What a mysterious email from Cast and Crew might mean for the future of production in California
TL:DR: This is good for workers and bad for studios and payroll companies. But since it hurts payroll companies, expect them to be the loudest about why this injustice allegedly hurts you the most.
If you’re like thousands of others who have ever been paid by the payroll company Cast & Crew, you may have found this email in your inbox last night:
The California Employment Development Department (EDD) has informed Cast & Crew that payments made to loan-outs should have been paid directly to the loan-out corporation owner/shareholder as wages. It is anticipated that this will quickly become an industry-wide issue. It will not be specific to payroll processed by Cast & Crew, and would apply state-wide, regardless of payroll provider. We are monitoring this situation closely and will let you know of any updates.
What’s a loan-out? And why should you care? Is a studio and/or a payroll company really the death of the entertainment industry as we know it?
Let’s dive in:
Loan-Outs 101
Picture this: It’s your 30th birthday. You’ve decided to go all out, so you’re hiring someone from Etsy to make custom invitations for your shebang.
You agree to a price, you meet a few times to discuss progress and approve designs, and a few weeks later, you get your invitations in the mail and pay their invoice.
In this scenario, you don’t have to worry about your Etsy artist’s healthcare, or how they’re handling their payroll, or how much they spent on graphic design software or calligraphy brushes or paper, or whether they did it on vacation, or whether they spent five hours a day on it or just twenty minutes.
It’s like a black box you put money into, and out pops a product later.
Loan-Outs in the Entertainment Industry
This money-in-product-out relationship is the same structure studios have with most above-the-line (and some below-the-line) crew members. Instead of agreeing a to hire a writer, the studio makes an agreement with the writer’s one-person company (usually something with a fun, quirky name - this is the loan-out).
This is clean accounting for the studio: the company is expected to deliver X (usually an outline/story, a first draft, and a final draft) and payments are made out to the company at intervals that reflect each delivery. How the company pays its employee (the writer), what expenses the company incurs to create the product, whether the writer accomplished their task in one afternoon or a 7-day sleepless sprint, whether that company has to provide healthcare or the employee gets it through their union - that’s all up to the loan-out to theoretically figure out. The studio just has to pay a fixed amount for specific deliverables.
But that’s not how it really works
If you’ve ever worked in production or in a writers’ room, you know that the studios are much more hands-on than the above, idyllic scenario would suggest. Even though the writers (or directors or producers or DPs) are technically employees of their loan-out company, the studio directly gives them:
- A place to work
- An expectation of when they need to perform their work (M-F, business-ish hours)
- Equipment to perform their work (software/hardware/photocopiers, pens, whiteboard, desks, etc.)
In fact, the loaned-out writers, as people, have workdays that are nearly indistinguishable from the workdays of people who are direct employees (the rest of production staff not in a loan-out of the payroll company).
Which...is an issue.
Worker Compliance 101
When a company hires someone as an “employee”, that person gains a number of protections, like having their employer pay into payroll taxes, getting covered by their employer’s Worker’s Compensation policy (which provides you with financial renumeration if you’re injured on the job), and training/recourse for discrimination, sexual harassment, and other issues. In other words, when a business hires an employee, it also incurs a number of costs on top of that employee’s wages.
When a company hires someone as a loan-out or “independent contractor”, the human doing the work doesn’t have the same protections they would if they were classified as an employee. It’s up to that loan-out ‘Ha-Ha Productions, LLC” to pick up the slack and pay the costs that would normally be attributed to the official employer.
Hiring someone as an independent contractor is cheaper for a hirer than hiring someone as an employee.
The ABC Test
Again, before we continue: hiring someone as an independent contractor (called a “loan-out” in our industry) is cheaper for the hirer. Not only does it make the loan-out responsible for paying certain taxes that are the responsibility of the hirer, but it also pushes certain regulatory obligations, like sexual harassment training, onto the part of the loan-out corporation. (In more technical terms, it allows the studio to mitigate risk by transferring requirements and liability to another party.)
Believe it or not, corporations have a sordid history of abusing the way they hire people - and one of the most prevalent ways is by misclassifying hired people as contractors (money goes into black box, product comes out) when they’re really filling all the duties an employee would fill (show up to this building, at this time, and do the work exactly in the way we prescribe for you). Therefore, in order to protect workers, there are guidelines at both the federal and local level that indicate whether a worker should be considered a contractor or worker.
In California, this is laid out by AB 5, which has 3 major conditions that must all be met for someone to be considered an independent contractor/loan-out. They are:
PART A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
PART B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
PART C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
The Issue at Hand
As indicated by Cast & Crew’s email, the Employment Development Department (EDD) has indicated that people who were hired via loan-outs should have instead been hired as employees.
We’re still waiting on explanation why EDD has taken determined that *all* loan-outs are in compliance violation, but a Reddit thread suggests that EDD, who’s responsible for paying out unemployment and other benefits to workers, may have become aware of abuses in the loan-out system. Instead of people treating their loan-out like a hirer, who has to pay payroll tax, contribute to unemployment insurance, and comply with other regulations, they just took their payment and treated it like a free cash injection.
Where Payroll Companies Come In
Here’s the really fun part.
Payroll companies (Cast & Crew and Entertainment Partners) play a unique role by offering to become the Employer of Record. Rather than a studio hiring thousands of people on various crews across multiple shows, the studio pays another company to be the official employer of record (EOR) of all these people. The EOR pays their wages, pays into their unemployment, is on the hook for providing health insurance if they’re not a union member, provides the requires sexual harassment training and accepts all the liabilities the studio would have to adopt if they were the employer.
It also creates a liability shield, so that were a crew member wanted to sue their employer over safety violations, wage theft, or anything else, they'd be suing the payroll company, not the studio.
Since studios hire the payroll companies to process both wages to employees and payments to loan-outs, any AB 5/ABC/compliance issues are taken on by the payroll companies.
The State of the State
Here’s where we find ourselves:
EDD has informed Cast & Crew (and possibly other payroll companies) that loan-outs should been treated as employees (eg: paid wages)
This would make the payroll companies liable for significant contributions to payroll tax, unemployment insurance, and other penalties
Cast & Crew is already waging a campaign to encourage affected “employees” to contact EDD to dispute this classification
Muddying the Waters
EDD has indicated that it will refuse to recognize loan-out corporations. Whether it has the power to uniformly enact this is in question.
Many people under loan-outs have worked out how to utilize this role to their advantage, and have tax strategies that would allow them to deduct certain luxuries to their advantage: a Mercedes G-Wagon falls under the same class of expenses and tax deductions as farm equipment.
Studios/payroll companies will likely argue that this will drive studios to find writers rooms and other above-the-line talent outside CA, where studios may still be able to take advantage of more ambiguous worker classification regulations
To which, I have three objections:
1. Studios clearly prioritize Co-EP and above level talent as the captains of a project. How many of those people are available outside of California and are worth the risk of hiring?
2. If loan-outs are so financially beneficial for the people hired, why aren’t the world’s wealthiest CEOs (Musk, Altman, Herd) using this same structure to offer "management consulting and guidance" through a loanout to their companies?
3. Similar to the case Cast & Crew and Entertainment Partners are likely to make, Proposition 22 stated drivers for companies like Uber and Lyft are independent contractors and are not entitled to benefits like paid sick leave and unemployment insurance.
5/28/24 Update: EDD Statement
EDD has released a statement:
We understand the great importance of California’s film and television industry and are proud of our work to support California’s employers and industries. We have received various inquiries highlighting questions about loan-out corporations' ability to operate in California. As we have previously stated, EDD is not taking action to ban these companies in California.
We are one of the nation’s largest tax collection agencies and work closely with businesses to collect payroll taxes that fund vital Unemployment Insurance and State Disability Insurance benefits for workers. Our commitment is to ensure these taxes are collected according to state law.
We will continue our communication with industry representatives to ensure their concerns are heard and understood. We are optimistic that this dialog will help bring further clarity and information for the benefit of everyone who works in one of California’s most iconic industries.
We understand taxes can be complex, and we are here for those who have questions. We are committed to providing excellent service to California employers, communicating with industries, and supporting a fair payroll tax system for the benefit of all Californians. Our Office of the Taxpayer Rights Advocate is responsible for protecting the rights of taxpayers during all phases of a tax administration process.
Reading the note behind the note, it would appear that loan-outs have under special scrutiny because the businesses are not collecting payroll taxes, supporting the speculation from the Reddit thread. It's also worth noting that EDD never said it was banning loan-outs in its first statement, just that loan-outs should have been paid wages (eg: treated like employees) instead of payments (treated like independent contractors). This once again seems like a worker classification issue.
Unless, of course, someone with a lot of pull from within the industry made a call. If EDD is in fact announcing this as a turnaround, it took less than a business day (over a holiday weekend, no less) to about-face.
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