There’s no business like show business, and to bring massive projects to life, you need an army of talented individuals.
The entertainment industry has relied on temporary workers, often classified as independent contractors, to support the project-based industry.
And when it comes to post-production, studios often bring contract workers on board to get things done on time. So, what’s the problem?
Well, issues can arise regarding employment relationships in these types of scenarios.
If a worker is wrongly classified as a contractor, the employer can run into trouble.
Significance of classifying workers in the entertainment industry
Employee classification has a considerable significance for workers, businesses, and the public in general.
The Federal Law Standards Act (FLSA) and California Assembly Bill (AB 5) specify that workers should be properly classified as an employee or contractor, but the terms outlined in both laws vary.
What happens when a worker is classified as an employee?
Once a worker is classified as an employee, the hiring business is responsible for:
paying federal Social Security and payroll taxes;
paying unemployment insurance taxes and state employment taxes;
purchasing workers’ compensation insurance;
complying with state and federal regulations regarding wages, overtime, hours worked, and working conditions.
What happens when a worker is classified as an independent contractor?
If a worker holds the status of an independent contractor, the business is not obligated to bear any of the previously mentioned costs or responsibilities, and the worker obtains none of the labor law benefits.
Why has the law stepped in to regulate employee classification?
Worker classification laws are in place to ensure that employees get the benefits and labor law protections they’re entitled to.
Misclassification also deprives the federal and state governments of billions of dollars in tax revenue; therefore, regulations are necessary.
We mentioned that worker classification guidelines are different under federal law and the California Bill. Below, we’ll take a closer look.
Employment relationship under FLSA
The U.S. Department of Labor has clarified how to determine employment relationship under the FLSA.
The FLSA tests employment relationships based on economic reality rather than technical concepts.
For more information, please see PDF (Revised July 2008).
The Supreme Court has expressed that there is no single rule or test that can identify whether an individual is an independent contractor or employee.
Additionally, the time or mode of pay does not determine employment status.
To make matters easier to understand, the Court has listed the following factors that are significant for employee or contractor classification:
The extent to which the services rendered are an integral part of the principal’s business.
The permanency of the relationship.
The amount of the alleged contractor’s investment in facilities and equipment.
The nature and degree of control by the principal.
The alleged contractor’s opportunities for profit and loss.
The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
The degree of independent business organization and operation.
The characteristics are listed verbatim. Check out the source here.
Employment relationship under California law – AB 5
On 1 January 2020, the California Assembly Bill or AB 5 took effect. The law codified the California Supreme Court’s decision in the Dynamex case.
According to section 1 of the Legislature, the Act aims to ensure that workers are not exploited by their employers due to misclassification.
To properly classify a worker as an independent contractor, the Court has proposed the ABC test.
Below are the conditions that have to be met:
The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
The conditions are listed verbatim. For details about the ABC test, please visit this page.
Implications for the entertainment industry
You’ll realize that the ABC test limits entertainment production companies when it comes to hiring freelancers.
For example, a writer or editor hired to work on a specific episode will have to be classified as a company employee.
Therefore, entertainment production companies will have to take special care of employee classification criteria to avoid lawsuits and claims.
In the Aftermath of AB 5 – AB 2257
As soon as AB 5 took effect, it faced criticism from businesses and workers.
Various businesses, including guilds and unions from the entertainment industry, lobbied to get the Bill revised.
The California Legislature considered some feedback and introduced amendments under AB 2257, which took effect on 4 September 2020.
The revised law offered exemptions to certain occupations and businesses, such as the music industry, but did not exempt companies such as Uber, Postmates and Lyft.
Employee classification for the exempt groups will be based on the multifactor Borello test instead of the ABC test.
Unfortunately, section 2750.3 of the Legislature does not offer exemptions for the motion picture and television industries.
Worker status under federal law and California law may vary
Since California has its own employment classification criteria, workers may be considered employees and have protections under California law, even if they hold contractor status under federal law.
For more information, please visit the Labor & Workforce Development Agency Employment Status Portal.
The dangers of misclassifying workers in the entertainment industry
If your production company is found guilty of worker misclassification, you are liable to pay back taxes, interest and penalties.
Apart from the penalties related to wage violations, there are civil penalties between $5,000 and $25,000 per violation for willful misclassification under California Labor Code section 226.8.
The dangers of misclassifying workers don’t just end there because workers themselves can also file claims and lawsuits against your company if they feel they have been wronged.
A worker can file one or more of the following:
A wage claim with the Labor Commissioner’s Office
A lawsuit for multiple claims and violations.
Conclusion
To avoid all the trouble and costs associated with improper classification, it’s best to get it right from the start.
The trouble, however, is that the determination of employment relationship is fact-dependent, so if you are unsure about employee classification, consult an expert.
You could also file a form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) so the IRS can determine the worker’s status for you.
Filing the form comes with a set of potential problems because the IRS might suspect that your production company has classification issues. This could then lead to an employment tax audit.
Revolution can offer guidance when it comes to labor relations and risk management, so feel free to get in touch with us for clarifications.
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