As we rapidly move toward closing the books on 2019, a couple of key pieces of new legislation are top of mind for production companies: Assembly Bill 5 and Senate Bill 271.
Both go into effect January 1, 2020. We break them down here.
AB5 seeks to sharpen independent contractor definition for California employers
Assembly Bill 5 basically takes the California Supreme Court ruling in the Dynamex Operations West V. Superior Court case and codifies it into law. Fun fact: it’s estimated that the status of approximately 2 million independent contractors will be shifted to employees as a result of AB5.
The Dynamex three-part test to qualify as an independent contractor rather than employee
The Dynamex ruling, as you’ll recall, laid out a strict test for a worker to qualify as an independent contractor rather than an employee. A worker will be considered an employee, and the hiring production entity their employer, unless the relationship passes a three-part test.
Note that all three elements must be true in order for a worker to qualify as an independent contractor rather than an employee:
1) The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact.
What it means: To qualify as true independent contractors, workers cannot be subject to control and direction of the hirer… things like telling them when to start work, when to stop work, and how to do the work. Imagine trying to hire a grip for a shoot starting next Tuesday, only to have them say: “That doesn’t work for my schedule… I can fit you in sometime in February.”
That kind of exchange would not be unusual for a true independent contractor, for example a plumber bidding on the renovation of a restaurant. But an employee? Nope.
2) The worker performs work that is outside the usual course of the hiring entity’s business.
What it means: Let’s go back to our plumber and restaurant for an example of a contractor relationship. Clearly the restaurant is not in the plumbing business; therefore, the worker may qualify as a contractor under this test.
A production crew worker doing production work for a production company would clearly have a much harder time passing this part of the test; after all, production is the hiring entity’s business in this case.
3) 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.
What it means: The worker has their own trade or business along the lines of the job they are performing for the hirer. Good evidence of this would be their own tools, insurance, office location, website, signage, etc.
Our plumber, for example, likely does not ask the restaurant to provide wrenches and pipes of their own… and the restaurant will want to see the plumber’s insurance policy before allowing work to start.
Again, the worker-hirer relationship must meet all three parts of the test in order for the worker to qualify as a contractor rather than an employee.
Some exceptions, but few for production
AB5 does provide for a number of exceptions for certain workers and situations which if met will result in the application of the “right to control economic realities test” set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Regulations which proceeded the Dynamex decision.
Exceptions exist for certain occupations, service providers and contracts for professional servicers if numerous criteria are met. It is important to note that to date, with the exception of freelance writers, the entertainment industry in not included in the specific exceptions recognized under AB5.
How does AB5 affect how loanouts can be paid on production?
While many productions have interpreted the court ruling and subsequent bill to mean that most crew members are employees and not independent contractors, some have asked how this affects bona fide loanout companies.
The unions’ position is that the relationship between a production company and a loanout is not one of independent contractor or employee/employer; it is instead a business to business relationship protected by the contractual rights under the collective bargaining agreements. Thus the union argument is that that AB5 does not undermine those contractual rights. Production companies that are union signatories, paying loanout corps under collective bargaining agreements, may enjoy protection by virtue of those agreements.
It’s important to note that this is an unsettled area of law, and the entertainment industry is examining it carefully; we would not be surprised to see lobbying for an exception in early 2020. Misclassification may result in substantial tax consequences and lawsuits. Media Services cannot advise a production company on whether or not to pay loanout entities or how to classify workers; we urge you to consult with your legal counsel on this matter.
SB271: California keeping Unemployment in the home coffers
Another California law that goes into effect January 1 specifically targets the entertainment industry, in particular productions that shoot out of state. The state wants to ensure that when California residents travel to another state to work on a production, their unemployment contributions are credited to their home state of California, rather than to the destination state.
Due to this new legislation, as of January 1, Media Services will bill State Unemployment Insurance (SUI) at California rates for all California resident workers, regardless of where production occurs. The employee will also have SDI/VPDI withheld at their state and local residency rates rather than those of the production state/locality, since these contributions are reported along with SUI. These new practices are meant to ensure that California residents will have proper unemployment benefits available in their home state if and when they are needed.
The change will have no impact on workers’ compensation rates or state income tax for your California resident crew, as those have always been assessed at the resident state level.
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