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Imagine wanting to crush independent contractors and small businesses so badly that you would go after your own supporters. In California, that scenario is becoming a reality as Gov. Gavin Newsom’s California Employment Development Department (EDD) is going after the state’s sacred cow – Hollywood!
You may not be sympathetic to Californians or to Hollywood, but don’t let that take away your attention. California is the breeding ground for most of the bad ideas that become national and this latest scheme could impact the entire economy.
If you aren’t familiar with independent contractors or gig workers, they represent an estimated 70 million people in the workforce who want to work flexibly. Instead of working as an employee, they work as a contractor who is responsible for their own business, including expenses and various taxes.
California Gov. Gavin Newsom speaks at a news conference in Sacramento, March 16, 2023. (AP Photo/Rich Pedroncelli)
In Hollywood, many of the "creatives," including producers, writers and actors, act as contractors and call the businesses they create "loan-out" companies. It is just like it sounds – they loan out their services, whether writing scripts, appearing on camera or otherwise – to the productions on which they work. If a company contracts with a loan-out company, it is like hiring any another contractor vs. making someone an employee.
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Even though freedom to work how you want is incredibly important to Americans, including to those contractors and more than 33 million U.S. small businesses, there has been a major backlash against independent contractor work. Because contractors are not employees and they can’t be unionized, unions have led the push to try to make it impossible to be or use a contractor.
In March, a Biden administration’s Department of Labor rule against independent contractors went into effect, seeking to categorize more contractors as employees versus solo businesses. This was borne out of California’s own anti-contractor and anti-gig workers rule, AB5.
Contractors have recently been told that they needed a business entity (such as an LLC) to be classified as a business contractor instead of a company’s employee.
With California’s latest actions, that is now up in the air. Per recent reports, the Employment Development Department of the state of California, which is responsible for distributing unemployment benefits, is saying that loan-out companies, those corporate entities that are widely used in the entertainment industry described above, may not be allowed by the state.
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These loan-out companies are an industry standard. The solo entrepreneur, for their part, gets an entity that gives them a liability shield. They are also able to expense costs related to their work and can even get extra retirement benefits, like setting up business retirement plans.
Of course, the tradeoff is that they are paying their own employment taxes, including the portion usually paid by an employer.
But California is now saying no to these contractor entities.
Cast & Crew, an entertainment industry payroll service provider, was recently audited by California’s EDD. Last Friday, they sent out a notice stating, "The California Employment Development Department (EDD) has informed Cast & Crew that payments made to loan-outs should have been paid directly to the loan-out corporation owner/shareholder as wages," as reported by The Hollywood Reporter.
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This is an absolute nightmare for small businesses and independent contractors.
If California disallows these entities, deciding who is responsible for future and back taxes could create a giant accounting nightmare and huge penalties for those small companies and all of Hollywood.
If this is allowed to happen, what does this mean for the future of these small businesses? Will all of their previous business deductions be voided and will penalties be levied on that?
This could ruin these small business entities and their creative talent owners.
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If California says these business entities are not valid, does that mean the federal government will follow suit?
The bigger picture question for you and all Americans is, what does this all mean for other business contractor entities? Because it is hard to believe that this will end with just Hollywood. Will your hairstylist or IT professional find themselves battling this too, possibly subject to major fines and penalties and with their ability to earn a living under threat?
If the Democrats in California are willing to go after Hollywood, a major industry filled with supporters, who won’t they go after?
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California leads the nation in crushing the backbone of the economy. They did so during COVID, again with AB5, and now are trying to further consolidate the power of unions and big businesses, and it will undoubtedly go nationwide.
Use your voice to push back and let small businesses have a chance to flourish. The backbone of the economy depends upon it.
Editor's note: In a statement issued on May 28, The California Employment Development Department (EDD) noted that the department is not taking action to ban loan-out corporations' ability to operate in the state.
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