AB5 And The Potential Impact On Community Theaters in CA
Kevin Surace (Artistic Director, SCP)
December 27, 2019
Updated Jan 5, 2020 to include the issue of “fine artists”
Updated Jan 8, 2020 to include per diem for volunteers
Added links to sample agreements
I thought it best to share this overview with all community theaters in the bay area. I have already had to deal with this same issue long before AB5, with musicians around the country as well as contractors in technology. While I am not an attorney, I’ll share what I have learned and some strategies going forward. By going forward, I mean January 1, 2020.
I’ll provide one good piece of news here…the show will go on. But it will potentially cost more, and it won’t be in the way we have all handled stipends and honorariums and volunteer bonuses in the past.
OVERVIEW
AB5 has tightened and extended the laws regarding independent contractors versus employees. It goes into effect on Jan 1, 2020.
This means that the bill impacts THIS CURRENT SEASON, not just a new season.
Note that the IRS has always had strict guidelines on employees versus contractors. And it is quite likely that creative staff, musicians, and others that community theaters “paid” as contractors with a small stipend should have been classified as employees. See this: https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
Reading the IRS definition already clearly states that if an organization requires someone to show up at a given time and place (say to direct a rehearsal), they must be categorized as an employee.
Actors, for the most part in community theater, already are volunteers, so we are not really talking about an impact to most non-equity actors. Instead, it’s paid staff that is the target and the focus here. People who often get a small stipend to perform their work. However, an “actor bonus” and nice things like that would need to cease immediately.
The new bill strengthened the “ABC test” of an independent contractor to broaden it to include gig workers, specifically Uber and Lyft. The musician’s union and SAG and others were consulted but could not come up with any proposal that was usable. I and others believe the reason for this is that the unions want ALL workers in the space classified as employees anyway. They have fought for this for years, including non-union workers, and have won in court. So, they were not motivated to do much in the end.
I say strengthened because in 2018, the California Supreme Court ruled against Dynamex and established that everyone is an employee UNLESS they can prove that the worker meets all 3 requirements of the ABC test.
This is the CA Supreme Court, not AB5, and it was a ruling a year before AB5 came into existence. People who think that bringing this to the courts will change it are probably hoping beyond hope, since it was the CA supreme court that created the ABC test in the first place. AB5 just made it clear beyond a doubt.
The ABC Test (Dynamex Case)
Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the putative employer proves:
(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and
C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
Note that each of these requirements need to be met in order for the presumption that a worker is an employee to be rebutted, and for a court to recognize that a worker has been properly classified as an independent contractor.
You can read more about this ruling from May 2018 here: https://www.laboremploymentlawblog.com/2018/05/articles/class-actions/dynamex-decision-independent-contractors/
— — —
A currently discussed amendment to AB5, which may be up for a vote in September 2020, would add just independent musicians to the list of exclusions. Specifically those performing bar gigs and such. Musicians at a wedding are already excluded becuase the wedding party is not in the business of showcasing music. A bar may be. Unions oppose the amendment. So, don’t count on it passing in CA. However, it may only cover independent musicians in very short gigs…a night or two, at a venue whose main business is not music. The NLRB and others have long ruled that musicians in a theater setting ARE temporary employees. Meaning this may not affect Community Theater musicians. And it would not go into effect until 2021 if ever.
So for today…the law is the law.
BACKGROUND
The “ABC” test for paying as a 1099 has always been in place from the IRS, though with a looser interpretation. While this new AB5 CA amendment tightens the rules post DYNAMEX, one COULD have argued that temporary workers (like director, MD etc) in theater were never really contractors. Because they must work at the theater and is clearly in the usual course of business. But everyone looked the other way, until now.
The old rules (from the IRS) were already tested several times in theater and symphony for musicians in the past. And in every court case from 2011 onward, the IRS and NLRB (and the courts) ruled that musicians MUST be employees even if hired for only one night, provided the hiring entity has music as part of their normal business (and it was also made clear that any musical theater indeed does require music and thus all musicians are employees, even when hired for just one night). So, one could argue, there is no real change with AB5 for musicians, but everyone is waking up to the reality.
Please read the AB5 text below, especially the ABC points which must be met to be paid as a contractor. You will note that it would be unlikely a theater would hire someone to “perform work that is outside the usual course of the hiring entity’s business.”
Also see Appendix A (Musicians must be classified as employees). While I point to a few court cases and such brought by unions, the resuklt was not union specific. The result of all tests was a musician in theater or orchestra is an employee. Union or not.
THE AB5 BILL LANGUAGE (the most important parts):
SEC. 2.
Section 2750.3 is added to the Labor Code, to read:
2750.3.
(a) (1) For purposes of the provisions of this code and the Unemployment Insurance Code, and for the wage orders of the Industrial Welfare Commission, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
HOWEVER, there is an exclusion for some business entities which perform a B2B service:
(1) If a business entity formed as a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation (“business service provider”) contracts to provide services to another such business (“contracting business”), the determination of employee or independent contractor status of the business services provider shall be governed by (court case) Borello, if the contracting business demonstrates that all of the following criteria are satisfied:
(A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
C) The contract with the business service provider is in writing.
(D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
(E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
(F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
(H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
(I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
(J) The business service provider can negotiate its own rates.
(K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
(L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
— — — — — — — — — — — -
WHAT WILL UBER DO?
Uber is unlikely to win in a fight against the bill itself. Even though Uber and Postmates filed suit on Dec 30th requesting an injunction. Because the ABC test in the bill is similar to that of the IRS but moreover exactly as that which the court already ruled, it seems unlikely they would be able to prove the bill is unconstitutional. Instead they are focused on showing that drivers do not fit the definition of an employee and are not subject to the bill. Uber’s attorney has said they will prove that drivers are outside the usual course of Uber’s business because Uber’s business is to connect passengers and drivers, not actually drive.
“That legal test, called the “ABC test,” certainly sets a higher bar for companies to demonstrate that independent workers are indeed independent. Under that three-part test, arguably the highest bar is that a company must prove that contractors are doing work “outside the usual course” of its business. But just because the test is hard does not mean we will not be able to pass it. In fact, several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”
While Uber can take that stand (spending $100M+ defending it) and might even win eventually in court, Community Theater would have a harder time proving that directing a show, playing music, and stage managing are outside the usual course of our business. These staff positions are indeed inside the usual course of the theater business. So even if Uber wins someday, and I have my doubts since mostly they are seen as a transportation company, the bill would remain in force. No one is likely to unravel the bill anytime soon.
WHAT ABOUT THE EXCLUSION FOR FINE ARTISTS?
The federal government has only one definition for Fine Artists which is here:
https://www.bls.gov/ooh/arts-and-design/craft-and-fine-artists.htm#tab-2
It is worth a read. It is true craft and visual artists. NOT musicians or directors.
Some have said “we will ignore that and make up our own definition. Maybe include musicians or even stage managers and directors.” The bills author herself recently said a fine artist could mean many things, but she cannot define it since the bill doesn’t specifically define it. The IRS or a court will eventually define it. BUT, I feel this is very risky to come up with our own definition that meets our own specific criteria. People who make up their own broader defintion for exemptions always lose. Someday you could lose to an IRS or EDD that disagrees and you will have no recourse. Do you really think they will bfoaden a defintion to meet your needs? Or use whatever they can find at the Bureau of Labor and Statistics. In addition, and this is important: It really doesn’t matter because the fine artist in our case CANNOT meet the additional criteria for exemption.
Scenic Artists, Digital (projection) designers, perhaps costumers, master carpenters and others creating physical or visual artwork probably qualify in the Fine Artist exemption. Meaning they can be an independant contractor IF they meet the additional tests. Lighting designer? Sound designer? Perhaps, but those are less clear.
BUT, regardless of what definition you use, a professional exemption from AB5, and thus the ABC test, still MUST pass the following 7 criteria, plus all 11 items of Borello.
Fine Artists is a professional service exemption and therefore you have to meet all of these criteria to be exempt from AB5:
If the hiring entity can demonstrate that the professional:
(1) Maintains a business location separate from the hiring entity;
(2) Has a business license and any required professional licenses or permits;
(3) Has the ability to set or negotiate their own rates;
(4) Has the ability to set their own hours;
(5) Customarily engages in the same type of work performed under the contract;
(6) Holds themselves out to other potential customers for the same type of work;
(7) Exercises discretion and independent judgment.
If you meet ALL these 7 criteria as a “Fine Artist”, even ignoring the governments definition of such, you are exempt from AB5’s ABC test and therefore governed under the Borello decision (an 11 point test) to determine if the worker should be classified as an independent contractor.
For musicians, one could say this covers a musician working alone on a new piece of music from their business location. Or recording on their own. Or maybe programming mainstage for a show at their home etc.
But theater requires a musician or director or SM or PM to be on site, not at their own business location, during VERY specific show or rehearsal hours. Most staff in theater simply does not meet this test, even if you stretched the definition of fine artist. Possibly scenic artists and carpenters could. Their own hours…yes. A lot of design is at home. yes. Have a business license? They might. So it’s possible that those few roles may still fit as an independent contractor. But you would need to define how this person IS a fine artist by the federal definition, meets the 7 criteria above in AB5, and further meets all 11 cfiteria in Borello. And I would do so in their contractor agreement so years in the future when someone comes to question it, there can be no disagreement by either side.
THIS SUCKS: SO…WHAT CAN WE DO?
Since a community theater is in the business of producing theatrical works that include actors and probably music (and directors and stage managers etc.), those doing work for the theater would seemingly have to be categorized as employees starting now. So, this is an urgent matter.
Here are the possible methods to handle this which we can consider:
1) Volunteers of course are not employees or contractors but rather a volunteer, and may receive no money except expense reimbursement. This can include mileage. Volunteers are a staple of nonprofits but must sign a volunteer contract stating they are volunteering their time. They cannot be paid in any other way.
§ 553.101 “Volunteer” defined. (a) An individual who performs hours of service for a public agency for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered, is considered to be a volunteer during such hours. Individuals performing hours of service for such a public agency will be considered volunteers for the time so spent and not subject to sections 6, 7, and 11 of the FLSA when such hours of service are performed in accord with sections 3(e)(4) (A) and (B) of the FLSA and the guidelines in this subpart.
There is some talk that theaters could just “bonus” volunteers somehow with a wink and a nod, but this is tricky as the definition in FLSA is VERY clear: “no expectation or receipt of compensation.”
So you would have to surprise bonus all your staff. Every show. And in an audit or court, this strategy will likely go down in flames as it is clearly intended to skirt the law, avoid minimum wage and avoid employment altogether. Save reimbursement for miles or other costs, this doesn’t appear to be a strategy theaters can rely on without substantial risk to their board members.
Now, how many creative staff would volunteer for $0.00? Some, but probably not too many. Still, mileage could be something — at say 40 miles roundtrip is $0.14/mile (for volunteers) might add up to $300 for the rehearsals for reimbursement. These would have to be well documented.
The bigger issue here are people who live close by and need to get paid a little in order to do the work as the money supplements their income. This includes much of the staff theater typically has (MDs and directors and SM’s etc.). Many cannot or will not do a show for $85 in gas money total. As much as they love you.
PER DIEM for meals (M&IE) is another possibility for reimbursement. The IRS has tight regulations around the amounts and handling of this.
1) An expense report IS required proving the volunteer was away from home and on business during the specific hours in question. This can come at the end of the show run. But must be documented and filed for at least 5 years to be safe.
2) You can only pay up to the allowed amounts. In much of California in 2020 these amounts are “up to” $16 for breakfast, $17 for lunch and $28 for dinner.
3) You must have a corporate policy which applies to everyone equally. For example you might offer a per diem for dinner if the volunteer was required to be on premises from 6pm-7pm and you did not offer food (you can’’t bring in pizza for everyone AND pay per diem). Also this policy applies to volunteers and employees since you should not create a separate class which gets per diem and others don’t. Though any independent contractor would not be part of this program.
4) This money is not required to be reported as income for the volunteer.
Is there any risk in the per diem meal allowance? The IRS states that this is available when traveling away from home, or away from your general vicinity of home. But does not specify miles required or other. Just that it is meant for someone traveling on business. So we would have to justify that for the volunteer, this is travel away from home on business (on behalf of the nonprofit). I feel this risk is quite low, but not zero. It’s not an EDD issue so only the IRS might come back and claim that some people were close to home and thus should deduct this as income. But the risk to the theater seems quite limited.
A sample expense policy which includes Per Diem is here for you to edit:
https://docs.google.com/document/d/1Y7wRmIYiQJcaWIvnG_q2ngMYZXnIQoXjOpj9De59J6E/edit?usp=sharing
One thing you CAN do is to divide some roles. Your Stage Manager might be split into two roles. Rehearsal Stage Manager and Production Stage Manager. The production job cpud be paid and the rehearsal job might be a volunteer. In fact this can be the same person volunteering for rehearsals (on a Volunteer contract) and as an employee for actual shows. To keep costs in line your Director might have an assistant director (a different human). The Director job is paid, but limited to maybe 10hrs/wk for 6 weeks. The AD would take the directors direction and continue to work the cast, sans director, for the other 10hrs/wk of rehearsal. Not ideal…but likely meets the intent of the law. And keeps your costs similar.
Here is a link to a sample Volunteer Agreement you can use for actors and staff who can volunteer for specific roles that should meet the above standards. You can edit it for your own theater.
https://drive.google.com/open?id=1Y8Wrvt-08QJzwILv22rB6YNfWC_ohw_K
IMPACT to COSTS: Could decrease the cost of a show if everyone could be a volunteer with no bonus, depending on reimbursements. However, many reliable people would disappear, likely making it impossible to produce a show. But using this sparingly and correctly should keep costs about the same as today.
2) Payroll: Contract with an online payroll provider (say Paychex or Square or 100 others) and add staff in specific roles as temporary part time employees. In CA you must pay people weekly or every 2 weeks (or bi-monthly). It cannot be monthly. A payroll service can be $20/mo plus $4/employee per month. It’s not a huge cost but it is a pain to submit payroll 2x a month, and that would require many hours a month of collecting times cards and submitting to the payroll processor. That accountant must be paid or be a volunteer as well. The theater could limit the number of hours per month a worker can work (a director of a show might have a contract for exactly 60hrs/mo for two months at least for minimum wage ($15hr to $17/hr depending on the city). This Director could possibly volunteer for some hours, unpaid, as a volunteer. But a theater cannot require that. So, a director “salary” would end up at maybe $2000 without any volunteer hours. This might be higher than you had paid before, and also there are payroll taxes and such to be handled, though no benefits are likely required.
A stage manager might have 20 shows at 3hrs/show at $16.05/hr. Ignoring any rehearsals. They might volunteer their time for meetings and rehearsals.
Musicians might now have a call time equal to curtain time. That is how many professional organizations work. They can come earlier but must be ready to play at the downbeat and that is when pay starts. They would be paid for the hours of the show…minus the break. Musicians would end up being paid around $30-$45 per show depending on the show length. So this may not be as big of a new cost as other staff would since community theater musician stipends have been in this range the last few years. But you would give up the early “one hour before curtain” call.
There are a few other small benefits required in the state of CA. See Appendix B. Since employees would be part time and temporary, only a few apply to us. And no one should hit the limit of 50 employees (which kicks in other benefits). These may add 12% to the wage cost.
The real impact here is not the cost and pain of payroll, it’s that theaters often don’t pay the current minimum wage to most people as a stipend (probably closer to $9/hr if you look at it). And the law requires minimum wage in your city. This is the true hit here. The rest is overhead and a pain, but doable. And a lot of payroll can be totally online and the employee does it all themselves. Forcing minimum wage is the most painful and expensive part of this for community theater.
Actors bonuses, if you ever had them, are out. They are now volunteers.
IMPACT to COSTS: Likely would increase the cost of a show by $5K to $25K, depending on volunteer hours and those who would choose to classify as strictly volunteers. If carefully thought through, might not impact show cost at all. Musician impact would likely be minimal in terms of cost increase.
3) B2B: Meaning that if an MD has an LLC that provides a variety of music services, we could contract with that LLC for say $1000 to provide the MD service. But they must have their own business (I do) and that costs them $800/yr min tax. Most don’t have that, meaning it may not be available to us. Another version of this is if I provided say all the employee related services to a show for a fixed cost. That moves the payroll burden to me. However, it would not reduce costs since I would have to hire them at minimum wage instead of the theater directly. But would be easier on theaters. The only exclusion is for me myself and I, who as the owner of a company (LLC) can choose to bid anything I want on a contract even if I get paid less than min wage. That is why the “everyone has their own LLC” could technically be a solution, but most people don’t and won’t.
Now the “Borello” test would apply here…free from “control, and direction” of the paying entity. A theater would argue that to be the case given the artistic nature here, but that probably won’t hold water. HOWEVER, one LLC entity performing services for a non-profit, especially when they perform many services for many entities, seems an unlikely target to chase in the future. But even this comes with a minor risk.
4) Ignore the new law: Yes, it’s possible to just go on as theaters have been for years. Pay a stipend as 1099. You assume the bill will get fixed in time, and who would come after a community theater anyway even if it doesn’t? Would the state really sue a theater, or chase them, or turn to the Fed? Maybe not…but we don’t know. Now, I am not suggesting anyone ignore the law, but it IS an option I believe some organizations may take.
So, what is the risk?
If the state or Feds were to come after organizations even years in the future, that theater would have to go back and make up pay to minimum wage and pay the payroll taxes plus the often large fines. If the theater didn’t have the funds to do so, the board members would be individually liable to pay from their own pocket. Not to scare you, but that’s actually the law (I have been on a nonprofit board that hit some bumps and the board members had to pay up). Yes, as a board member YOU are personally liable for any payroll issues and taxes. I know you didn’t know that. But even if you left the board but it happened on your watch, you get to pay up. Over a few years, a community theater could rack up $500K of back wages and taxes due. Split that around your board table and see who wants to stay.
So, I would caution everyone against ignoring this and hoping it goes away. The IRS wins in the end. I have seen this EXACT case in nonprofits where they miscategorized workers and after five years the IRS showed up and ruled, unilaterally, that the worker was purposely miscatgorized as a contractor when they met the definition of an employee. There was no defense or even anyone to argue with. They just lost. Done.
As a board member you have a fiduciary responsibility to operate within the law. You don’t get to ignore it and hope something changes. And your insurance will not cover negligence of a board member around payroll and taxes. Don’t ignore the law. It is the law. It is not worth the personal risk.
Summary:
I don’t believe there is a 5th option (well, you could maybe hire contractors out of state who work on Skype, but that seems ludicrous) …though I may not have thought of every possible avenue.
I believe we must consider a reasonable combination of 1, 2, and possibly 3 and move forward, quickly, given the impending date. The personal liability is too real to sit back and think more as the law is crisp and clear.
1) Theaters must first try and get as many people in specific roles contracted as volunteers, where mileage reimbursement makes sense or they sinply love to volunteer. Sign the volunteer contract I linked to above. Done. Love to make this 100% volunteer. But we all compete with other theaters for Director, Choreo, MD, SM, PM and so on offering ZERO $$. They know the going rate and count on that income to add up through the year. If we make their stipend $0, some simply cannot afford to put in the time. And you cannot, ever, suggest there would be a bonus for someone volunteering. You will be liable if caught. Don’t do it. Mileage reimbursement is about all you have here.
2) Theaters will need to setup a payroll provider and process timecards or other methods of time keeping on-line. And hire some or most staff for shows as temporary part-time employees. I just don’t see any way around this at this time to stay within the very clear rules. It really is not a huge deal to do it, and I have done it a dozen times including in most nonprofits. Theaters will just have to bite the bullet. I know this seems to break the spirit of community theater where everyone is a volunteer. If everyone agrees to volunteer with no hope or expectation of renumeration, you can still be that theater. But musicians won’t show up, and most directors and other staff won’t either.
An option here of course is to have say a Director (paid) and an assistant Director (volunteer). The Director is only needed 1/2 the normal time, relying on the assistant director to cary on when the director is not there. This “role sharing” is a way to keep the costs closer to what they are today. As long as the roles are different and clearly defined.
3) Contract with another business when possible where the owner is the person likely to provide services. That becomes a simple business to business contract and the negotiated price is what it is. This has a small risk as AB5 defines this as not allowed, but I think quite minimal since the onwer of an LLC can indeed bid a job at any price. A sole-proprietership would be harder to defend. However this only applies to a few people who already have an LLC. So, it’s probably a 10% to 20% solution at best.
Given the above, a theater might get 20% in category one as pure volunteers, 10% in category three, leaving 70% of staff in category two (and likely all musicians). If true, the cost of producing a show may rise somewhat, but some would opt to be volunteers. And you would have the ongoing burden of processing payroll. But I see no easy way of avoiding that.
Some prominent theaters in the bay area have already made this decision and will be processing payroll on Jan 1, 2020. There is simply no choice without significant personal financial risk.
I hope that this overview helps to clarify the situation and the urgency of resolution. Not tied to a new season, but in fact the current one. A mix of people in categories 1, 2 and 3 above, plus some role splitting/sharing, will be the best we can do today staying within the bounds of AB5 and frankly the IRS existing rules, as well as the court rulings involving musicians and the other cases. If we can get 100% unpaid volunteers — great. But that seems unlikely and we will need to accommodate some increase in budgets given much of the staff that ends up on payroll.
Theater will go on. Community Theater will go on. Yes, ticket prices may need to rise. And we will all need more donations to survive. But the show will go on.
APPENDIX A
Musicians Are Not Independent Contractors Despite Entrepreneurial Discretion and Signed Contracts: NLRB
by PLC Labor & Employment
Published on 28 Dec 2011 • USA (National/Federal)
The National Labor Relations Board (NLRB) held that musicians are employees rather than independent contractors of a symphony orchestra. In its December 27, 2011 decision in Lancaster Symphony Orchestra, the NLRB found the musicians to be employees using the common law agency test, because the employer controlled all manner of performance and scheduling after the musicians agreed to play. Member Hayes dissented.
Key Litigated Issues
On December 27, 2011, the NLRB issued a decision in Lancaster Symphony Orchestra, reinstating the representation petition and remanding to the Regional Director for further action. The key litigated issue was whether the orchestra’s musicians were employees covered by the NLRA rather than independent contractors.
Background
Each year, the Lancaster Symphony Orchestra (LSO) mails information to local musicians, requesting availability for performances in the coming season. Once the musicians have selected performances for which they are available, the musicians return a signed agreement for a one-year term indicating that they are independent contractors of the LSO. Among other terms, the agreement sets a fixed pay rate for rehearsals and performances. The LSO also maintains rehearsal and performance guidelines and a strict attendance policy, although the musicians are able to work for other employers throughout the season.
In 2007, a union petitioned for an NLRB representation election based on union authorization cards signed by 30% of the LSO’s musicians. An NLRB regional director denied the representation petition because the musicians in the proposed bargaining unit were independent contractors, not employees. The union appealed the regional director’s decision by requesting it be reviewed by the five member panel (Board) in charge of the NLRB’s election process. A three-member panel of the Board reviewed the regional director’s decision.
Outcome
By a two to one vote (Member Hayes, dissenting) the Board majority found that the musicians were employees of the LSO. The Board focused primarily on the first factor in the common law agency test, whether the LSO has the right to control the manner and means of the performance of the job (NLRB v. United Insurance Co., 390 U.S. 254 (1968)). Specifically, the Board held that the LSO retained control over:
· The musical selections and style of performance.
· Which musicians are selected for each performance.
· The rehearsal schedule, including the number of rehearsals and how they were conducted.
The Board majority also noted that the LSO maintained behavioral guidelines for rehearsals and performances and retained the right to discipline musicians for unprofessional behavior.
Finally, the Board majority found that the remaining factors, including the musicians’ entrepreneurial opportunity or risk, weighed in favor of employee status or were inconclusive. The Board did not find evidence of the musicians’ work outside of the symphony or opportunity to select in which, if any, LSO program they would participate indicative of an independent contractor relationship. The Board majority also dismissed the musicians’ signed agreements stating the musicians were independent contractors, holding that there was disagreement among the musicians as to whether they were, in fact, independent contractors. Further, the Board majority found that musicians returned to play with the LSO year after year, even though the agreement was only for a one-year term.
Member Hayes dissented, asserting that the Board majority’s analysis did not properly follow the Board’s past application of the common law agency test factors. Though Hayes also relied on the right-to-control factor, he argued that the appropriate focus was whether the musicians could choose to accept or decline particular work with the LSO and other entities, rather than whether the employer controlled the artistic aspects of the performance (Lehrohl v. Friends of Minnesota Sinfonia, 322 F.3d 486 (8th. Cir. 2003)).
Hayes found that the musicians did retain control over the manner and means of their performance because they could:
· Use discretion in selecting the performances in which they would participate.
· Work for any other employer, including other performance groups.
In making these choices, Hayes concluded that the musicians also had the entrepreneurial opportunity to earn as much from the LSO as they wished, while also maximizing outside employment to earn more income throughout the year.
Though the LSO retained creative control over the performances, Hayes argued that the Board historically found that while creative work is often done according to the specifications of the hiring party, this does not shift an independent contractor to employee status. Hayes noted that this control is primarily over the end product, the performance, rather than the manner in which the work is performed.
In the remainder of his analysis, Hayes concluded that each of the common-law agency test factors weighed in favor of the musicians’ independent contractor status, most notably, the musicians provided their own instruments, which were the most important and necessary performance tools.
Practical Implications
In light of this decision, employers should beware of the current interpretation of the right to control a worker’s performance of the job despite explicit signed agreements and historical Board practice to the contrary. The Board majority’s opinion suggests that workers’ entrepreneurial opportunities and discretion are construed narrowly and given less weight than in the past. Accordingly, this Board majority would more easily find workers to be employees covered by the NLRA rather than independent contractors than would prior Boards.
Court Documents
· Lancaster Symphony Orchestra, 357 N.L.R.B. №152 (Dec. 27, 2011).
Musicians Are Employees, Not Independent Contractors, NLRB Tells Theater Company
USA August 2, 2016
A Regional Director of the National Labor Relations Board has ruled that a group of musicians were statutory employees under the National Labor Relations Act and, therefore, entitled to vote in an NLRB-conducted union representation election. In the Matter of Fiddlehead Theatre Company, Inc. and Boston Musicians Association et al., Case Number 01-RC-179597 (July 26, 2016). The decision comes on the heels of a holding by the U.S. Court of Appeals for the District of Columbia Circuit granting enforcement of an NLRB Order that musicians with the Lancaster Symphony Orchestra were employees, not independent contractors, and entitled to join the union. Lancaster Symphony Orchestra v. NLRB, №14–1247 (D.C. Cir. 2016).
Whether individuals performing services for an entity are employees, who are protected by the NLRA, or independent contractors, who are not, is determined by 11 well-established factors in the Restatement (Second) of Agency § 220 (1958), the NLRB held in 2014 and 2015. FedEx Home Delivery, 361 NLRB №55 (2014) and Sisters’ Camelot, 363 NLRB №13 (Sept. 25, 2015).
The factors are:
- Extent of control by the employer
- Whether or not the individual is engaged in a distinct occupation or business
- Whether the work is usually done under the direction of the employer or by a specialist without supervision
- Skill required in the occupation
- Who provides the supplies, tools, and place of work
- Length of time for which individual is employed
- Method of payment
- Whether or not the work is part of the regular business of the employer
- Whether or not the parties believe they are creating an independent contractor relationship
- Whether the principal is or is not in the business
- Whether the evidence tends to show that the individual is, in fact, rendering services as an independent business
In Lancaster, the NLRB and the Circuit Court relied heavily on the orchestra’s control over the manner of the musicians’ performance, including limiting their conversations during rehearsals and performances. In Fiddlehead, the Regional Director ruled the musicians were employees despite the employer’s having established the existence of several factors tending to show the musicians were independent contractors: (1) they worked on a show-by-show basis, (2) they were highly skilled workers, (3) they supplied their own instruments, and (4) they were paid a flat fee. However, the Regional Director relied on several other factors in finding employee status, including that (1) the employer exercised substantial control over the details of the musicians’ work, (2) the musicians had very limited input into scheduling of performances, (3) the musicians were instructed to follow the company’s dress code, and (4) the musicians did not have the potential for entrepreneurial gain. Regional Director’s decision is appealable to the NLRB in Washington, D. C.
In a related development, the Board’s General Counsel has announced that he will seek to convince the five-member NLRB that misclassification of individuals as independent contractors instead of employees independently violates the NLRA because it restricts those misclassified employees from exercising their Section 7 (of the NLRA) rights to engage in protected concerted activity. Employers that utilize individuals whom they believe are independent contractors rather than employees should scrutinize carefully the relationship with a keen understanding of the factors deemed relevant by the NLRB. As is the case under many other federal and state laws, proving independent contractor status is likely to be an uphill battle.
APPENDIX B:
What Kinds of Employee Benefits are Required in California?
Social Security Benefits
Wages, up to a certain amount according to law, are taxed in order to provide retirement benefits. The federal government provides Social Security to retirees, which is funded through payroll taxes. Employers are required to pay the same amount in taxes to Social Security as are employees.
FMLA Benefits (does not apply)
The federal Family and Medical Leave Act (FMLA) and the related California Family Rights Act (CFRA) give employees the right to take unpaid leave for family and health reasons. Eligible California employees are guaranteed up to 12 weeks’ unpaid leave for serious health conditions, paternity or maternity leave around the birth of a child, or preparation for a family member’s military service. In most circumstances, you must be returned to the same job at the end of your leave. Additional leave is available for employees who must care for a family member who was seriously injured while on active military duty.
FMLA applies to employers who have at least 50 employees for at least 20 weeks in the current or previous year. Employees qualify for FMLA protections if they have worked for the company for at least a year; worked at least 1,250 hours in that year; and work at a location with at least 50 employees within 75 miles.
Pregnancy Disability Leave (likely does not apply)
California employees who are pregnant are entitled to up to four months of disability leave because of the pregnancy. This leave can be taken before or after the birth of a child, depending on the mother’s medical condition, and is in addition to the CFRA leave described above. A worker’s job is protected while on PDL.
And now, CFRA covers employers who have at least 20 employees for the purposes of allowing parents to bond with their newborn child before the child’s first birthday.
California Paid Sick Leave
California law requires that employers provide paid leave to workers who fall ill or who must take care of a sick family member. California employees who work at least 30 days within a year from beginning their employment earn at least one hour of paid leave for every 30 hours worked, beginning on the first day of employment. The law applies to virtually all California employees, even part-time or temporary employees. Unused sick leave can be forfeited after a designated period of time and does not have to be paid to employees when they leave their job.
Workers’ Compensation
California employers in all fields must provide workers’ compensation insurance, regardless of the type of business or the number of employees. If an employee is injured at work or becomes sick as a result of working, the employer is responsible for a variety of benefits including medical care, disability, and rehabilitation. Employees are guaranteed prompt medical treatment regardless of fault in a workplace accident.
Holidays and Vacations (not required)
State law does not require that employers provide paid time off for holidays. Employers may, however, be required to accommodate employees for religious holidays. Employers are also not required to provide vacation.
Final Wage Payment
California law requires that when an employer terminates (fires, lays off, etc.) an employee, the employer must pay all wages — including any vacation or PTO — owed to the employee at the time of termination. The law also requires that the employer pay all owed wages within 72 hours of the employee quitting. However, if an employee gives notice at least 72 hours before quitting, the employer must pay all owed wages on the last day of employment.
