AB 5 and Other California Labor Laws Impacting Production in 2020

Gavel and scales representing new CA laws affecting production industry in 2020

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 (aka AB 5) and Senate Bill 271.

Both AB 5 and SB 271 go into effect January 1, 2020. We break them down here.

What is AB 5 and how will it impact production crew independent contractors?

Assembly Bill 5 (AB 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 AB 5. 

The Dynamex three-part test to qualify a production crew member as an independent contractor rather than employee

The Dynamex ruling, as you’ll recall, laid out a strict test for a worker (including those on production) to qualify as an independent contractor rather than an employee of the production company. A production crew worker will be considered an employee, and the hiring production entity their employer, unless the relationship passes a three-part test.

Note that under AB 5, all three elements must be true in order for a production crew worker to qualify as an independent contractor rather than an employee of the production entity:

1) The production crew 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, film crew workers cannot be subject to control and direction of the production company 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 the crew member 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 crew worker performs work that is outside the usual course of the production company’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, film production is the hiring entity’s business in this case.

3) The crew worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring production 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 production crew worker to qualify as a contractor rather than an employee of the hiring production company.

AB 5 has some exceptions, but few for production crew

AB 5 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 AB 5.

How does AB 5 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 entertainment industry unions’ position is that the relationship between a production company and a loanout crew or cast member 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 AB 5 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 crew or cast workers; we urge you to consult with your legal counsel on this matter.

SB 271: California keeping Unemployment in the home coffers for production crew

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.

Need help with entertainment payroll compliance?

Get in touch with us here.

How Production Crews Come To Embrace the W2

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While smaller productions in the past may have paid their production crew as independent contractors and issued a 1099 at the end of the year, more and more producers are getting on the W2 train and paying crew and cast members properly: as employees. Our own Anthony Lopez recently wrote about this very topic on ProductionHub, letting crew members know what to expect when switching from 1099 to W2 payroll. (Hint: there are a lot of good things about it!)

Some of the topics the article covers are:

  • What’s the difference between a W2 and 1099?
  • Why is production making me switch to W2s?
  • How W2 employment is actually good for crew members

Crew members making the switch to being paid as W2 employees instead of 1099 independent contractors will be happy to learn about some of the benefits of W2 employment. The article considers the upside of the production employee categorization, for the crew member. These include:

  • Unemployment benefits. Production crew members paid as employees are able to file for unemployment when the job ends. This is a perk not afforded to independent contractors, who are expected to participate in the profit and loss of their business. Losses include not being able to find work!
  • Workers’ Compensation coverage. In a proper employment scenario, the production company is required to carry workers’ compensation insurance to cover crew employees who sustain injuries on the job that keep them from working. Workers’ comp is often provided by an employer-of-record payroll service hired by production.
  • Overtime and meal penalties. Film set employees who are hourly must be paid proper overtime, as well as meal penalties when breaks are not provided per state and federal law. When the production works with a reputable payroll service, those situations are flagged and required.
  • Social Security and taxes. Film crew workers paid as W2 employees have Social Security contributions withheld from their checks, as well as state and federal income tax and other fringes. While it might seem like less pay up front, it ends up helping the crew member not get caught short at tax time, as well as shoring up their Social Security funds for retirement.

Conclusion: W2 employment for crew members is not only the right thing to do, but actually in the crew’s best interest. See the full article here.

Questions about W2s vs 1099s for production crews?

Anthony Lopez is a senior payroll consultant who specializes in crew hiring best practices. He can be reached at 917 305 8322 or anthonyl@mediaservices.com .

Producers Take Advantage of IRS Forgiveness Program

Good news for production companies concerned about prior misclassification of workers as independent contractors: the Internal Revenue Service has beefed up its Voluntary Classification Settlement Program to be even more beneficial to employers. The program was launched in 2011 to encourage employers to start properly classifying employees who had previously been claimed as independent contractors (paid with 1099’s). The settlement program allows taxpayers who were treating workers as independent contractors to now treat them as employees, without incurring stiff penalties and fines for past infractions.

The IRS has now relaxed some eligibility requirements and extended the program until June 30, 2013. An example of increased eligibility is that the program can now be used by employers who are currently under IRS audit, unless it is specifically an employment tax audit. The IRS has also eliminated the previous stipulation that required users of the program to extend the period of limitations on assessment of employment taxes.

To take advantage of the program, the settlement requires employers to pay just 10% of the employment tax liability from the most recent tax year for the reclassified workers, with no interest or penalties. In exchange for the advantageous terms, the employer agrees to treat that class of workers as employees for all future tax years going forward.

“This is an incredible break for the entertainment industry,” says veteran film and TV payroll consultant Shelley Wolfe. “In the eyes of the government, there are almost no independent contractors in our industry. Studios and production companies have been hit with massive audits and paid millions to the IRS in back penalties for misclassifying crew members. This program gives employers a once-in-a-lifetime ‘get out of jail free’ card. If you have ever paid a crew member as an independent contractor, do yourself a huge favor and look into this program.”

Over 1,000 employers have taken advantage of this program and switched their workers from independent contractors to employees. Learn more about the process here. To speak to a payroll consultant about converting your independent contractors to employees, call (866) 429-9316.

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