Loan Out Companies: Pros, Cons, and Considerations for Your Production
As an entertainment industry professional, you may have heard the term "loan-out company" thrown around in discussions about contracts and payroll. Perhaps you even reference “loan out companies” in your contracts with workers. But what exactly is a loan-out company, and do you need one for your production? In this blog post, we'll dive into the details and explore the pros, cons, and important considerations surrounding loan-out companies.
What is a Loan Out Company?
A loan-out company is a separate legal entity, typically a corporation or LLC, created by an individual (usually an actor, director, writer, or other talent) to "loan out" their services to a production company. The idea is that the individual would remain an “employee” of their own loan-out company, which in turn contracts with the production company and is used with the aim of tax benefits and liability protection for the production company.
OK, Sounds Great - I’m Ready To Use a Loan Out: Can I? (Misclassification)
The idea of a loan out sounds great, but before you go setting up your production with a series of loan out agreements, take caution: just because you use a loan out doesn’t mean you’re absolving your liability as an employer of those entities.
Full stop.
While the entertainment industry has been accustomed to regularly using loan-outs as a way to shield liability from the production companies (and get tax benefits), with recent changes in certain state’s laws regarding employment classification, we need to take another examination of the decision to engage in loan-outs with workers.
But what’s the risk if I go ahead and classify all my crew as independent contractors (with a Loan Out) anyway?
Misclassifying workers can have serious, serious financial consequences (so serious, we wrote it twice!), especially in California. For example, misclassification can subject a company to liability for failure to pay wages (including overtime), missed meal and rest break penalties, waiting time penalties (up to 1 month of pay), and wage statement penalties. Additionally, if the employee is forced to litigate these claims (and prevails), they may be entitled to attorney’s fees and costs. Even a single-day shoot that suffers misclassification issues can result in the exposure of liability to a worker for a full 30 days worth of wages, plus penalties (and yes, that is true even if the shoot was just 1 day).
And worse, most of these laws carry individual liability. In other words, trying to just shut up shop and walk away from your business if you are faced with such claims won’t really make it go away because employees can seek recovery from the owners and the businesses as individuals, too.
Can We Just Agree on Loan Out and Classification Status?
But what if the worker and I both agree to the classification? Unfortunately, parties cannot just “agree” to be in an independent contractor or employee relationship. Instead, this relationship is dictated by law.
But My CBA Gives Me a Right to Use a Loan Out?
When California’s worker classification law changed in 2018 by the Dynamex case and in anticipation of California law codifying the decision (AB5), entertainment-related guilds and unions (including SAG-AFTRA) issued statements to their members advising that AB 5 would not change a member’s right to use a loan out.
Specifically, SAG-AFTRA stated, in part:
Members of our guilds and unions are not independent contractors; they are employees, whether or not they utilize loan-outs. Loan-out companies are employers and so they too do not have independent contractor status. AB 5 exempts the kind of business-to-business relationships that loan-out companies are set up to support. Furthermore, AB 5, by setting up rules applicable when one employer loans an employee to another employer, specifically contemplates that loan-outs will continue. Our collective bargaining agreements (CBAs) expressly allow members to use loan-outs. Our CBAs also protect your status as an employee. AB 5 does not undermine these legal or contractual rights. AB 5 is not directed at our industry, and we do not believe it will trigger a change to industry practices.
In other words, while members may utilize a loan out in certain circumstances (like in business-to-business relationships, as explained below), most of the members of unions or guilds in production will be classified as employees (at least under California law).
The determination of classification will typically turn around whether the individual being retained is classified as an independent contractor or employee under the relevant law. If the worker can be classified as an independent contractor, then it is possible that the loan-out approach can be used in that circumstance. However, an employer cannot opt to use a loan out as a way to circumvent worker classification laws - this would have been true before AB 5 and remains true now. In other words, an employer cannot hire an individual through the individual’s company (and pay them as a 1099), as a way to get around state classification laws. Instead, the analysis of whether the worker should be an independent contractor or employee will depend on the analysis of the reality of the worker’s situation (and the relevant law where the worker is performing services).
What About California’s Business-to-Business Exemption under AB 5?
For productions in California, you may have heard of there being a business-to-business exemption under AB5 (the legislation that changed California’s worker classification analysis). Essentially, this exemption provides that a business providing a service to another business may properly fall under an independent contractor classification if it meets certain criteria. Generally, the business must be providing the service directly to the business and not to the other business’s clients. One example of a business relationship in the entertainment industry that may fall into this exemption (if certain criteria are met) could be craft services (for a production).
What About Multi-State Productions?
And more confusing - the laws on worker classification vary from state to state. For example, California recently adopted the “ABC Test” to determine workers classification. Many other U.S. states also use this test. But other states may follow a test more similar to the IRS analysis, also known as the “common law” test. And when productions cross state lines, the classification really gets confusing. It may be possible that a worker falls into the independent contractor category in one state, but when production moves into another state, the individual is classified as an employee under that state’s laws.
So, in short (and we can’t overemphasize this): the classification of workers in production are serious consideration. If you aren’t sure how to handle it: consult with an experienced employment law attorney.
OK, I think I can still have a loan out…now let’s consider:
State-Specific Tax Considerations:
Note that some states (approximately 16 and counting) impose taxes on loan-out companies (depending on circumstances), and each state has its own set of requirements for registration and reporting.
In most cases, loan-out companies must register with the state's Department of Revenue, Secretary of State, or both before working with production in that location. In fact, some states (approximately 3) impose a tax on loan-outs only if they do not register with the Secretary of State. Other states require loan-outs to register with the state for film incentive purposes and withhold tax on wage statements made to the owner.
Thus, understanding tax regulations around loan-outs is crucial.
Non-resident performing artist loan-out companies may need to meet specific requirements to qualify for the production company's incentive, and taxes must be deducted from payments accordingly. If you’re unsure of tax responsibilities, consult with a tax attorney or CPA.
Independent Contractor Laws
Certain jurisdictions (ex: the City of Los Angeles and New York City) have requirements that an independent contractor relationship must be memorialized in writing and further dictate the specific details of what the agreement must include.
CONCLUSION
In conclusion, navigating the intricacies of loan-out companies in the entertainment industry demands careful consideration of various factors discussed in this blog post. From understanding the legal implications of misclassification to state-specific tax obligations and independent contractor laws, the decision to utilize a loan-out company for your production requires thorough evaluation. By weighing the pros and cons outlined herein and seeking guidance from experienced legal professionals, you can make informed decisions to protect your production's interests and ensure compliance with applicable laws. Remember, whether you choose to utilize a loan out or not, staying informed and seeking expert advice when needed are crucial steps toward success in the dynamic landscape of the entertainment industry.
Ready to navigate the legal landscape of the entertainment industry with confidence? Contact Wagner Legal today for expert guidance on workplace laws, including loan-out companies and more. Subscribe to our blog and newsletter to stay updated on industry insights and legal developments. Our experienced team is here to support your production's success. Reach out now to ensure compliance and protect your interests.
