Answers - Payroll 101 - FLSA
Employees and the Fair Labor Standards Act (FLSA)
The Fair Labor Standards Act (FLSA) was enacted in 1938 with the aim of protecting workers particularly vulnerable to being taken advantage of, such as children and low-wage employees. The federal statute established stringent rules for the employment of minors, and created the basis for our current wage-and-hour laws. Minimum wage, the 40-hour workweek and mandatory payment of overtime all have their roots in the original tenets of the FLSA. Over the years, the statute has evolved, but it still remains the basis of federal employment law throughout the United States.
The FLSA applies to the entertainment industry as to any other. Production companies and even crew members have at times sought to avoid the strictures of the statute by classifying entertainment workers as independent contractors rather than employees. But over time, the government has become increasingly vigilant about the misclassification of production employees as contractors. The feds are concerned about two things here: the loss of income tax from misclassified contractors (although those taxes are at least partially recaptured) and the loss of payroll taxes from production companies when crew members are misclassified. Those payroll taxes go toward funds that are drawn on by U.S. workers in entertainment and other industries alike; those funds include Social Security and Medicare. How do I know if a crew member is an employee or independent contractor? Who qualifies as an employee versus an independent contractor in the entertainment industry?
Definition of Employee
An employee is required to comply with directions as to when, where, and how the employer wants him or her to work. An employee is hired by the employer, works exclusively for the employer and is subject to dismissal or can quit at will. An employee performs services under the company’s name, is generally paid a salary, reimbursed for expenses and fringe benefits and is furnished tools, equipment, materials and training.
Independent Contractors vs. Employees
Employee – Required to comply with when, where, and how to work
Independent Contractor – Sets own hours, determines own sequence of work
Employee – Works exclusively for the employer
Independent Contractor – Can work for multiple employers; his or her services are available to the public
Employee – Hired by the employer
Independent Contractor – Self-employed
Employee – Subject to dismissal, can quit at will
Independent Contractor – A contract governs how the relationship ends
Employee – Has a continuing relationship with the employer
Independent Contractor – Works by the job
Employee – Does all work personally
Independent Contractor – Permitted to employ assistants
Employee – Performs services under the company’s name
Independent Contractor – Performs services under the worker’s business name
Employee – Paid a salary, reimbursed for expenses & fringe benefits
Independent Contractor – Payment by the job
Employee – Is furnished tools, equipment, materials and training
Independent Contractor – Furnishes own tools, equipment, and training
Common Law Test
The only actual legal test the IRS can use to determine a worker’s classification is the “Common Law Test,” which says that if a business tells, or has the right to tell, a worker, how, when, and where to work, then the worker is an employee.
The top three factors the IRS looks at are:
- Instructions to workers. A crew member is probably an employee if he or she is required to follow instructions as to when, where and how the work is to be done.
- Job Training. Training indicates that the work must be performed in a particular manner. Any form of employer-provided training suggests the worker is an employee.
- Realization of profit or loss by a worker. An employee does not realize a profit or incur a loss from his or her work, but an independent contractor does.
Reasonable Basis Test
There are possible exceptions to the Common Law Test which are outlined in the Reasonable Basis Test. The IRS will look at the following exceptions:
- The employer has not treated the worker or similar workers as an employee.
- here is a recognized practice in the employer’s industry of treating similar workers as independent contractors.
- here are court decisions for treating similar workers as independent contractors.
- The IRS has ruled in a “published ruling” that the workers are independent contractors.
- The company has received a specific ruling from the IRS that the workers are independent contractors.
- A past IRS employment audit of the employer did not disallow the worker’s treatment as an independent contractor.
If you misclassify an employee as an independent contractor, it can create significant problems for your production company. Misclassifications represent a large potential loss of revenue for all levels of government. Because of the loss to Social Security, Medicare, disability and unemployment insurance the government looks negatively at independent contractors as not contributing to the economy. If the independent contractor faces tax problems, needs unemployment or disability benefits, at that point they have an incentive to go back and claim they were employees all along… and then it is up to the employer to prove they are actually independent contractors. If the production company is unable to prove that the worker is an independent contractor, it can cost the company a substantial amount of money in federal and state taxes, penalties, and employment benefits.
Exempt and Non-Exempt Production Employees
Non-Exempt Employees – Employees who are covered by the FLSA’s minimum wage and overtime laws are called non-exempt employees. The federal government and most states have set a minimum wage for non-exempt workers. If the employer is covered by both state and federal law and the two rates are not the same, the employer is required to pay the higher minimum wage based on the state in which the employee works.
Exempt Employees – Those not covered by the FLSA minimum wage and overtime laws are called exempt employees. Exemptions to the FLSA requirements are not based on job title but on the employee’s actual duties, responsibilities, and level of authority. In almost all cases an exempt employee must make a minimum of $455 a week (Federal), $800 (California). FLSA regulations include the following types of white collar exempt employees:
- Executives – To be classified as an executive, a person must direct the work of at least two full-time workers, have hiring/firing authority, and use discretionary powers. Executives include department managers and supervisors who are directly associated with management decisions.
- Administrative Employees – The primary duty of exempt administrative employees is, the performance of office work related to management or general business operations. Employees who perform special assignments (like auditors) are exempt. They must exercise independent judgement and discretion in matters of significance.
- Professionals – Learned professionals, whose duties involve the use of advanced knowledge acquired by specialized study. Teachers, engineers, and attorneys are some examples.
- Outside Salespeople – Are exempt if they meet two requirements: (1) they are engaged in selling or getting orders for the company’s product/service and (2) they work away from the employer’s premises. There is no salary requirement for outside salespeople.
What Is Governed by the FLSA
The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Covered, nonexempt workers are entitled to a minimum wage, which varies by state. Nonexempt workers must be paid overtime pay at a rate of not less than one and one-half times their regular rate of pay after 40 hours (Federal), after 8 hours daily (California) up to 12 hours, double time after 12 hours.
What Is Not Governed by the FLSA
- Vacation, holiday, severance, or sick pay
- Meal or rest periods, holidays off
- Premium pay for weekend or holiday work
- Pay raises or fringe benefit
A discharge notice, reason for discharge, or immediate payment of final wages to terminated employees. These are determined at the state level.