It began as a routine audit at Cast & Crew, one of several payroll companies that service the entertainment industry.
But that audit — typically handled in secret — has now raised alarms across Hollywood.
Last week, Cast & Crew put out a warning that the California Employment Development Department was attempting to “invalidate the use of loan-outs” — a common structure by which entertainment professionals get paid.
Without loan out companies, workers would be unable to deduct certain employment-related expenses — leading to higher income taxes. Their earnings would also be subject to payroll taxes, which fund the state unemployment and disability insurance programs.
“We knew that even just raising this information would cause some panic,” said John Berkley, the CEO of Cast & Crew, in an interview late on Tuesday. “We weren’t looking for that panic at all. But we just sort of knew that there’s so many people that rely on the loan out structure, and if there is a real or perceived threat to that structure, people are going to be nervous.”
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SAG-AFTRA told its members on Saturday that it is looking into the situation.
“We are all prepared to explain the history, validity, and importance of loan out companies to entertainment industry workers, and highlight the devastating impact disregarding these entities would have on the industry,” the union said.
The EDD has yet to fully explain what it is doing.
In a statement on Sunday, the EDD noted that it is forbidden from confirming or commenting on specific audits. On Tuesday, the agency said in a statement that it is “not taking action to ban these companies in California.”
The agency went on to state that it collects payroll taxes, and its “commitment is to ensure these taxes are collected according to state law.”
“We will continue our communication with industry representatives to ensure their concerns are heard and understood,” the agency said. “We are optimistic that this dialog will help bring further clarity and information for the benefit of everyone who works in one of California’s most iconic industries.”
Ross Agre, the chief legal officer at Cast & Crew, said Tuesday that the audit involves one of its payroll entities and affects about 2,000 loan out companies.
It got started with an examination of claims for unemployment benefits.
“The basis of the audit is the EDD looking into unemployment claims and how employees that have loan outs were filing those claims,” Agre said. “I think the EDD is ultimately focused on the proper payment and collection of employment and some related taxes.”
Independent contractors and self-employed people are generally not eligible for unemployment insurance, because they did not pay into the program.
Cast & Crew decided to alert the entertainment unions after realizing that the examination was potentially consequential to a lot of people. The issue affects both crew members who work below the line as well as above the line workers like actors and directors.
“They are taking a new policy approach to the whole loan out structure,” Berkley said. “I don’t know exactly how to interpret what their position is. What we do know is that they’re looking into these loan out entities and have made an assessment about what taxes should be paid.”
Cast & Crew provides payroll services to its customers — production companies — but it does not decide the appropriate structure by which to pay people. It just facilitates the transaction.
As such, it does not have a complete understanding of the issues in the audit, and it does not take a position on how it should play out.
The EDD position could be a consequence of AB 5, the 2019 law in California that limited the classification of workers as “independent contractors” rather than employees. Agre said it was not clear whether that was the basis for the EDD position.
“I don’t think we can say exactly how the EDD is interpreting this,” he said. “We at Cast & Crew have no visibility into the relationship between our customer and the loan out that they’re engaging.”
Cast & Crew did file a petition with an administrative law judge challenging the EDD’s assessment of the tax treatment of loan outs.
“We feel like we’re doing that on behalf of the industry and the continuation of what seems like a standard industry practice,” Berkley said. “I’m sure that the unions and the guilds and our customers would join us in that. But we’re not here to fight the EDD… We’re not here to fight policy.”
The challenge to the EDD determination is playing out in a closed-door process.
The administrative law judge ruled that the 2,000 loan out companies affected by the audit would be sent notices, giving them an opportunity to challenge the EDD’s assessment. Those notices are expected to go out soon, and anyone who receives one will have 30 days to respond.
Cast & Crew has been in conversation with other payroll providers about the issue, and believes it will affect them as well.
“This happened to happen during an audit of one of our payroll companies. There are other audits that could be happening or will be happening,” Berkley said. “We get audited just like all of our competitors do. There’s no reason to assume that there wouldn’t be a very similar situation going on.”
The payroll company said it will keep people informed, to the extent it can. But the company does not know how EDD’s position might affect other state agencies — like the Franchise Tax Board, which collects state income tax — and is not in a position to offer advice on how workers should navigate the situation.
“There’s very severe stakes here,” Berkley said. “But we don’t know exactly what’s happening.”
