California’s “Assembly Bill 5” Threatens Unintended Consequences for the Entertainment Industry
Caitlin Hall-Swan is a J.D. candidate, 2021 at NYU School of Law.
If you’re an entertainer, your income comes from “projects” – you take one job here, another there. Actors who work on a film, or musicians who produce an album, typically engage in short term employment rather than signing on as an employee of a big studio or production company.
Because of the nature of entertainment work, loan out companies
are a longstanding institution in the entertainment industry. Creative
professionals such as actors, musicians, and screenwriters often do business
under a loan out entity – typically a single-owner LLC or corporation. The loan
out company enters into contracts with studios, production companies, and other
creative businesses and agrees to provide – or “loan out” – the services of the
entertainer. In this way, the loan out is an independent contractor of the production
company while the entertainer is an employee of the loan out.
This structure is mutually beneficial for the entertainer as
well as the businesses they service. Entertainers can reduce the amount they
pay in annual self-employment taxes because they are employed instead by the
loan out entity. The entity also allows entertainers to deduct business
expenses, such as the costs of talent agents, managers, or attorneys. In
addition, using a loan out protects an entertainer’s personal wealth and assets
from liabilities related to the entertainer’s work. Thus, business advisors
recommend that creative professionals who make between $75k
and $100k per year should form a loan out to engage in employment
opportunities.
Employers benefit from hiring loan out entities, rather than
individuals, because doing so enables them to sidestep certain employment law
requirements. For example, when a production company contracts with a loan out,
rather than an individual, it ensures that it will retain
copyright ownership of the entertainer’s creative work. Under the loan out
structure, after all, the creative worker is classifiable as an independent
contractor, rather than an employee of the production company, and the
entertainer’s independent contractor status enables the production company to retain
complete copyright ownership.
Now threatening the industry custom of the loan out company
is a newly passed bill in California: Assembly
Bill 5. The new legislation codifies the California Supreme Court decision
in Dynamex
Operations West. v. Superior Court and modifies the criteria that
distinguishes an employee from an independent contractor. Signed into law on September
18, 2019, AB5 is designed to protect gig
economy workers from misclassification as independent contractors; the
passage of the bill is a win
for many California workers (e.g., Uber and Lyft drivers), who now, as
employees, must receive basic employment benefits including minimum wage, overtime
pay, and healthcare.
The Dynamex test requires that a hiring entity categorize a worker as an employee, unless it can show that (A) the worker is free from the control of the hiring entity, (B) the worker performs work outside the usual course of the hiring entity’s business, and (C) the worker is customarily engaged in a trade, occupation, or business of the same nature as the work performed. AB5 puts the burden on employers to show that each of these requirements are met, which means that employers could get in legal trouble for hiring “independent contractors” who should, according to the Dynamex test, be hired as employees. The entertainment industry is concerned that loan outs will not meet the Dynamex criteria because loan outs (entertainers) do not perform work outside the usual course of the hiring entity’s business (entertainment). In failing part (B) of the test, the entertainment loan out cannot be hired as an independent contractor.
Thus, AB5 may render an entertainer’s loan out company unusable.
If production companies and studios might face liability for hiring a loan out
as an independent contractor, they may choose to hire creative professionals
instead as employees and stop hiring talent through their loan out companies. A
company like Netflix, for example, could scale back on hiring independent
entertainers and ramp up in-house production. In effect, the loan out company
could become obsolete.
The loss of the loan out as a business device would affect
tax and liability issues, which in turn could affect compensation structures
and production budgets. On that basis, entertainment lawyer Rick Genow has
warned that “[t]he economic impact would be somewhat devastating
to both talent and the studios.” On the other hand, other commentators,
including major talent
unions, claim that AB5 will have no effect on the industry use of loan
outs. For example, the Screen Actors Guild – American Federation of Television
and Radio Artists released a statement advising its members that “AB5 will have
no impact on the use of loan outs.” Union claims are
substantiated by a business-to-business exemption that is provided in the bill,
which states, in part, the following:
“Subdivision (a) and the holding in Dynamex do not apply to a bona fide business-to-business contracting relationship . . . under the following conditions:
(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by Borello,[1] if the contracting business demonstrates that all of the following criteria are satisfied . . . .”
What continues to give industry workers pause is that there
is a stringent list of criteria to be adhered to in order to fall under this
business-to-business exemption. It’s possible that entertainment loan out
companies may not proceed through the rigors of adherence despite being
eligible to qualify for such an exemption. Either way, there still remains the
concern that larger studios will seek to avoid any risk by deciding to only
hire employees.
Is Hollywood right to be fearful? It’s not clear yet. AB5 isn’t going to change the face of the gig economy overnight, so it is certainly not going to have immediate effects on the entertainment industry. In this case, only time will tell.
[1] The Borello test is a multifactor balancing test to determine whether a worker is an independent contractor or an employee that, before Dynamex, had been in effect since 1989. The test is considered more amenable to “independent contractor” designations than Dynamex because not all of its factors must be satisfied.
Check out another take on the affects of AB-5 on the entertainment industry here.
