(This post has been superseded by a change in California law. Please see this post.)
Lately, I’ve had several conversations with clients about whether the folks they hire to work on their films and theatre projects are properly classified as employees or independent contractors. It’s an important distinction, and one that can have costly consequences if not handled properly.
California Law imposes strict penalties for misclassifying employees as independent contractors.
On January 1 of 2012, California’s law changed to create significant penalties for employers who willfully misclassify workers, and fail to withhold taxes, pay into the Worker Compensation system, etc.
In the entertainment industries, this misclassification is prevalent. Producers who wish to avoid the hassle, and/or the cost of a payroll company, or of paying minimum wage, overtime, or complying with other wage and hour laws often prefer to treat their workers as independent contractors. But the Federal government, mainly through the IRS, has in recent years, been taking this situation seriously, aggressively pursuing violators.
California joins the cause
Now, California has taken similar measures. Under the new law, which doesn’t change the criteria, but only the consequences, penalties range from $5,000 to $15,000 per violation for isolated violations, and where a pattern or practice of violation exists, as much as $25,000 per violation.
How to classify your workers
Particularly in entertainment, workers may look at times like employees and at others like contractors. It’s often difficult to determine which classification to use.
The IRS view is that most crew members, actors, and others working on a film production should be classified as employees, not independent contractors, and that taxes should thus be withheld.
But, where a loan-out company is involved, it, rather than the producer, is the employee, so no withholding is required of the producer. Also, if the person is being hired not just for his or her services, but also brings equipment, supplies, or intellectual property rights to the party, then the relationship can probably be characterized as one of an independent contractor. Merely declaring in a contract that the parties are independent contractors, though, will do little to persuade the authorities that this is in fact the case.
the “Control” test
To determine whether a worker is an independent contractor, the law uses a so-called “control” test. This test looks at a number of factors to evaluate whether an employer has the right to exert control over the manner and means by which the worker performs his or her services.
Factors considered in determining employee vs. independent contractor status
Under the “control test”, lawyers and courts must look at the specific facts in each case and then look at a series of factors and economic realities. Specifically, the Courts will examine:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his task;
- The skill required in the particular occupation;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job;
- Whether or not the parties believe they are creating an employer-employee relationship.
In applying this analysis, the burden of proof is on the employer. Absent evidence sufficient to prove an independent contractor relationship, the presumption is that the worker is an employee.
So, producers beware. Failure to classify an employee properly can prove costly. If there's any doubt, contact your attorney and ask.