Are you paying too much tax?

If you're 'misclassified,' then you just might be

Volume CX, No. 5May, 2010

Harvey Mars, Esq.

Which is better as a musician: to be an employee or an indpendent contractor?

This is a hot topic right now, and it’s just in time for Labor History Month.

President Obama’s proposed federal budget for the 2011 fiscal year highlighted one of its key enforcement priorities – to fight the misclassification of employees as independent contractors. The proposed budget for the Department of Labor includes a $25 million “Misclassification Initiative,” which is intended to assist the department in identifying and reducing employee misclassification.

There are extremely important reasons why it’s better to be classified as an employee instead of as an independent contractor. First of all, independent contractors are not eligible for either workers’ compensation (if they get hurt on the job) or unemployment checks (if they are laid off).

Secondly, independent contractors have to pay all of their taxes by themselves.

Usually, employers cover 7.65 percent of your taxes. (The taxes are called FICA, and are made up of 12.4 percent of your wages for Social Security and 2.9 percent for Medicare. The total is 15.3 percent. It’s supposed to be split between employer and employee.)

When you are misclassified as an independent contractor, you are losing 7.65 percent of your wages.

If you make $30,000 per year as a musician, you are losing $2,295 in taxes out of your own pocket that your employer should be paying for you!

Thirdly, independent contractors aren’t eligible for legal protections that employees benefit from, such as protection from illegal discrimination based on race, age or sex.

Finally, independent contractors do not have the right to join or form unions.

You might think that being an independent contractor is better because it means you can deduct everything on your taxes: meals, travel, etc. You would have to crunch the numbers with an accountant, but in our view, it’s always better to be an employee. Another good reason is: it’s the law.

New York State law has specifically defined musicians as employees. (This is a law that Local 802 helped pass in the 1980’s.) Pursuant to New York State Labor Law § 701(3)(b), the term “employee” is defined as including professional musician or person otherwise engaged in the performing arts who performs services as such. For purposes of this statute, “engaged in the performing arts” means performing services in connection with the production of or performance in any artistic endeavor which requires artistic or technical skill. Hence, for purposes of engaging in representational activities covered by the New York labor law, musicians are presumed to be employees.

Musicians are also considered employees under New York’s unemployment compensation law. See Labor Law § 511(1)(b).

However, even under federal law, musicians are often deemed employees, even when the legal criterion used suggests otherwise.

Under federal law, a multi-factored “right of control” test is utilized. Under this test, an individual is considered an employee if the one for whom services are performed retains the right to control the manner and means by which he or she achieves the result sought.

This test is usually satisfied because most musicians’ performances are controlled by the music director or conductor of the organization for which they are engaged (even though the manner in which they play their instruments is not).

The fact that the right of control test may be satisfied for musicians when many of the facts indicate independent contractor status was made clear by the National Labor Relations Board in a case involving our union: American Federation of Musicians (Royal Palm Theatre), 275 NLRB 677 (1985).

There, the National Labor Relations Board held that freelance musicians for recordings used at a dinner theatre operated by the employer were employees, even though the musicians were not selected by the employer, and were utilized for only a few hours with no real expectation of future employment.

The board held that these factors, which would normally indicate independent contractor status, were outweighed by the fact that the employer’s musical director exercised complete control over the musicians, telling them when to appear, what to play, and how the music should sound.

The board concluded that the musicians were “under the continuous supervision and exercised control of the musical director and subject to his complete discretion and artistic interpretation and taste.”

Also see Matter of Faze 4 Orchestra, Ltd., 245 A.D. 2d 929, 666 N.Y.S> 2d 857 (3rd Dept. 1997). In that case, musicians were ruled to be employees of their booking agent, who set their fee and instructed the band where and when to play.

It should be emphasized that one of the most significant factors used by the NLRB to determine if a musician is an employee rather than an independent contractor is whether they have any financial stake in the outcome of the performance. If they bear some economic risk, then the NLRB will not hesitate to deem the musicians independent contractors.

Thus, while it may be financially beneficial for musicians to be paid a percentage of the house receipts, if they do so they always run the risk that they will be deemed independent contractors.

Likewise, the NLRB has determined that if musicians will not get paid if a show is cancelled due to inclement weather, they may be considered independent contractors. This happened recently to musicians who were under contract to perform at Jones Beach.

Those are the exceptions. In general, as a musician, you should be classified as an employee. It’s much better for you. If you think you’ve been misclassified, contact my office. Local 802 needs to know when musicians are misclassified. Don’t give up your rights!

More on pension

Last month, I wrote about our pension fund. In my article, I referred to the Pension Benefit Guaranty Corporation and how it will guarantee a minimum monthly payment if a pension plan becomes insolvent. Several members later pointed out to me that the $54,000 maximum annual benefit that I referred to only applies to single employer plans. The PBGC, in fact, maintains separate programs for single employer and multi-employer plans. The AFM Pension Fund is a multi-employer plan.

Under the Multiemployer Pension Plan Amendments Act, the PBGC makes loans to insolvent multi-employer funds so that they can continue to pay vested benefits as required under the plan if they become insolvent. These loans are required to be repaid if and when the fund has the financial capacity to do so. The PBGC does not actually pay benefits directly to multi-employer fund participants. The statutory limit on a PBGC loan is the product of the participant’s years of service multiplied by the sum of 100 percent of the first $11 of the monthly benefit accrual rate added to 75 percent of the next $33 of the monthly benefit accrual rate. (For someone with 30 years of service, the loan limit would be $12,870).

Benefit increases that have been in effect for less than 60 months are not guaranteed by the PBGC and are considered an adjustable benefit for critical plans.

Withdrawal liability assessments against withdrawing employers are also intended by the Multiemployer Pension Plan Amendments Act to assist distressed multi-employer funds in paying vested benefits.

Concern about the solvency of the AFM Pension Fund, however, is not warranted at this point in time. Even in its current state, the fund has indicated that can continue to pay vested benefits for at least the next 40 years. With the implementation of its rehabilitation plan, it is reasonable to expect the fund’s situation to improve.

Harvey Mars is counsel to Local 802. Legal questions from members are welcome. E-mail them to Harvey Mars’s previous articles in this series are archived at Nothing here or in previous articles should be construed as formal legal advice given in the context of an attorney-client relationship.