What is this AB5 bill everyone is talking about?
You have probably heard about the new California legislation clarifying the rules around companies claiming workers are independent contractors rather than employees.
On September 18th, 2019, Governor Gavin Newsom signed Assembly Bill 5 (AB5) into law. The law, which Newsom states, “will help reduce worker misclassification — workers being wrongly classified as ‘independent contractors’ rather than employees,” took effect January 1, 2020.
AB5 makes it more difficult for companies to label workers as independent contractors by simplifying the criteria to classify workers as independent contractors.
Formerly, companies could use the “IRS 20 Factor test - Independent Contractor or Employee?,” which was somewhat subjective and not terribly black and white, but was helpful in starting to evaluate workers’ classifications.
The new law generally creates a presumption that a worker is an employee unless the employer can prove all of the following:
- The person is free from the control and direction of the hiring entity
- The person performs work that is outside the usual course of the hiring entity’s business
- The person is customarily engaged in an independently established trade, occupation or business of the same nature that involved the work performed
What does AB5 mean for production?
For those who are veterans in production, it doesn’t change what has been known for a long time. To be compliant, hardly anyone on a film or television crew can truly be classified as an independent contractor. Not only do they not qualify under the guidelines, but there is many years of precedent where most crew positions are classified as employees under collective bargaining agreements.
It is important to understand what criteria must be met, and to document your proof before designating anyone as an independent contractor. More often than not, crew members should be designated as employees, so think carefully and proceed with caution before deciding otherwise. And remember, even if you have the paperwork to back up your decision, the Department of Labor has the last word—and it’s very rarely, if ever, on your side on this issue.
What are the penalties for misclassifying employees?
It’s now potentially even more costly to treat crew members as independent contractors, rather than processing them through production payroll as employees.
The Labor Code authorizes California's Labor and Workforce Development Agency to assess civil penalties of not less than $5,000 and not more than $15,000 for each violation of misclassification, plus any unpaid taxes.
Misclassification is common in our industry. Processing crew members as employees can be particularly difficult for low budget productions that don’t feel they can afford the employment taxes required. Misclassification is simply not worth it though. If caught, it will cost a production much more than the expense of correctly paying workers as employees.
Do I need to worry about how workers are classified if I’m shooting outside of California?
The independent vs. employee debate is a Federal one, with its own penalties imposed on top of any state penalties.
In addition, more than 40 states have agreements with the U.S. Department of Labor to share information and coordinate enforcement efforts pertaining to employers incorrectly treating employees as independent contractors.
Federal tax penalties require employers to pay all of the employee's unpaid social security, unemployment, and income tax withholdings. There may also be a penalty of $5,000 per misclassified worker assessed, plus 1.5% of the employee’s federal income tax liability, plus 20% of the amount that should have been withheld for the employee’s social security taxes.
Is there other exposure?
In truth, the bottom line remains the same when applying this issue to Workers’ Compensation insurance. Courts are very liberal and will protect the injured individual. As such, any Workers’ Compensation claims filed by or against an uninsured independent contractor will more than likely flow up to the production company and/or hiring/contracting entity, making it the employer of record forced to pay the claim. This is why having a contingent Workers’ Compensation policy is important even if a company has no true employees as such policy protects the production company from being without workers' compensation should an independent contractor/subcontractor/volunteer/intern/etc. submit a claim.
This information in this communication is general in nature, and is not intended, nor should it be construed, as legal, accounting, tax or other professional advice rendered by GreenSlate, LLC. The reader should contact his or her attorney, CPA, or tax professional prior to taking any action based upon this information.