The arrangement works to the advantage of adult business owners as well, since it reduces both taxes and paperwork (and who, after all, goes into the adult business to fill out forms?).
As recent events in California have demonstrated, however, adult business owners may need to pay closer attention to how they classify their workers. In early September, the California Occupational Safety and Health Administration issued citations to two adult film companies, Evasive Angles and TTB Productions.
Cal/OSHA fined the companies for violating a number of state regulations, including the requirement that employers protect employees from blood-borne pathogens and provide adequate follow-up medical care ($25,000), that employers report the work related illnesses of employees ($5,000), that employers maintain logs of all work-related injuries, illnesses or fatalities ($375) and that employers have in place an Injury and Illness Prevention Program ($185).
Cal/OSHA's fine was based on the conclusion, reached with the assistance of the Division of Labor Standards Enforcement, that the actors used by Evasive Angles and TTB Productions were in fact employees and not independent contractors. Without that finding, there would have been no fines, since the state's health and safety regulations apply only to employees and not to independent contractors.
The potential significance of Cal/OSHA's action goes far beyond the assessment of a fine for bad working conditions and poor record keeping. Any business that miscategorizes an employee as an independent contractor may be required to pay a variety of back taxes for that individual, including FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and tax withholding. In addition, the business may be fined for its failure to pay the taxes. If the number of workers is large enough and the period of mischaracterization long enough, the accumulated back taxes and penalties can effectively shut down a business.
Worker Key Factors
Given the potentially severe consequences, it's extremely important for an adult business owner to consult with an attorney about how workers should be classified. Unfortunately, there's no single standard for determining the status of a particular worker. Instead, there are ranges of factors that fall into three distinct categories: behavioral control, financial control and the relationship of the parties.
"Behavioral Control" refers to whether the business has the right to control how an individual does his or her job. According to the Internal Revenue Service, there is no requirement that the employer actually exert such control, just that it has the right to do so. One factor, for instance, might be the amount of instruction given to the worker, requirements that certain tools (or toys) be used, the time and schedule for the work and so forth.
"Financial Control" refers to the fiscal stake the individual has in his or her business; the larger the financial commitment, the more likely it is that the individual is an independent contractor. Business expenses are another factor. If an individual is not reimbursed for expenses, it is more likely that he or she is an independent contractor. Similarly, if the person's work can result in a profit or loss for that person, then he or she is less likely to be classified as an employee.
Finally, the "Relationship of the Parties" covers factors dealing with how the business and the individual perceive their relationship. If there is a written contract, for instance, that declares the worker to be an independent contractor that will help to show the parties' intent. Likewise, the receipt of benefits is a strong indication that the worker is considered by the parties to be an employee.
The IRS is the primary agency concerned with the nature of workplace relationships. Adult business owners should also be aware, however, that their workers also might be covered by the federal Fair Labor Standards Act and its state equivalents. The FLSA is the law that establishes a minimum wage (currently $5.15 per hour) and overtime pay (time and a half over 40 hours per week) for covered employees. It also requires businesses to maintain certain records and imposes limitations on child labor (which obviously should not be a factor in the adult entertainment industry). There are some exceptions that may apply (for instance, the minimum wage is just $2.13 an hour for workers who receive tips), but as the U.S. Department of Labor points out, exceptions are construed narrowly against employers.
Again, it is extremely important for adult business owners to spend some time with an attorney experienced in labor matters, since there are a large number of factors to consider in determining if a worker is covered by the FLSA. Again, the consequences for making the wrong choice can be severe. If the Department of Labor determines that an employee has been underpaid, it may recover back wages and fines of up to $1,100 per violation. In some instances, the agency may pursue criminal penalties as well.
Another agency keenly interested in the proper classification of employees is the Social Security Administration, which collects and redistributes the FICA payments collected by the IRS. If a worker is mischaracterized as an independent contractor, then the business is effectively (and illegally) shifting the burden of its FICA contribution to the individual.
Despite the obvious risks, there are clearly strong incentives for a business to classify workers as independent contractors. The size of the workforce, for instance, can be more closely tailored to the actual amount of work, overhead is lower and the stress of meeting payroll is lower.
Above all else, the cost of health benefits (currently averaging $6,000 per year per employee) is far lower. But it is critically important for adult business owners to recognize the potential risks in making their own determination of a worker's status.
As the adult entertainment industry grows larger and gains greater mainstream acceptance, it will come under increasing scrutiny for its observance of these types of workplace regulations.
Frederick Lane is an expert witness, author of "Obscene Profits" and "The Naked Employee," and cofounder of Tech Law Seminars, an in-house training and seminar company focusing on legal and social developments sparked by new technology. For additional information, please visit www.Frederick-Lane.com.