The Hollywood sign

Michael Buckner for PMC

The California state department responsible for providing unemployment benefits is disputing the common industry practice of paying workers through loan-out companies instead of directly, according to a major Hollywood payroll provider.

“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,” payroll provider Cast & Crew said in an email sent to industry workers on Friday. “It is anticipated that this will quickly become an industry-wide issue. It will not be specific to payroll processed by Cast & Crew, and would apply state-wide, regardless of payroll provider.”

According to the payroll provider, the EDD’s position “appears to be targeted generally to the use of loan-out corporations in the entertainment production industry and would have a major impact on loan-outs working on countless productions in California.”

Many Hollywood workers — from screenwriters to reality television producers — set up loan-out companies, which both offer corporate protections and can provide these workers with a tax benefit. By setting up an S-Corporation, C-Corporation or LLC, workers become an “employee” of that entity and their compensation is paid to the company, which then pays the individuals. According to a blog post by industry payroll provider ABS Payroll, production companies can also benefit from the use of loan-outs: “Hiring a loan-out can save the production company money because they will not have to pay the payroll taxes for that individual,” the post says.

The Hollywood Reporter has reached out to EDD, Cast & Crew and multiple other major Hollywood payroll providers for comment.

Cast & Crew is opposing this position, the company said in its note, and is working with both entertainment companies and union leaders to confront what it called this “extremely important issue.” The payroll provider informed email recipients that loan-out corporations “under review” are set to be sent notices within the next 30 days. Those corporations can then “join the challenge to the EDD’s attempt to invalidate the use of loan-outs” by filing a petition.

In a statement, a spokesperson for the actors’ union SAG-AFTRA said it is aware of the EDD’s position on loan-out corporations. “We are in contact with Cast & Crew and the other entertainment unions about this matter. We will engage with the industry, our sister unions and the government as this situation develops,” the spokesperson added.

IATSE, meanwhile, said in a statement that “We are aware of an EDD audit at Cast & Crew and are looking into it.” The Writers Guild of America West added, “We are in contact with our sibling unions about this issue. WGA West will take any necessary action to preserve the long-standing use of loan-outs in this industry.” A Directors Guild of America spokesperson said it was aware of the EDD statement to payroll providers on loan-out companies: “The DGA is monitoring the situation and working in collaboration with the other unions and guilds to investigate and respond in order to protect entertainment industry workers.”

In the meantime, Cast & Crew said in its communication, “There is no current restriction on our continued processing of payments to loan-out corporations, and we will continue to do so as normally directed.”