Tuesday, August 09, 2011

When is a "Sub-contractor" an Employee?

An e-mail from this week:

... [Questionable Business Practices, Inc.] uses the old 1099 trick for their employees and then takes 90 days to pay them. They [the employees] report to work on the employer's schedule, use the employer's hardware and software, and office space. Get an hourly rate (they do get time and a half but after 50 hrs and no double time on Sunday) Some are tired of waiting for their checks and fear they will be left out in the cold at one point. ...

The charming company referred to above is an effects shop in Los Angeles that is usually behind in its payments to workers with the general excuse of: "Hey, we really want to pay you, dude, but [Disney, Warners, Universal, choose one] hasn't paid us yet!"

I wrote to the individual approaching us that this is an old trick in Tinsel Town ...

Many companies sailing close to the wind, financially speaking, ignore the well-known IRS guidelines which dictate that workers who 1) work in-house, 2) take directions from supervisors, and 3) use the company's equipment/software are acting as employees and not a sub-contractors. But -- and I hope you're sitting down for this -- companies ignore these rules because there's financial advantages that accrue to them. (Who would have thought?)

Companies which use the sub-contracting gambit don't pay unemployment insurance, don't pay Social Security taxes, and (perhaps most important), aren't on the hook having to pay wages in a timely fashion. Any bonafide employee, you see, can run to the California Labor Commisioner after five days of no paycheck and file a complaint. And for every day thereafter -- up to thirty days -- that the unpaid worker fails to receive that paycheck, the non-paying employer is required to pay an additional day's pay.

A fine rule, yes? No wonder questionable employers try to dodge it.

Several years back, the IRS contacted TAG for information about sub-contracting violations. They explained the Federal guidelines about sub-contractors, which I vaguely knew but seldom focused on. At the time, the Feds were looking for Hollywood corporate entities who were abusing sub-contracting rules, of which there were many. As one of the agents explained to me, Washington D.C. had long been aware of movie scofflaws, and their on-going abuse of Federal tax rules. At that time, the Internal Revenue Service was making a concerted effort to rein the abusers in.

But it turns out, the effort fell short. And it turns out, this sort of crap continues to go on all the freaking time.

I'm shocked.

Kaplan here ..

I've done some research and found the following avenues for artists interested in reporting their wrongful classifications:

California's Employment Development Department is very interested in recovering lost state taxes and have some forms available to interested parties. The Employee Determination Guide was meant to help buisness determine proper classification, but certainly works for employees who aren't clear if they are properly classified.

There is also the Assessment or Audit Lead Referral form which can be used to either have EDD make a determination as to your status (and possible claim), or direct them to initiate a claim against an employer.

The California State Division of Labor Standards Enforcement is the agency that is capable of recovering lost overtime wages. This link lists the local regional offices where people can file a claim. They have also set-up 888-275-9243 (888 ASK-WAGE) as a toll free number for wage questions.

The Internal Revenue Service, as Steve mentioned above, is very interested in helping correct mis-classifications of this nature. They have a webpage dedicated to reporting tax fraud. That pages links to the Information Referral form needed to initiate a claim.


Anonymous said...

I have just experienced exactly what you are talking about. To the letter. I was one of a dozen artists who were all dealing with this scenario. We have no union support in small post houses like the ones you describe. The only one to help you out is yourself by quitting. Then you definitely don't get paid. If you raise a fuss, you get let go and never called back. I'm still waiting for over 2 months of back pay. This is illegal and should not be happening.

Steven Kaplan said...

If you'd like union support, by way of a contract with the company, you can always initiate the process by signing a rep card:


Steve Hulett said...

Adding, union or no, call me (818) 845-7500 and I would be delighted to assist and provide strategies wherein you can get your money.

Can't file a grievance (obviously) but can help in other ways.

Anonymous said...

Hey Steve,

This is an issue, I work at a place now that calls me a "contractor" yet I work in house on their equipment at their desk and on and on. They do pay on time but they do not pay my taxes, SSI or anything else and that gets old pretty fast. I wish they would but the fear comes with reporting such activity. If I or anyone else did the place would be shut down and a good amount of people would be out of a job. Any suggestions? This happens all too often in our field and some how I seem to end up working at all of these places.

C.M.B. said...

Anonymous 9:01:00 AM:

I am in the same situation you are, but I actually prefer the contractor status when it comes to non-union shops. They pay my corporation, and it pays me. No taxes are taken out, but I am able to write off enough to come out ahead compared to if I was an employee. Do you get paid as a company or an individual?

Anonymous said...

Hey CMB just sent you an email. Steve can you chime in on this how setting up a corporation helps with the whole tax situation.

Anonymous said...

C.M.B. makes a good point. If you are a contractor then make it clear up front that is exactly what you are and don't let them try to treat you as an individual employee (but who is in reality an independent contractor) Make them pay your business and the business pays you.

It's been my experience that business people have more respect for artists who clearly understand how the business world works and are not perceived as starry-eyed art school geeks who can be manipulated.

Get your hands on the Graphic Artists Guild Handbook of Pricing and Ethical Practices. The Graphic Artists Guild is currently offering a free download of "Promote, Negotiate and Make Money: Essential Business Practices for Today's Creative Professional" . A webinar series is also being developed to support this popular publication.

If you're in L.A. then be an active union member for sure , support The Animation Guild. But if you're outside of TAG's jurisdiction or you're working as an independent contractor at non-union studios then the Graphic Artists Guild has a lot of good resources to offer.

Anonymous said...

I do a lot of 1099 work, and last year I got killed on the self employment tax. I'm definitely incorporating. Here's an interesting article on the subject.

Anonymous said...

It's called tax evasion. And amazingly there are still companies calling EMPLOYEES "independent contractors" or "consultants" to avoid taxes, even though the IRS and the state have been cracking down on this bogus classification. I have worked for several such companies and it looks to me that they are doing great, not on the edge financially. How stupid are the owners of these companies to risk all the fines and penalties, as well as the actual back payments? Thanks for the list of who to contact, but unless the process is anonymous, few will report them unless they are really pissed off. However, government revenues are down, so they would LOVE to hear about companies who have this policy!

Contractor CE said...

I agree with Mr. Anonymous whose just above me. A lot of companies does that just to avoid their taxes. I hope the IRS will investigate more about those kind of company..

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