Employee misclassification is one of the leading labor abuses in the country. In fact, in recent years, both the Internal Revenue Service and the U.S. Department of Labor have launched a misclassification initiative to combat this pervasive issue.
Misclassification runs rampant in the entertainment industry, where terms like “low pay/no pay”, “copy, credit, meals”, and “deferred payment” get thrown around freely in order to meet budget. With the ease of access to affordable high quality recording equipment and editing software, the fast-growing independent market has only added to the I.R.S. and U.S. Department of Labor’s frustrations in this regard.
The Fair Labor Standards Act defines the term “employ” very broadly as follows: to “suffer or permit to work.” Most individuals providing services to a for-profit business will be deemed an employee under the law unless a specific exclusion applies. A good rule of thumb is this: if you are asking someone to perform work that is benefitting you, start with the assumption that they are your employee, unless an exception proves otherwise.
While by no means a comprehensive list of all “employee misclassification” concerns, here is a brief overview of three of the most common misclassifications, and when and how they can lawfully be applied to support your project.
Unpaid (or Low Paid) “Volunteers”
Federal law prohibits most private sector, for-profit employers from using volunteers – at all. If they are to “suffer or permit to work” for you in the for-profit sector, they need to get paid for it.
So, is “copy, credit and meals” considered a valid form of payment? Not really. If the person is an employee, they are owed minimum wage, overtime payments where applicable, and withholdings for salary, such as income tax and social security payments. Employers cannot circumvent federal and state laws with respect to the payment of wages. If the person is not an employee but an “independent contractor” (discussed below), “copy, credit, meals” and other similar forms of “in lieu of payment” compensation are still often illusory in nature, and therefore not valid consideration, because they may never come to fruition.
Some employee compensation is permitted to be “deferred” under 26 U.S. Code § 409A. However, there are very strict rules regarding the timing of payment for deferred compensation, and serious tax liabilities may be imposed on filmmakers who are cash-basis taxpayers, ranging from 20% to over 40% of the compensation at issue, depending on the state of residence of the filmmaker-taxpayer. In short, it is not simply a box to be filled in on a line-item budget without some serious forethought as to whether it will benefit you in the long run.
For those involved in the public sector (government) or in a non-profit organization, there is good news. You ARE permitted to use volunteers, as long as they are performing civic, charitable or humanitarian work with no expectation of pay. If a qualifying volunteer does receive any benefits for their service, the total value of those benefits must be substantially less than the total value of their services provided.
Private sector, for-profit organizations CAN utilize unpaid interns, assuming the internship qualifies under the six criteria set forth by the United States Supreme Court. The Supreme Court held that the term “suffer or permit to work” cannot be interpreted so as to make a person whose work serves only his or her own interest an employee of another who provides aid or instruction. Therefore, the following six criteria are applied to determine if someone actually qualifies as an “unpaid intern”:
- The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
- Experience is for the benefit of the intern;
- The intern does not displace regular employees, but works under close supervision of existing staff;
- The employer providing the training provides no immediate advantage from the activities of the intern, and on occasion operations may actually be impeded;
- The intern is not necessarily entitled to a job at the conclusion of the internship; and
- Both understand that the intern is not entitled to wages for time spent in the internship.
If all of those six factors are met, an employment relationship does not exist.
There is an opportunity for filmmakers to give film students a true learning experience at no cost. However, once again, misclassification issues and abuse related to unpaid internships are commonplace, with interns being asked to make coffee runs or to assist in low-level tasks with little to no supervision. In such instances, litigation is becoming more frequent, and the consequences of losing such cases are severe for the employer – with minimum wage violations, overtime violations, liquidated damages, state law violations for failure to provide rest and meal breaks, and other civil penalties applied.
Independent Contractors Independent contractors, by definition, are self-employed, and because they are not employees, they are not subject to minimum wage laws, the person hiring them does not have to pay FICA (social security and Medicare) and FUTA (federal unemployment insurance) taxes, and they do not have to withhold federal income taxes for these individuals. For this reason, filmmakers and other employers are often tempted to reclassify employees as independent contractors in order to avoid taxes, benefits, and other liability. However, due to the potential loss of billions of dollars of taxable revenue, the I.R.S. has cracked down on misclassification of independent contractors in recent years as well.
As a general rule, an individual qualifies as an independent contractor if the payer has the right to control or direct only the result of the work, and not what will be done or how it will be accomplished. This is a heavily fact-dependent determination. In short, an independent contractor is not an independent contractor simply because that is how you referenced them in their deal memo.
The I.R.S. and the Courts often weigh the degree of control and independence exercised by the independent contractor in order to make a determination. For example, they may examine whether the company has the right to control how and what the worker does with respect to his or her job. They may look at whether the business and financial aspects of the workers’ job are controlled by the payer. They will also look at the type of relationship between the parties, and whether there are any written contracts between them, any employee-type benefits being offered, or any long-term working relationship which may denote an employee-employer relationship. Ultimately, the analysis is extremely fact dependent, and there is no magic number of factors that qualify a person as an independent contractor. If you are unsure, you can file a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) and the IRS will review the facts and officially determine the worker’s status.