New California legislation effective January 1st, 2020 thought to threaten the use of loan-out companies
by Jason Schneider, CPA
The impetus behind Governor Gavin Newsome’s signing of Assembly Bill 5 was primarily to address the concerns of gig economy workers in their fight to be classified as employees instead of independent contractors. If those who drove Uber and delivered Postmates qualified as employees, then they’d become legally entitled to benefits such as medical insurance, paid time off and retirement contributions. The enactment of AB5 into law effective January 1, 2020 surely has drastic consequences for the gig economy and various industries alike, but the immediate implications to Hollywood were not as clear.
The primary concern of those in the entertainment industry was whether talent could continue using loan-out companies given this new climate. While studios have always been reluctant to enter into contracts with Single Member LLCs, they have been amenable to the use of wholly-owned S and C corporations. Given the new legislation and now famous Dynamex decision, would studios continue to recognize loan-out corporations?
As of November 6th, 2019 all the major studios and some streaming services have agreed to respect the use of loan-out companies after January 1, 2020. The studios have followed the lead of the various guilds who issued a joint statement adhering to the usage of loan-outs in a post-AB5 world.
While the agreed upon continuance of loan-outs is a sigh of relief for many in the industry, AB5 and Dynamex still do not come without consequences. Employers must proceed with caution when 1099’ing anybody who performs services that fall within its natural course of business. A college intern reading scripts and writing coverage for an agency could be classified as an employee under the new legislation. Same goes for a PA working on set for a short two week stint. The law suggests that workers must be completely removed from the natural trade or business in order to qualify as an independent contractor e.g. a plumber hired to fix a sink.