It’s spring 2023, live entertainment is back, and perhaps so is the Internal Revenue Service (“IRS”). The Inflation Reduction Act, signed into law on August 16, 2022, authorizes $80 billion in funding for the IRS over the next 10 years, of which more than $45 billion is earmarked for enforcement. [1] What does this mean for businesses who host musicians, dancers, artists, comedians, actors and other performers? With more enforcement from the IRS comes a likelihood of greater scrutiny of how businesses apply the IRS Code to each activity, including the employment status of artistic performers.
Whether the artists are classified as independent contractors or employees is determined on a fact specific basis by each state and the IRS, though a fair amount follow versions of the “ABC Test”: (A) is the performer free from control in the performance of services — either under contract or in fact; (B) is the service provided different than the service that the company provides; and (C) is the performer customarily engaged in an independently established trade, occupation or business of the same nature? [2] Each factor under the ABC Test has several conditions the Court (and the venue) must consider while determining the employment status of a performer. [3] Under the ABC Test, a performer is presumed to be an employee unless all three conditions are satisfied. [4]
A misclassification of the performer can have severe financial and criminal components. [5] Considering that the U.S. Department of Labor estimates that up to 30% of companies misclassify employees, it is critical for every venue, no matter the size of the space or fame of the performer, to understand the laws regarding independent contractors. [6]
How States Handle The Employee Vs. Contractor Question
In 2014, New York determined that there were at least 26,000 instances of employee misclassification, resulting in nearly $316 million in unreported wages. [7] States have a tremendous incentive to collect taxes on those unreported wages and enforce the provisions of their employment laws. Employers that misclassify performers in New York are also subject to fines of up to 20% of all wages and 100% of Medicare and Social Security contributions. [8] The New York State Department of Labor has issued guidelines for determining worker status of performing artists. [9] In New York, “a person is an independent contractor only when free from control and direction in the performance of services” or when the performer has a written contract stipulating them to be employees of another. [10] Indicators of a performer being “free from control” include the performers (a) sharing in fees from the venue; (b) providing their own equipment; and (c) retaining the right to exercise artistic control over the elements of the performance.
California recently passed Assembly Bill 5 (the “Gig Worker Bill”) to address the misclassification of independent contractors. The Gig Worker Bill was aimed at Uber/Lyft and the newly created gig economy. The bill expanded upon the Supreme Court of California case, Dynamex Operations West, Inc. v. Superior Court, 4 Cal. 5th 903 (Cal. 2018), which held that most wage-earning workers are employees and should be classified as such. [11] Artist industry groups successfully lobbied to amend the Gig Worker Bill to exempt certain musicians and performers. [12] That does not mean that all performers are independent contractors, and they still must pass the ABC Test. California enforces civil penalties to employees that range between $5,000 and $25,000 per violation. [13]
In Washington, the Employment Security Department has been recently auditing restaurants, hotels and other venues claiming that performers are employees unless they have a written independent contractor agreement. Under Washington law, an entertainer is not an employee only if there is a written contract for “the services for a specific engagement or engagements when [the entertainer] performs no other duties for the [employee]” or the work is performed “on a casual basis.”[14] While a touring musician under a written contract may reasonably be classified an independent contractor, a house DJ, spinning every Friday night, would not.
Onus on Venues to Understand the Laws
Classifying all performers as employees is the most cautious approach to avoid legal ramifications. However, that has other legal and fiscal considerations that a venue must scrutinize. As employees, the performers (a) would be covered by the minimum wage and overtime rules of the Fair Labor Standards Act (“FLSA”); (b) have their wages subject to income tax payroll tax withholding; and (c) may be subject to State unemployment tax, Workers’ Compensation insurance or other State benefits.
Performers generally prefer to be independent contractors. Whether it’s Destiny Child’s Independent Women, or Ne-Yo’s or Kelly Clarkson’s Miss Independent, performers want to have Janet Jackson-style Control of their performance. The U.S. Supreme Court has used the skill of the performers to assist in the consideration of independent contractor or employee status. [15] That does not mean that Adele would be an independent contractor and GWAR or Insane Clown Posse, both often vying for “Worst Band in the World”, would be employees. [16] Performers are not judged against each other, but as to the general public, for their skill.
It is critical for all venues to understand their obligations and the restrictions under the FLSA and state-specific laws. While every venue wants to put on a good show, the exposure for venues to misclassify performers should create pause before scheduling such acts. With the IRS expanding their enforcement in the coming decade, venues should have increased diligence in determining their relationship with the performers.
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[1] https://www.congress.gov/bill/117th-congress/house-bill/5376
[2] Bowerman v. Field Asset Services, Inc. 39 F4th 652 (Ct. Appeals, 9th Cir. 2002).
[3] https://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm
[4] The Federal law, the “Fair Labor Standards Act” and the Fifth Circuit follow the “economic realities test” to determine whether a worker is an employee or an independent contractor, which expands the ABC Test to consider additional non-exhaustive factors. Kibodeaux v. A&D Interests, Inc. 579 F.Supp.3d 896 (Dist. Ct. S.D. Texas, 2022).
[5] Under Massachusetts General Laws, c. 149 sec. 148B, the Attorney General may impose fines up to $25,000 or imprisonment for up to one year for a first offense on the president, treasurer or officer of an organization for willful misclassification and up to $10,000 or imprisonment for up to six months for non-willful misclassification.
[6] https://www.nytimes.com/2010/02/18/business/18workers.html
[7] https://www.rfcuny.org/rfwebsite/principal-investigators/manage-an-award/misclassification-of-workers/
[8] N.Y. Lav. Law secs. 650-665.
[9] https://dol.ny.gov/performing-artists-ia-31817
[10] Id.
[11] https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5
[12] https://variety.com/2020/music/news/california-gig-economy-assembly-bill-5-ab5-musicians-1234583320/
[13] California Labor Code, sec. 226.8.
[14] RCW 30.04.148.
[15] Community for Creative Non-Violence, et al. v. Reid., 480 U.S. 730, 109 S.Ct. 2166 (1989).
