By: Mark Litwak
As of January 1, 2012, a new California law creates significant penalties for employers who "willfully" misclassify their workers as independent contractors. In the movie industry, the government usually considers most crew members, as well as above-the-line personnel, to be employees, not independent contractors.
Producers, however, often attempt to hire others as independent contractors because it is administratively simpler, and they may want to avoid hiring a payroll company, withholding taxes, paying the minimum wage or overtime, and complying with other wage and hour law regulations. Moreover, a producer may want to avoid covering staff under workers' compensation insurance, unemployment insurance, disability insurance, or social security.
The federal government has for some time now been cracking down on employers who treat regular employees as independent contractors, thereby avoiding taxes and side-stepping various employment laws.
The new bill, SB 459 was recently signed into law by Governor Brown. It does not change the criteria for determining whether a worker qualifies as an independent contractor, but it greatly enhances the penalty for employers who misclassify personnel.Penalties range from $5,000 to $15,000 per violation for isolated violations. Where there is a pattern or practice of violations, the penalty can increase to $10,000 to $25,000 per violation.
However, it is often difficult to determine how personnel should be classified. The IRS takes the position that most people working on a film production should be classified as employees, not independent contractors. They obviously want taxes withheld. If the person is being employed through a loan out company, then the loan out company will withhold taxes and this should not pose a problem for the producer. Moreover, if the person is being hired, not just for their time but also equipment that is being supplied, it is more likely to pass muster as an independent contractor. Simply calling the person an independent contractor or using a independent contractor form of agreement, does not by itself give much protection.
In determining whether an individual providing service to another is an independent contractor or an employee, the "control" test, is often used initially to make this evaluation. To put it simply, an employee is an individual who the employer has the right to exercise control over the manner and means by which the individual performs his or her services.
However, there is no single determinative factor. Rather, it is necessary to closely examine the facts of each service relationship and to then apply a multi-factor or "economic realities" test. (Labor Code § 3357; S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 C al. 3d 341 at pp. 349, 354.) The Borello court identified the following additional factors that must be considered:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee's investment in the equipment or materials required by his task;
5. The skill required in the particular occupation;
6. 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;
7. The alleged employee's opportunity for profit or loss depending on his managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship.
The party seeking to avoid liability as an employer has the burden of proving that persons whose services he or she has retained are independent contractors rather than employees. In other words, there is a presumption of employment.
To review the bill and analysis
As of January 1, 2012, a new California law creates significant penalties for employers who "willfully" misclassify their workers as independent contractors. In the movie industry, the government usually considers most crew members, as well as above-the-line personnel, to be employees, not independent contractors.
Producers, however, often attempt to hire others as independent contractors because it is administratively simpler, and they may want to avoid hiring a payroll company, withholding taxes, paying the minimum wage or overtime, and complying with other wage and hour law regulations. Moreover, a producer may want to avoid covering staff under workers' compensation insurance, unemployment insurance, disability insurance, or social security.
The federal government has for some time now been cracking down on employers who treat regular employees as independent contractors, thereby avoiding taxes and side-stepping various employment laws.
The new bill, SB 459 was recently signed into law by Governor Brown. It does not change the criteria for determining whether a worker qualifies as an independent contractor, but it greatly enhances the penalty for employers who misclassify personnel.Penalties range from $5,000 to $15,000 per violation for isolated violations. Where there is a pattern or practice of violations, the penalty can increase to $10,000 to $25,000 per violation.
However, it is often difficult to determine how personnel should be classified. The IRS takes the position that most people working on a film production should be classified as employees, not independent contractors. They obviously want taxes withheld. If the person is being employed through a loan out company, then the loan out company will withhold taxes and this should not pose a problem for the producer. Moreover, if the person is being hired, not just for their time but also equipment that is being supplied, it is more likely to pass muster as an independent contractor. Simply calling the person an independent contractor or using a independent contractor form of agreement, does not by itself give much protection.
In determining whether an individual providing service to another is an independent contractor or an employee, the "control" test, is often used initially to make this evaluation. To put it simply, an employee is an individual who the employer has the right to exercise control over the manner and means by which the individual performs his or her services.
However, there is no single determinative factor. Rather, it is necessary to closely examine the facts of each service relationship and to then apply a multi-factor or "economic realities" test. (Labor Code § 3357; S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 C al. 3d 341 at pp. 349, 354.) The Borello court identified the following additional factors that must be considered:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee's investment in the equipment or materials required by his task;
5. The skill required in the particular occupation;
6. 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;
7. The alleged employee's opportunity for profit or loss depending on his managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship.
The party seeking to avoid liability as an employer has the burden of proving that persons whose services he or she has retained are independent contractors rather than employees. In other words, there is a presumption of employment.
To review the bill and analysis
