EDD says it’s ‘taking no action to ban these companies in California,’ but questions remain
It started with a routine audit at Cast & Crew, one of several payroll companies serving the entertainment industry.
But this audit – usually conducted in secret – has now raised alarms across Hollywood.
Last week, Cast & Crew issued a warning that the California Employment Development Department was attempting to “invalidate the use of loans” — a common structure through which entertainment professionals are paid.
Without loan companies, workers wouldn’t be able to deduct certain job-related expenses, leading to higher income taxes. Their income would also be subject to payroll taxes, which finance national unemployment and disability insurance programs.
“We knew that just releasing this information would cause some panic,” Cast & Crew CEO John Berkley said in an interview Tuesday evening. “We weren’t looking for this panic at all. But we kind of knew that there were so many people relying on the loan structure, and if there was a real or perceived threat to that structure, people would be nervous.
SAG-AFTRA told its members Saturday it was looking into the situation.
“We are all set to explain the history, validity and importance of entertainment industry worker loan companies, and highlight the devastating impact that ignoring these entities would have on industry,” the union said.
The EDD has yet to fully explain what it does.
In a statement released Sunday, the EDD said it was prohibited from confirming or commenting on specific audits. On Tuesday, the agency said in a statement that it would “take no action to ban these companies in California.”
The agency went on to state that it collects payroll taxes and that its “commitment is to ensure that these taxes are collected in accordance with 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 dialogue will help provide greater clarity and information to benefit everyone who works in one of California’s most iconic industries.”
Ross Agre, Cast & Crew’s chief legal officer, said Tuesday that the audit involved one of its payroll entities and affected about 2,000 lending companies.
It all started with a review of applications for unemployment benefits.
“The basis of the audit is that the EDD is reviewing unemployment claims and how employees receiving loans were filing those claims,” Agre said. “I think the EDD is ultimately focused on properly paying and collecting jobs and some associated taxes.”
Independent contractors and self-employed workers are generally not eligible for unemployment insurance because they have not paid into the program.
Cast & Crew decided to alert entertainment unions after realizing the scrutiny was potentially consequential for many people. The problem affects both crew members who work below the line as well as above-the-line workers like actors and directors.
“They’re taking a new policy approach to the whole loan structure,” Berkley said. “I don’t know exactly how to interpret what their position is. What we do know is that they are investigating these lending entities and have assessed the taxes that should be paid.”
Cast & Crew provides payroll services to its clients – production companies – but does not decide the appropriate structure through which to pay people. It just makes the transaction easier.
As such, he does not have a complete understanding of the audit issues and does not take a position on how it should be conducted.
EDD’s position may be a consequence of AB 5, the 2019 California law that limited the classification of workers as “independent contractors” rather than employees. Agre said it was unclear whether that was the basis of the EDD’s position.
“I don’t think we can say exactly how the EDD interprets this,” he said. “At Cast & Crew, we have no visibility into the relationship between our client and the loan they are committing to.”
Cast & Crew filed a petition with an administrative law judge challenging the EDD’s assessment of the tax treatment of the loans.
“We feel like we’re doing this on behalf of the industry and continuing what seems to be standard industry practice,” Berkley said. “I am sure that unions, guilds and our customers would join us in this effort. But we’re not here to fight EDD… We’re not here to fight politics.”
The challenge to the EDD’s determination is being played out behind closed doors.
The administrative judge decided that the 2,000 loan companies affected by the audit would receive formal notices, thus giving them the opportunity to challenge the EDD’s assessment. These notices are expected to be published soon and anyone who receives one will have 30 days to respond.
Cast & Crew has discussed this issue with other payroll providers and believes it will affect them as well.
“This happened during an audit of one of our payroll companies. Further audits could or will take place,” Berkley said. “We are audited like all our competitors do. There is no reason to assume that a very similar situation would not arise. »
The payroll company said it would keep people informed, where possible. But the company is unsure how EDD’s position might affect other state agencies — like the Franchise Tax Board, which collects state income tax — and is unable to give advice on how workers should handle the situation.
“The stakes are very high here,” Berkley said. “But we don’t know exactly what’s going on.”