California’s Assembly Bill 5 (AB5), enacted in 2019 and later amended in 2020, brought significant changes to the entertainment industry, specifically with respect to freelance independent contractors working on films. AB5 changed how companies were meant to classify workers, and individuals who were previously deemed W-9 independent contractors were now suddenly considered W-2 employees. Being aware of AB5’s intricacies is essential for producers and production entities engaging key crew and talent for their film projects in California.
The ABC Test, a codified cornerstone of AB5, mandates that a worker be classified as an employee unless the hiring entity can prove these three conditions are met:
Control and Direction: The worker is free from the hiring entity’s control and direction in the performance of their work.
Work Outside Usual Business: The work performed by the individual is outside the hiring entity’s usual course of business.
Independent Trade, Occupation, or Business: The worker is engaged in an independently established trade, occupation, or business.
For industries like film production, where a production company needs control and direction to ensure a project runs smoothly, classifying crew and talent as independent contractors is a challenge. The law requires a nuanced approach to avoid misclassification, which can lead to severe financial penalties that will hinder any project’s development. To navigate these challenges, producers and production entities have a few options when constructing their agreements with talent and crew members:
Exclusive Engagement of Loan-Out Companies: Contracting exclusively with a worker’s loan-out company significantly mitigates the risk of misclassification as this avoids creating a direct-hire relationship with the individual worker. By contracting instead with the individual’s loan-out company (usually an LLC), there is a chance that the relationship would qualify under AB5’s business-to-business exemption.
Abstaining from WMFH Clauses: It is important for hiring companies to make sure they own the rights and proceeds of the services provided by cast and crew, therefore, “work made for hire” provisions (“WMFH”) are typically seen in agreements. However, under the California Labor Code, including a WMFH clause in an independent contractor agreement will transform that contractor into a statutory employee. Opting for an assignment of rights provision instead may avoid triggering immediate statutory employee classification.
Allowing Limited Rights Retention: Even if WMFH clauses are included in the agreement, modifying them to allow contractors to retain limited rights in the commissioned work may also prevent statutory employee misclassification.
Furthermore, when looking to hire talent and crew members, bringing in a payroll company can certainly streamline the onboarding process and help ensure AB5 compliance. In fact, the Screen Actors Guild (“SAG”) requires all SAG productions to use one of their pre-approved entertainment payroll companies. By engaging a payroll company, they can ensure compliance with federal and state employment laws. Choosing whether or not to use one depends on factors such as the complexity of the production, the specific services and commissioned work sought from cast and crew, budget, and the overall willingness to outsource payroll responsibilities.
Complying with AB5 requires a careful consideration of these options. By adopting the appropriate approach on a case-by-case basis, producers and production entities can adequately mitigate the risk of statutory employee misclassification and ensure safe passage through California’s evolving employment regulatory landscape.
