it’s not always crystal clear whether someone is an employee or an independent contractor. They could fall within this gray area where it’s not so clear. So, there’s dangers.
My advice is if you’re concerned about being fined the safest thing to do is to hire them through a payroll company. Hire them as an employee and have taxes deducted. There’s no risks for that. It’s only if you hire someone who’s deemed an employee and you pay them as an independent contractor then you have some risk.
So, it’s much cheaper for you to just abide by the law until it’s amended to include the film industry or new laws are made. The safest thing you can do financially is to either start the loan out company or just hire a payroll company.
Right. And by the way, those penalties are for violating the law. There could be additional penalties. For instance, if you hired someone as an independent contractor and they should have been employees and they also worked a lot of overtime. Now, you might also be liable for violating the overtime statute. So yeah, there could be a whole, a whole bunch of potential problems.
Oh my gosh. A letter I received said an option to consider is hire an entertainment law firm. If you’re a producer that has employment contracts in place drafted after 2020, you could potentially be subjected to tax penalties and lawsuits by both city and state of California. Does this mean that even if you have contracts in place, you could be fined if you were paid wrong?
Yes. When the courts look at a contract, if the contract says this is a contract for the sale of a duck, but it’s obvious what you bought instead was the chicken. The court’s not going to be fooled. you know? So, if you say this person is an independent contractor just because the contract says this person is an independent contractor, then it doesn’t make right.
If they should have been an employee, the contract’s not going to fool anyone. I’m not sure most independent filmmakers need to hire an entertainment law firm specifically for this. I would say hire a payroll company.
If you hire a payroll company, you will probably be okay because this is exactly what the payroll company has expertise in.
If you’re uncertain about what to do, you can hire an attorney. But my guess is that most of the time, if you just had a payroll company that would solve the problem.
Carole Dean is president and founder of From the Heart Productions; a 501(c)3 non-profit that offers the Roy W. Dean Film Grants and fiscal sponsorship for independent filmmakers. She hosts the weekly podcast, The Art of Film Funding, interviewing those involved in all aspects of indie film production. She is also the author of The Art of Film Funding, 2nd Edition: Alternative Financing Concepts. See IMDB for producing credits