The Visual Effects Society (VES) recently held an event in Los Angeles titled “The 1099 Dilemma” to examine labor issues facing companies and artists. Who decides if you are an Independent Contractor or an Employee? Can a proper Independent Contractor relationship be established? What are the Insurance issues? Is there such a thing as a “Day Rate”?
The Visual Effects Society (VES) recently held an event in Los Angeles titled “The 1099 Dilemma – Help for Film/TV Business People and Artists” to examine labor issues facing companies and artists. “1099″ is a reference to the Internal Revenue Service form used to report income for Independent Contractors as opposed to a W2 form which would be required for Employees. The “Dilemma” refers to the misclassification of workers as Independent Contractors who should be considered employees or the desire to remain an Independent Contractor. These are challenging times for both companies and individual artists in visual effects, this event aimed to get valuable information into the hands of those affected, clear up some misconceptions and identify areas that could be financially dangerous.
The morning was broken into four parts with four individual speakers, although there was plenty of opportunity for questions and audience involvement. This was a more than three hour event packed with information, we have worked hard to faithfully summarize, but this article should be considered along with consultation with your own tax and legal advisors and further research. Also, this forum focused on California Labor Law, if you are not in California you should check local laws for how they differ.
Wage & Hour: Robert Rogenson, California Labor Attorney and 1099 Specialist
First panelist was Robert Rogenson who covered the wage and hour portion issues, the legal factors.
In establishing a work relationship there are a few things we have to determine. First, is the relationship as an Employee or as an Independent Contractor? More about the details of that determination later, but why would a company or worker want to have an Independent Contractor relationship? Independent Contractors cost companies less money than employees, that can provide companies with a competitive advantage if the competition is using employees. Independent Contractors enjoy tax advatanages. There are reasons on both sides of the relationship that may have both parties desiring Independent Contractor status. You DO NOT want to stop reading here, as a worker or employer, because that classification is NOT up to you.
Independent Contractor or Employee, it’s not up to you or the company!
There has been a lot of media attention lately to misclassification of workers as independent contractors instead of employees. As Federal and State budgets experience trouble they are looking at areas of missing revenue leading to increased scutiny and enforcement. Potentially millions of dollars in payroll tax revenue is being lost by deliberate misclassification of workers as independent contractors. Companies would be wise to examine their practices in this area because the penalties fall on the company for misclassification. Here are a few articles in the media on this subject:
Rogenson pointed out: “It’s really not up to the worker and to the company to determine whether an individual is an Employee or Independent Contractor, it really depends on the facts of that relationship”. This is a complex issue made more complex because the various agencies involved have their own rules and tests (California Labor Commision, Federal Department of Labor, the IRS, State Tax Collector, National Labor Relations Board, etc). As complex as it is “it’s not up to the worker or the company as to how they are going to classify their relationship”. “It is substantially more expensive for companies to have employees than independent contractors, you have administrative costs, payroll burden, payroll taxes, Social Security, reimbursement obligations…”. “Essentially, in California, as well as Federal, when a worker performs work for a company, or for some other entity there is going to be an employment relationship recognized.” The law assumes the worker to be an employee unless the employer can claim that the independent contractor status is proper. There are many factors that enter into that determination and agencies are looking out for worker protections, maintaining a competitive level playing field and loss of revenue in taxes. “The Obama adminstration, in February, announced a misclassification employee initiative, in which they directed the IRS and the Federal Department of Labor to start focusing on industries that are using independent contractors incorrectly, that they are classifying workers as Independent Contractors when in fact those workers are employees”. There has been a huge uptick in enforcement and manpower for enforcement in this area.
Rogenson outlined some items in determining Independent Contractor vs. Employee status that he classified as “Significant factors”:
“The single most important factor is “Control”, who has the right to control the worker?” – in what ways does the company control the worker? This can be setting work hours, determining where work is performed, what equipment is used. A true independent contractor is contracted to provide a service without the company controlling the minutia of getting the job done.
“Are the workers providing services that are an integral part of the regular business of the company?”. Rogenson used the example of a law firm employing a gardener to do garden work. That would be a proper independent contractor relationship as the company is contracting for services outside the area of the business. If that same firm is hiring someone to do legal work classifying that worker as an independent contractor becomes difficult. “I can speak from first hand experience from the enforcing agencies, it’s a super elevated factor. If you are performing production services or visual effects services for a company that only does visual effects, that’s going to tilt much more toward the employment factor than as an independent contractor”.
Length of time – is the worker permanent or for a specified duration? “If this individual is working for four years for the same company providing the same services, that is going to tilt more toward the employment relationship”. What is method of payment? Independent Contractors usually provide services on a project basis.
“What opportunities for profit and loss do the workers bear?”. An independent contractor is their own business, they have the potential for profit and loss. Rogenson mentioned that several industries have come under scrutiny lately and cited the example that Federal Express classifies many of their drivers as Contractors, they lease them trucks, require uniforms, set schedules… there is a class action suit over this and increased overall scrutiny in the courier industry. “The appearance of the drivers owning equipment and being responsible for the maintenance, etc. looked like a more proper contractor relationship until other factors are considered.” “… if that worker, or that artist is relying upon the company and that company is providing all the equipment and the individual artist is just providing their skill, that profit and loss goes down” (in weight in determing status) “there really isn’t much risk… it looks more and more like an employment relationship”.
“What is the understanding of the parties?”. An agreement would help establish the relationship but it was pointed out that you cannot contract away rights if other factors establish an employer/employee relationship. If there was to be an investigation such an agreement would likely be discarded if it was determined the other factors outweigh that agreement… you can’t sign away rights or around laws. A question was asked about multiple workers doing the exact same job, one W2 employee, one 1099 Independent Contractor and a third on a “Day Rate” (more on “Day Rates” later), Rogenson thought that would be problematic.
“Does the individual provide services to other clients?”. This is an area that Russell Saffer, CPA (the second panelist) talked more about. He recommends that his clients require workers to work for more than one company in a given year, part of a checklist of items he requires clients to observe to use Contractors.
None of these individual factors are soley determining, they must be weighed as a whole to determine intent. “The individual factors are not weighted themselves the same, Control is the highest.” “The notion of Independent Contractor, 1099, is the notion that you have hired somebody outside of your industry, to build and provide a service that you normally can’t do and to deliver that product, pursuiant to your specifications. I want a box built that looks like this, I’m not a box builder, go build that box and I’ll pay you for that box. Versus, we do this type of production, we need it on a daily basis and we need it on a weekly basis and we need it done exactly like this and we know in order to get it done we need it in this amount of time and we need you here because we need to make sure it is done correctly, pursuiant to what we the payer is demanding… well now you’ve got Control, now you don’t have paying for an end product but actually paying over daily labor… that’s all going to look more and more like an employment relationship, I think strongly like an employment relationship”. “I think the number one thing is time, the time that the individual is supposed to be there. That is an exercise and a demonstration that that company, in order for the company to achieve it’s objectives needs the worker there at those times.”
Rogenson pointed out that Employees enjoy protections that Independent Contractors do not, including: overtime laws, meal periods, rest periods, anti-discrimination laws, unemployment and the right to collective bargaining protection. One area that did not get a lot of discussion was that Independent Contractors have no protection on payment terms. As an employee the state establishes maximum intervals for pay periods, but these do not apply to contractors, we hear all the time about workers having a 15 day term in their deal memo but being strung out 90 days or more for payment. Also in the case of the company filing bankruptcy Employees take priority over other debts, including Contractors.
A good summary of this discussion came as the result of a question about the a worker needing to be scheduled because of the schedule of the director to review work. The thought was what if that was the reason for a time to be set otherwise the work could be done at any time. Rogenson’s answer was: “why do you have to be there? Because the director is there to critique and correct your work? Now there may be some control, you are not just providing a product, you’re not just delivering a product that’s going to be delivered at the end but is going to be changed and subject to change throughout and the director is here in the purpose of building and making this product so you are in the same kind of line of industry… there’s a lot of factors there that tend to show Employment vs. Independent Contractor”.
If the determination is made that the worker is an Employee the question of Exempt vs. Non-Exempt (overtime versus no overtime) must be answered, more about that later in the article.
(a personal aside… I first met Rogenson by phone when he was Chief Counsel for the California Division of Labor Standards Enforcement. Some listeners to the fxpodcast will know that we have been trying to arrange an interview with a California labor law expert for a long time. After multiple pre-interviews we lost track of him when he left the employ of the State of California and joined Atkinson, Andelson, Loya, Ruud & Romo. We re-connected at this event and he will be appearing on an upcoming fxpodcast when his schedule permits.)
Taxes: Russell Saffer, CPA Saffer & Flint
There are many tax reasons why working as a 1099 Independent Contractor is preferred by the employer and the worker. Saffer spent time outlining how to properly setup that relationship, if possible. You can see if companies can save money by not having employees, 1099 workers can enjoy tax advantages and enforcement has been lax how we have gotten to the confusing place we are in. He started with a story about one of his clients:
The client is an audio post house. They worked with primarily Independent Contractors for 12 years and had 3 audits by EDD – the California office of Economic Development. They passed the first two, but not the third. On $2 million dollars in revenue per year they wanted to enact a $200,000 fine (Statute of limitation restricted to three years). They protested for 18 months and EDD settled for $4000 before the court date. What triggered each audit? A complaint to EDD, the primary enforcer in California. As mentioned earlier the agencies are being much more aggressive now. “I can guarantee you an unemployment claim will trigger an audit for an Independent Contractor, it takes one.” He also mentioned you will probably win.
As a matter of protection for the company he now requires contractors to provide proof of a few things:
- City Business licence
- Registered as a DBA
- W9 on file
- Real understanding and agreement between both parties about the relationship
- Requires them to have their own personal cel phone
- Requires them to register on IMDB and be out selling themselves (websites, etc.)
- Business cards
- Must work for work for at least one other company during the year
- It is critical that the company files 1099′s and contractors pay taxes due, if company does not File 1099 there is no statue of limitations.
- Invoices cannot look like a timesheet. He made a big point about this. An Independent Contractor would not need to report their hours to the company, only invoice for the work done. This can be a big red flag.
Saffer said if you have a receptionist, Administrative Assistant or similar person, they should be an Employee.
A question was asked about a situation where a company forced workers to come on as Independent Contractors, who bears the responsibility/liability? “The tax side of this all falls on the employer. If the 1099 was issued and the Contractor files their return, shows the proper amount of income, it usually stops there on the Independent side. The risk of all this unfortunately does fall with the hiring company.” “One other thing to keep in mind too about an assessment that is made, an income tax assessment or withholding tax assessment, that is personally liable to who ever signs the checks. So if you’re the 1099 issuer and you’ve got control of that checkbook and it is determined that you have Employees, congratulations, you are now personally liable for withholding taxes that weren’t paid. Both IRS and EDD have the power to go through what they call Trust Fund Recovery.”
Saffer presented his recommendations for best practices to ensure compliance with the laws if you believe there is a proper Independent Contractor relationship. At times it seemed he was outlining ways to try and work around things Rogenson early presented as only determinable by facts. There is a old adage that if you ask a surgeon for medical advice the solution will likely be surgery – assume that asking a CPA if you can function as an Independent Contractor should be viewed in much the same way.
Insurance: Jeff Gelineau, CEO United Agencies
This section covered workers compensation insurance. Turns out it is not as confusing as you would think. As a sole proprietor an insurance company will not sell you a workers comp policy, so if you are an independent contractor and get injured on the premises of a company you are working for, who pays? Workers comp does not care about employment status. An employer signs up for worker comp and reports to the insurance company a head count or salary total. That count should include everyone who works for the company regardless of status. Gelineau explained: “The injured person is covered. They don’t care who paid who, who’s going to pay the premium they don’t really care about all that, all they care about is that the injured person is covered”. The cost of workers comp is very low to the employer. At the anniversary of the policy it will be reviewed or audited and then numbers of people covered can be adjusted. “Workers Comp is compulsory. Any Employer with Employees under California law, under Federal law is required to have workers comp.” Workers Comp is provided in lieu of the right to sue your employer, in California it has no deductibles or co-payments, but each state determines what benefits are. Fines for not providing workers comp are $1000 per employee, if someone is injured and the company does not have a policy it is $10,000 or a year in jail – or both. There was talk about a State Certificate only policy that Contractors can get ($300-500) that you can get to exclude yourself from a companies policy but it seemed like a bad idea for both sides. This is mostly a company issue and I would advise any company to consult an insurance agent to get the details. Workers should know that workers comp seems to be very available to use for any injuries received on the job (including repetitive stress injuries) regardless of your employment status with the company.
TEAM Payroll Services: Muriel Katz
TEAM provides payroll services for talent and Ccrew in the music business as well as models. They have teamed up with the VES as a member of the Power Circle, they offer employer of record and payroll services. There was some immediate reaction to that term “employer of record” in the room as there has been some heated discussions in online forums and among artists in Los Angeles and New York about some other companies operating in that space. In those cases Employers were forcing artists to use certain services and there was debate about fees and taxes being charged to the artists for that privilege. Katz did not know about any of this and said they were not like that.
Katz went on to explain the various classifications of workers. Once it is determined a worker is an Employee, rather than an Independent Contractor, you must next classify them as Exempt vs. Non-exempt (No Overtime vs. Overtime). Remember these distinctions only apply to Employees. Katz provided a few slides:
- In and Out Times and actual hours worked
- Established Hourly Rate that is equal to or greater than the minimum hourly rate
- Some Examples: PA, Prod. Coord., Asst. Prod Coord., Asst. Prod. Supervisor
- DSLE (Division of Labor Standards Enforcement) – Any Person “…engaged in work which is primarily intellectual, managerial [supervising two or more people], or creative, and which requires exercise of discretion and independent judgement…”
- Exempt from overtime provisions, meal period requirements, in/out time record keeping
- Some Examples: Art Director, Producer, Prod Manager/Supervisor, etc.
Note: Job title alone DOES NOT determine exempt status. Should an audit or claim arise, the Department of Labor will look at the facts and circumstances of employment relating to each employee in making that determination, and the determination is made on a case by case basis at the discretion of the Department of Labor.
Two criteria must be met to qualify as exempt. There is a salary test and it is based on job duties. Basically this classification is reserved for bona fide executives, administrative types. This is a very large area of the law and there are very complicated rules. One is that even supervisors have to be primarily engaged in the pursuit that exempts them. Katz gave the example of a recent Starbucks case where managers were being classified as exempt yet spent more that 50% of their day at the front counter like a regular employee, making them non-exempt.
There is no such thing as a “Day Rate”
A topic was raised several times throughout the day from audience questions regarding “Day Rates”. There is no such thing as a day rate under California labor law. Everything is based on an hourly rate with:
- Straight Time for 8 hours
- 1.5 times hourly rate after 8 hours up to 12 hours
- double time after 12 hours
- 6th day worked is paid at 1.5x until 12 hours, then 2x
- 7th day worked is paid at 1.5x until 8 hours, then 2x
In addition under California labor law there must be a meal break no later than 5 hours after start of work. It must be a half hour or an hour, there is no such thing as a working meal. Employees must also receive 10 minutes breaks every 4 hours worked. If rest period is not given the employee is to be paid 1 hour additional pay.
The only exception is exempt employees which have to meet very strict criteria, as we just mentioned – and have to be employees, not contractors. There was a lot of discussion about defining artists under a “creative” clause but it was explained that that only applies to very specific cases and always in a top creative role (originating concepts). This will likely come as a surprise to many, especially in design houses where this practice is supposedly prevalent. An audience member brought up a recent case against Electronic Arts where workers were being incorrectly classified as exempt while being required to work long days and more than 5 days in the week without extra compensation.
Labor laws are something every employee should be familiar with, here is one resource: Division of Labor Standards Enforcement Assistance for employees and employers – Answering your questions
Companies may want to look at the TEAM website for more explanation of what they offer or contact them: teamservices.net
In conclusion, this was a great event with outstanding panelists. Companies would be wise to examine their practices as the penalties can be severe and enforcement is ramping up. Workers should be proactive in understanding their rights and options, the various agencies involved have robust web sites and as speakers at this event pointed out complaints to these agencies are an effective tool if you cannot resolve on your own.
We want to commend the VES and Robert Morgenroth, Director of Development for VES for putting this event together. This is exactly the kind of thing that we as VES members have been looking for them to do for a very long time and we hope they do more of this. Our industry and artists are under a of lot of pressure and getting access to a well organized event like this with information to help everyone navigate the complexities is an inestimable resource. We are committed to stay focused on labor issues, next up will be an fxpodcast with Rogenson as soon as we can schedule this with him.
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