This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.
As an entertainment
attorney practicing in New
York, I see people and companies
struggling to address the definition of independent contractor vs. employee,
frequently. Anyone who hires workers or is thinking of doing so, in
New York or elsewhere
in the United States, should be aware of the following.
Before hiring anyone, it is critical that one carefully determines with one’s accountant and entertainment attorney or other counsel whether the new hire is to be an “employee”; or, alternatively, an “independent contractor”. The terms have legal and financial import; they are mutually exclusive, and one should never use them interchangeably.
The distinction between the two types of workers is important because, among other things, it is usually more expensive and more administratively inconvenient to hire and pay “employees” as opposed to “independent contractors”. On the other hand, few persons or companies that hire workers are truly willing to relinquish control over their hires, to a sufficient degree to allow those workers to accurately be characterized as “independent contractors” as opposed to employees. As an entertainment attorney, I frequently encounter business projects of short duration such as a single film shoot, a single album recording, or a single pilot shoot. The question of “independent contractor vs. employee” therefore arises most often in the context of media and entertainment projects of multi-week or multi-month duration. Though the two constructs, “independent contractor” and “employee”, are not necessarily self-defining, the word “independent” is used for a reason, and truly translates to “loss of hiring-party control”. I’ll explain below.
The U.S. Internal Revenue Service in (former) “IRS
Publication 937” identified 20 “checklist” factors
that it considered when determining whether or not an individual worker
is an “independent contractor” as opposed to an “employee”.
The litmus test has apparently since evolved somewhat. See, e.g.:
The hiring party should review the most updated version
of the IRS criteria prior to any hires, and it is probably more important
to do so with one’s payroll company and tax accountant, than one’s
entertainment attorney. The hiring party should also be aware that the
IRS is not the only institution with whom to be concerned regarding
the all-important “independent contractor vs. employee”
determination. Other governmental agencies have a stake in preventing
mischaracterization of workers as independent contractors, too.
For example, the state Department of Labor (state “DOL”) in one’s own home state may apply its own checklist of criteria to distinguish independent contractors vs. employees. One needs to be aware that there is a federal [US] Department of Labor as well as a state Department of Labor. A hiring party needs to comply with the requirements of both. In a perfect world, there should be consistency between the respective “checklists” of the IRS and the applicable DOL, as well as consistency between each agency’s interpretation of those checklists. However, your entertainment attorney and tax accountant will opine to you that the world isn’t perfect, and those interpretations could differ as to what constitutes an independent contractor versus an employee. Therefore, one should be aware as to how a local state DOL characterizes the two different types of workers, too - if different than the IRS characterization. Additionally, from an enforcement perspective, the DOL could challenge a hiring business’ characterization of its workers as “independent contractors” vs. employees, without the IRS joining in on the contest. The IRS and the DOL are separate agencies, although there is a suggestion that they will more thoroughly share electronic data with each other on field data and this issue in the near future.
The “independent contractor” determination can be the proverbial unstable apple cart, easily tipped. An employer, as most know, should withhold taxes from an employee’s pay, and make unemployment contributions with respect to those employees, among other things. Hiring companies in the entertainment field, for example, even if they already have an entertainment attorney and a tax accountant, still often wisely use a “payroll company” to administrate payment obligations to workers, so as not to transgress. The cost of a hiring party mischaracterizing an employee as an independent contractor instead, could be high. If ever in doubt, payroll companies and accountants should skew cautious and conservative when making the distinction for their clients in favor of employees – and the entertainment attorney will usually tell the client to listen to his or her payroll company and tax accountant.
However, let’s say that a hypothetical music recording studio, or film production company, for that matter, hires 20 workers, characterizes them all (in reasonably good faith) as “independent contractors”, but uses no payroll company, tax accountant, or entertainment attorney initially. Let’s further assume that the film production or music studio pays no unemployment insurance or workers compensation contributions with respect to any of the hires, and does not withhold taxes from their paychecks. Then, one independent contractor worker is terminated, and vindictively files with the local state DOL for unemployment compensation, claiming to be a fired “employee” instead. Even after phoning the entertainment attorney and tax accountant to enlist their retroactive help, it may now be too late. The recording studio or film production could now find itself faced with a state DOL that characterizes not just the one claimant-worker - but all 20 workers - as “employees” as opposed to “independent contractors”. The apple cart tips. The camel’s nose is now in the tent.
The recording studio or film company may be required to litigate administrative hearings on the independent contractor v. employee question, and may thereupon be assessed retroactive unemployment insurance contributions, interest, and penalties with respect to the workers that “should have been paid as employees”. Other actions may also follow, such as a workers compensation audit, and perhaps even findings by the IRS and local tax authorities with respect to claimed monies that “should have been withheld” from the “employees” pay. The argument of, “But I told them they were independent contractors” may be considered a mere ipse dixit proposition and might not wash with the government. The entertainment attorney or the business owner can state the case to the authorities that short-term hires are the bread-and-butter of the local entertainment economy in the jurisdiction and so should be rewarded and not punished, but the adjudicating authorities may not accept that distinction between entertainment and non-entertainment sectors. Their only care may be to decrease the overall number of independent contractors and increase the total number of employees across all industries and sectors.
Could this nightmare have been avoided by the recording studio or film production company, through documentation, prospective use of its entertainment attorney, or otherwise? The answer is “Maybe yes, maybe no”. Please see Part II of this article for a further discussion.
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My entertainment law practice
includes state and federal employment law matters relating to independent
contractors and employees and other human resource matters as they arise
in the fields of film, music, television, publishing,
Internet, and other
media and industries, and copyright,
trademark, and contractual
matters If you have questions
about legal issues which affect your career,
and require representation, please contact me:
Law Office of John J. Tormey III, Esq.
John J. Tormey III, PLLC
1324 Lexington Avenue, PMB 188
New York, NY 10128 USA
(212) 410-4142 (phone)
(212) 410-2380 (fax)