John J. Tormey III, PLLC: NY Entertainment Lawyer

LLC’s, Corporations, And Other Business Structures - Part I: Written By New York Entertainment Lawyer And LLC Counsel John J. Tormey III, Esq.

This article is not intended to, and does not constitute, legal advice with respect to your particular situation and fact pattern. Do secure counsel promptly, if you see any legal issue looming on the horizon which may affect your career or your rights. What applies in one context, may not apply to the next one. Make sure that you seek individualized legal advice as to any important matter pertaining to your career or your rights generally.

While many artists continue to do business as individuals, there often comes a point in their career when it makes sense to ascend to the next level - to create a business, to create a company, usually in this day and age a limited liability company (LLC) or a corporation, with its own name and identity. In the fields of arts and entertainment, this process is often handled by and through an entertainment lawyer, and is often the first reason for which a new client seeks counsel. If you are an artist who has reached that point in your career, or even if you have already surpassed it and want to revisit your decision, then this article is for you. I am a New York entertainment lawyer who regularly handles corporate and LLC matters and my contact information appears below.

1. Choosing a Name For A New Business

If one is choosing a structure for a small business, there are a number of different types of business entities that can be formed. At minimum, one likely will need to assess the relative merits of the subchapter-”S” corporation (“S-corp”); the subchapter-“C” corporation (“C-corp”); and the limited liability company (“LLC”). This choice will be described in more detail, below, and in Part II and Part II of this Article. But the first issues one should address, also typically addressed with and through one’s entertainment lawyer, are the trademark considerations which may arise as a result of the chosen name for the limited liability company (LLC), corporation, or other form of company.

“Fanciful” (i.e., fictitious) new business names for a limited liability company (LLC), corporation, or other form of entity should be searched as trademarks, especially in fields like entertainment where name recognition can be so important. Entertainment lawyers will routinely search and then issue opinions on proposed trademarks of properties for clients, including trademark-searches on LLC names and corporation names themselves. Why go through this process? Because a new LLC, corporation, or other form of business needs to confirm that no other businesses have prior rights or viable claims to its newly-proposed name (or a name substantially similar to its newly-proposed name). In any event, one may be barred from registering a corporate, LLC, or other business name, if someone else has already registered the same name in the jurisdiction in which the entity-filing is intended. Moreover, if one’s business is intended to ultimately be national or international in scope, as is often the case in entertainment-related and Internet-related LLC’s and corporations, a careful trademark search conducted through one’s entertainment lawyer becomes all the more important. One doesn’t want to invest sweat and equity in a fanciful business name, only to later find out that he or she is legally prevented from using it, or is unable to stop others from infringing on the newly-chosen business name.

Principal owners of a new business do sometimes elect to incorporate or form a limited liability company (LLC) under their own legal and given name (i.e., “John Doe, Inc., or “John Doe LLC”), instead of a fanciful name, in the hopes of saving money that they would otherwise spend on a trademark search through an entertainment lawyer. But there are at least two potential drawbacks to doing so:

Incorporating or forming a limited liability company (LLC) under one’s given name often makes it more difficult to later successfully develop a separate and distinct brand identity for one’s products and services.

Incorporating or forming a limited liability company (LLC) under one’s given name (or even a variant thereof) marginally increases the chances that a court may be inclined to let a plaintiff “pierce” one’s “corporate veil” in a litigation, if the “corporate veil” issue ever arises. “Piercing” means “finding individual economic liability” on the part of the owner/principal. The plaintiff’s argument would be that a self-titled corporation (or LLC) is more likely to be the “alter ego” of its individual principal. Now, although the odds of one’s “veil” being “pierced” may not be that high - assuming that the business owner observes all other corporate or LLC filings and formalities up until that point - the risk of individual liability is still worth mentioning. After all, for many people, the avoidance of “personal liability” and the avoidance of possible “veil piercing” is the whole reason for their incorporating or forming an LLC in the first instance.

What do I mean by “personal liability”? That is probably the most important legal concept that a limited liability company (LLC) owner, corporation owner, or other form of business owner will ever seek to avoid! Please read the next installment of this article.

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My law practice as an entertainment attorney includes incorporations and the formation of limited liability companies (LLC’s), as well as work relating to trademarks and service marks. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY 10128 USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

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Business Structures - Part I

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Publishing and Digital and Electronic Rights - Part II: Written By New York Entertainment Attorney And Publishing Lawyer John J. Tormey III, Esq.

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Law Office of John J. Tormey III, Esq. – Entertainment Lawyer, Entertainment Attorney

John J. Tormey III, PLLC

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Publishing and Digital and Electronic Rights - Part II: Written By New York Entertainment Attorney And Publishing Lawyer John J. Tormey III, Esq.

Part I of this article discussed how phrases like the “digital right” or “electronic right” should not be assumed to be self-defining, even by and between publishing lawyers and entertainment attorneys, and how it is incumbent upon authors to reserve needed rights like the digital right or the electronic right to themselves in the context of a publishing deal. Next up, this Part II examines concepts such as the digital right or electronic right from the perspective of the publishing lawyer and entertainment attorney, and the standpoint of fairness - who between author and publisher should in fact hold on to the digital right and electronic right, once and assuming that they are first properly defined?

3. Yes, Digital Right And Electronic Right Uses Do Compete With Traditional Book Publishing Uses.

A publishing lawyer or entertainment attorney may be called upon to handle an author-side deal. A publishing lawyer or entertainment attorney may also be called upon to handle, under different factual circumstances, a publisher-side deal. So, now, a few words in defense of publishers, I suppose.

There is a perception in the author and Internet communities that publishers should not be taking broad grants of the digital right or electronic right from authors, since “digital rights and electronic rights do not compete or interfere with traditional book publishing and other media rights”.

Not true. Not anymore. For proof of that fact, ask a few veteran news desk editors whether or not they followed, or were otherwise concerned about, what appeared on the Drudge Report during the Clinton administration. Ask the CFO’s or in-house publishing lawyers of a few traditional encyclopedia companies how they feel about Wikipedia.

Incidentally, although as a publishing lawyer and entertainment attorney and unlike some others, I tend to use the phrase “electronic right” or even “digital right” in the singular number, there probably tends to be no single consensus as to what constitutes and collectively comprises the singular “electronic right” or “digital right”. There has not been sufficient time for the publishing, media, or entertainment industries to fully crystallize accurate and complete definitions of phrases like “electronic publishing”, “web publishing”, “electronic right[s]”, “e-rights”, “digital right[s]”, or “first electronic rights”.

Nevertheless, electronic media and specifically the digital right and electronic right, have already changed our history. You can be sure that they will have some effect, at a minimum, on most author’s individual publishing deals henceforth, and will be the fodder of publishing lawyer and entertainment attorney discussion for years to come. The fact is, electronic uses inherent in the digital right and the electronic right already do compete with older, more traditional uses - particularly because digital and electronic uses are cheaper and faster to deploy, and can potentially reach millions of users in less than, as Jackson Browne might say, the blink of an eye.

Commerce is increasingly relying upon the Internet and other electronic phenomena, and the linchpin of this reliance is the digital right and electronic right. After all, you are reading this article, and ostensibly gleaning some information or material from it. The Web, for example, has already put a sizable dent in dictionary and encyclopedia sales, and anyone who tells you otherwise is probably an employee in a dictionary or encyclopedia publishing company or publishing lawyer in-houser in denial of the digital and electronic right, trying to protect his/her stock options. As the recent and well-known Stephen King pilot program will attest, fiction is the next subject matter area to be affected. Many of us book lovers including publishing lawyers and entertainment attorneys don’t like to think about it, but bound hard-copy books may soon become the sole province of book collectors and publishing lawyer vanity bookcases alone. The vast majority of book readers, however, may so wholly embrace the digital right and electronic right that they soon even lose the patience to wait for their “amazon.com” mailed shipment.

Very few people who work in the publishing, media, and entertainment industries, including as amongst fair-minded publishing lawyers and entertainment attorneys, should dispute that electronic uses inherent in the digital right and electronic right can easily cannibalize the older and more traditional forms and formats. This cannibalization will only increase, not decrease, as time goes on. Again, the author should put himself/herself in the mind-set of the publisher or its in-house publishing lawyer, when having this digital right/electronic right argument with the publisher or publishing lawyer. The publisher otherwise may want to invest marketing and personnel support in the author’s work, and perhaps even pay the author an advance for the writing. In their view, though, the publisher’s publishing lawyer or entertainment attorney argues, why should they do so, and not also capture the author’s digital right or electronic right?

The last thing that the publisher or its publishing lawyer or entertainment attorney wants to do is to pay the author - and then discover that the author has “scooped” the publication with the author-reserved digital right or electronic right, stolen the publisher’s proverbial fire, and undermined the publisher’s investment in the author and the writing. The concern of the publisher and the book company’s in-house publishing lawyer or outside entertainment attorney is rational and valid. If the publisher allows the author to potentially undercut the book by exploiting author’s reserved digital right or electronic right, then the publisher is threatening the publisher’s own investment in the author and in the written work. (And on some subliminal level at least, the company’s in-house publishing lawyer also knows that this could come out of his or her future comp).

Compromises are available. One traditional compromise effected between publishing lawyers or entertainment attorneys is a so-called “hold-back” on the digital right or electronic right, whereby the author promises not to use or license-out any author-reserved digital right or electronic right for a certain period of time following publication. The author will need some leverage to get a publisher to agree to such a compromise, though. And a publishing lawyer or entertainment attorney should draft the clause - the author’s publishing lawyer or entertainment attorney, not the publisher’s counsel!

An author may think that small “portfolio” uses (e.g., tucked inside greeting cards, on an author’s personal web site, etc.) are so minor, that they will never compete with publishing rights granted for the same work, and may tell the publisher or the company’s publishing lawyer or entertainment attorney as much. The greeting card example does seem innocuous enough, but the publisher and its entertainment or publishing lawyer will likely not agree with the author regarding the author’s personal web site. It is the electronic right or the digital right that really scares publishers and their publishing lawyers and entertainment attorneys, and is perceived as threatening to their long-term investment in the author and his or her work.

The distinction to be made here is between hard-copy portfolio uses, and digital right or electronic right “portfolio uses”. The fact is that computer-uploaded text is so easy and quick to transmit, receive, and read. The posted content’s popularity could also spread like digital wildfire, so quickly - for example, if a company hyper-links to the author’s site, or if “Yahoo” bumps the author’s site up in their search-engine pecking-order. Many successes have already been made by virtue of digital right and electronic right self-publishing, and more will follow. Traditional (book) publishers and their publishing lawyers and entertainment attorneys already realize this fact. Accordingly, traditional book publishers and their counsel also realize that once they acknowledge an author’s reservation of a “self-promotion” digital right or electronic right, they risk losing control of a potential wildfire dissemination method. Again, this would put the publisher’s investment at risk - but smart business people and companies and the publishing lawyers and entertainment attorneys that represent them, don’t put their own investments at risk.

4. The Party To The Contract That Has The Better And More Immediate Means and Resources To Exploit The Electronic Rights, Should Be The One Who Takes The Electronic Rights.

Here is the final point. If a contracting party has no means and resources to exploit a digital right or electronic right or a given bundle of them, then that same party has no business taking (or reserving to themselves) those same digital or electronic rights by contract or even negotiating such a position by and between publishing lawyers or entertainment attorneys. To analogize, if I am a screenwriter who options or sells my script to the Acme Production Company, LLC, through an entertainment lawyer, how should I react if Acme asks me to specifically and contractually grant them “theme park rights” in my literary property in the negotiation between the entertainment attorneys? (Don’t laugh - this practice is now very prevalent in film and entertainment deals).

Well, if Acme doesn’t have its own theme park, I (or my entertainment attorney) now have a powerful argument for reserving the theme park rights to myself instead. “Hey, Acme”, I (or my entertainment attorney) say, “... how do you have the unmitigated gall to ask me for my theme park rights, when you don’t even have the ability to exploit or use them yourself? You don’t even have a theme park!” I (or my entertainment attorney) then make it clear to Acme that I don’t intend to be giving them any trophies that they can put on a shelf to collect proverbial dust.

The same argument can work in the publishing context, particularly as argued between publishing lawyers and entertainment attorneys, regarding the digital right or the electronic right. The author can proverbially cross-examine the publisher (or try to cross-examine the company’s publishing lawyer or entertainment attorney) as to what successful past uses they have made of other author’s digital rights or electronic rights across multiple books. The company President may fudge the answer, but the publishing lawyer or entertainment attorney representing the publisher must answer truthfully. (One good reason to negotiate through counsel).

If the true answer to the question is “none”, then the author can use the “trophy” argument stated above. If the true answer is, alternatively, “some”, then the author has a negotiating opportunity to compel the publisher and its publishing lawyer and entertainment attorney to contractually commit to digitally and electronically publish the author’s work, too. The author can argue: “I won’t grant you the digital right or electronic right unless you, publisher, contractually commit in advance as to how specifically you will exploit them, and how much money you will spend in their development and marketing”. The author or the author’s publishing lawyer or entertainment attorney can then carve those electronic right and digital right commitments right directly into the contract, if the author has the leverage to do so. Again, one should not try this at home - but instead use a publishing lawyer or entertainment attorney.

Needless to say, once the author makes the publisher commit, presumably through publishing lawyer or entertainment attorney counsel, to a development budget or other marketing or “release” commitment for the digital right or the electronic right, then both the author and the publisher might thereby also have some basis for numerical valuation of the rights themselves. And, it is an entirely reasonable argument for an author or author’s publishing lawyer or entertainment attorney to say to a publisher that: “I will license/sell you the following listed digital right[s] or electronic right[s] if you pay me the following additional amounts for them:_____________________. And in the blank space, the rights can be listed like menu options as they have been broken out in Item #1 above, each to which separate dollar values – that is, price-tags - are now assigned.

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My media law practice as a publishing lawyer and entertainment attorney includes the drafting, editing, negotiation, and closure of agreements including digital and electronic rights matters as they may arise therein, as well as in the fields of film, music, television, Internet, and other media and art forms. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY 10128 USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

http://www.tormey.org/publishing2.htm

Page:

Publishing and Digital and Electronic Rights - Part II

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Publishing And Digital And Electronic Rights - Part I: Written By New York Entertainment Attorney And Publishing Lawyer John J. Tormey III, Esq.

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Law Office of John J. Tormey III, Esq. – Entertainment Lawyer, Entertainment Attorney

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY 10128 USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

Publishing And Digital And Electronic Rights - Part I: Written By New York Entertainment Attorney And Publishing Lawyer John J. Tormey III, Esq.

The following publishing industry article addresses some of the legal issues arising for publishing lawyers, entertainment attorneys, authors, and others as a result of the prevalence of e-mail, the Internet, and so-called “digital” and “electronic publishing”. As usual, publishing law generally and the law of the digital right and electronic right specifically, governing these commercial activities, has been slow to catch up to the activity itself. Yet most of the publishing industry “gray areas” can be resolved by imposing old common-sense interpretations upon new publishing lawyer and entertainment lawyer industry constructs, including the digital right and electronic right, and others. And if after reviewing this article you believe you have a non-jargonized handle on the distinction between “digital right” and “electronic right” in the publishing context, then I look forward to hearing from you and reading your article, too.

1. “Electronic Right[s]” And “Digital Right[s]” Are Not Self-Defining.

All publishing lawyers, entertainment attorneys, authors, and others must be very careful about the use of jargon - publishing industry jargon, or otherwise. Electronic and digital publishing is a recent phenomenon. Although as a publishing lawyer and entertainment attorney and unlike some others, I tend to use the phrase “electronic right” or even “digital right” in the singular number, there probably tends to be no single consensus as to what constitutes and collectively comprises the singular “electronic right” or “digital right”. There has not been sufficient time for the publishing, media, or entertainment industries to fully crystallize accurate and complete definitions of phrases like “electronic publishing”, “web publishing”, “electronic right[s]”, “e-rights”, “digital rights”, or “first electronic rights”.

These phrases are therefore usually just assumed or, worse yet, just plain fudged. Anyone who suggests that these phrases alone are already self-defining, would be wrong.

Accordingly, anyone, including a publishing lawyer or paralegal representing a book publisher or entertainment lawyer representing a studio or producer, who says that an author should do - or not do – something in the realm of the “electronic right” or “digital right” because it is “industry-standard”, should automatically be treated with suspicion and skepticism.

The fact of the matter is, this is a great era for authors as well as author-side publishing lawyers and entertainment attorneys, and they should seize the moment. The fact that “industry-standard” definitions of the electronic right and digital right have yet to fully crystallize, (if indeed they ever do), means that authors and author-side publishing lawyers and entertainment attorneys can take advantage of this moment in history.

Of course, authors can also be taken advantage of, too – particularly those not represented by a publishing lawyer or entertainment attorney. There is a long and unfortunate history of that happening, well prior to the advent of the electronic right and digital right. It has probably happened since the days of the Gutenberg Press.

Every author should be represented by a publishing lawyer, entertainment attorney, or other counsel before signing any publishing or other agreement, provided that their own economic resources will allow it. (But I am admittedly biased in that regard). Part of the publishing lawyer and entertainment attorney’s function in representing the author, is to tease apart the different strands that collectively comprise the electronic right or digital right. This must be done with updated reference to current technology. If your advisor on this point is instead a family member with a Smith-Corona cartridge typewriter or a Commodore PET, rather than an entertainment attorney or publishing lawyer, then it may be time to seek a new advisor.

Even authors who cannot afford publishing lawyer or entertainment attorney counsel, however, should avoid agreeing in writing to give broad contractual grants to publishers of “electronic publishing” - or the “electronic right”, or “electronic rights” or “digital rights”, or the “digital right”. Rather, in the words of “Tears For Fears”, the author and author counsel had “better break it down again”. Before agreeing to grant anyone the author’s “digital right: or “electronic right”, or any elements thereof, the author and his or her publishing lawyer and entertainment attorney need to make a list of all the possible and manifold electronic ways that the written work could be disseminated, exploited, or digitally or electronically otherwise used. Notice that the author’s list will likely vary, month to month, given the fast pace of technological advancements. For example, these kinds of questions can be considered by the author and publishing lawyer and entertainment attorney alike:

Electronic Digital Right Question #1, Asked By The Publishing Lawyer/Entertainment Attorney To The Author: Can the work be published in whole or in part on the Internet? In the context of an “e-zine”? Otherwise? If so, how? For what purpose? Free to the reader? For a charge to the reader?

Electronic Digital Right Question #2, Asked By The Publishing Lawyer/Entertainment Attorney To The Author: Can the work be disseminated through private e-mail lists or “listservs”? Free to the reader? For a charge to the reader?

Electronic Digital Right Question #3, Asked By The Publishing Lawyer/Entertainment Attorney To The Author: Can the work be distributed on CD-Rom? By whom? In what manner and context?

Electronic Digital Right Question #4, Asked By The Publishing Lawyer/Entertainment Attorney To The Author: To what extent does the author, himself or herself, wish to self-publish this work, either before or after granting any electronic right or any individual “electronic publishing” rights therein to someone else? Will such self-publication occur on or through the author’s website? Otherwise?

Electronic Digital Right Question #5, Asked By The Publishing Lawyer/Entertainment Attorney To The Author: Even if the author does not self-publish, to what extent does the author wish to be able to use and disseminate this writing for his or her own portfolio, publicity, or self-marketing purposes, and perhaps disseminate that same writing (or excerpts thereof) electronically? Should that be deemed invasive of, or competitive with, the electronic right as otherwise contractually and collectively constituted?

The above list is illustrative but not exhaustive. Any author and any publishing lawyer and entertainment attorney will likely think of other elements of the electronic and digital right and other uses as well. The number of possible uses and complexities of the electronic right[s] and digital right[s] definitions will increase as technology advances. In addition, different authors will have different responses to the publishing lawyer and entertainment attorney, to each of the carefully-itemized questions. Moreover, the same author may be concerned with the electronic right in the context of one of his/her works, but may not care so much in the context of a second and different work not as susceptible to digital right exploitation. Therefore, the author must self-examine on these types of electronic and digital right questions before responding to the author’s publishing lawyer or entertainment attorney and then entering into each individual deal. Only by doing so can the author avoid the pitfalls and perils of relying upon lingo, and relying upon someone else to dictate to them what is the electronic right or digital right “industry standard”. As the publishing lawyer and entertainment attorney should opine, “There is no such thing as ‘industry standard’ in the context of a bilaterally-negotiated contract. The only standard that you the author should be worried about is the motivational ‘standard’ known as: ‘if you don’t ask, you don’t get’”.

Finally, the author should be aware that while the electronic right, digital right, and components thereof can be expressly granted, they can also be expressly reserved to the author, by a mere stroke of the pen or keystroke made by the publishing lawyer or entertainment attorney. For example, if an author wants to expressly reserve the “portfolio uses” mentioned in Electronic Digital Right Question #5 above, then the author should ask his or her publishing lawyer or entertainment attorney to clearly recite this reservation of the author portfolio electronic/digital right in the contract, and leave nothing to chance. In addition, if the author has some negotiating leverage, the author, through the publishing lawyer or entertainment attorney, may be able to negotiate the “safety net” of a “savings clause” which provides words to the effect that: “all rights not expressly granted to publisher, be it an electronic right or digital right or otherwise, are specifically reserved to author for his/her sole use and benefit”. That way, the “default provision” of the contract may automatically capture un-granted rights including any electronic or digital right for the author’s later use. This publishing lawyer and entertainment attorney drafting technique has likely saved empires in the past.

2. Publishers and Entertainment Companies Are Revising Their Boilerplate Agreements, As We Speak, In An Effort To Secure The Electronic Right[s].

It is well-known and should come as no surprise that right now, as we speak, publishers and their in-house and outside counsel publishing lawyers and entertainment attorneys are furiously re-drafting their boilerplate contracts to more thoroughly capture the digital and electronic right – that is, all of an author’s digital and electronic rights. The typical publishing agreement drafted by a company-side publishing lawyer or entertainment attorney will recite a broad grant of rights, then followed by a whole laundry-list of “including but not limited to” examples. If the author receives such an onerous-looking rights passage from a publisher or the publisher’s publishing lawyer or entertainment attorney, the author should not be intimidated. Rather, the author should look at it as an opportunity to make some money and have some fun. The author can first compare the list suggested in Electronic Digital Right Questions #1 through #5 above, to the publisher’s own laundry-list and the author’s own imagination. Then, the author can decide which if any of the separate digital or electronic rights the author wants to fight to keep for himself or herself.

If the publisher tells the author to blindly subscribe to their entire digital or electronic right[s] clause (or clauses), then the author still has the ultimate leverage, which is to walk away from the proposed deal prior to signature. Of course, this strategic approach wouldn’t be advisable in most cases - unless perhaps if the author has other written offers from other publishers already on the table. However, an author shouldn’t be forced by any publisher or any company-side publishing lawyer or entertainment attorney to sign away the electronic right, digital right, or any other rights that the author would rather keep - particularly rights which the author never specifically intended to shop to the publisher in the first instance.

The author should keep in mind the psychology and motivations of the publishers and their publishing lawyer and entertainment attorney counsel when doing all of this. A Vice-President (or above) at the publishing company probably woke up one recent morning, and realized that his/her company lost a great deal of money on a particular project by not taking a prospective license or assignment of an electronic right or digital right from another author. The VP probably then blamed the company’s in-house legal department publishing lawyers or entertainment attorneys, who in turn started frantically re-drafting the company boilerplate to assuage the angry publishing executive and thereby keep their jobs. When in-house publishing lawyers, entertainment attorneys, or others engage in this type of practice (some may call it “drafting from fear”), they tend to go overboard.

Accordingly, what you will probably see is a proverbial “kitchen sink” electronic right clause which has been newly-drafted and perhaps even insufficiently reviewed by the company-side publishing lawyers and entertainment attorneys, internally and themselves - wherein the publisher will ask the author for every possible electronic and digital right and every other thing, including (without limitation) the kitchen sink. The only response to such a broad-band electronic right or digital right clause is a careful, deliberate, and methodical reply.

Using the approach outlined in Section #1 above, the author and the author’s publishing lawyer or entertainment attorney counsel must separately tease apart each use and component of the electronic right and digital right that the publisher’s broad-band clause might otherwise capture, and then opine to the publisher a “yes” or a “no” on each line-item. In other words, the author, through his or her publishing lawyer or entertainment attorney, should exercise his or her line-item veto. It’s the author’s writing that we are talking about, after all. The author should be the one to convert the singular “electronic right” or “digital right” into the laundry-list of electronic rights. That’s why I use the singular number when referring to “electronic right” or “digital right” – I like to let the technologically-advanced author have all the fun making the list. That way, too, the author can tell me what he or she thinks the phrases actually mean, and what the difference between the two meanings really is, if anything.

The next installment of this article, Part II, will - believe it or not - have a few words in defense of the publishers and the publishing lawyers that work for them!

Click the “Articles” button at:

to return to the main Articles page.

My law practice as a publishing lawyer and entertainment attorney includes the drafting, editing, negotiation, and closure of agreements including digital and electronic rights matters as they may arise therein, as well as in the fields of music, film, television, Internet, and other media and art forms. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY 10128 USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)

http://www.tormey.org/publishing1.htm

Page:

Publishing and Electronic Rights - Part I

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Tuesday, January 1, 2013

Independent Contractors vs. Employees - Part II: Written By New York Entertainment Lawyer And Employment Attorney John J. Tormey III, Esq.

http://www.tormey.org/contractors2.htm

Law Office of John J. Tormey III, Esq. – Entertainment Lawyer, Entertainment Attorney

John J. Tormey III, PLLC
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New York, NY 10128

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Independent Contractors vs. Employees - Part II: Written By New YorkEntertainment Lawyer And Employment Attorney John J. Tormey III, Esq.

Part I of this article discussed the distinction between hiring “independent contractors” versus “employees”, and some of the consequences thereby resulting. To give the hypothetical some real-life relevance to an entertainment lawyer like myself, how could, for example, a recording studio or a film production characterize its workers as the former (independent contractors), rather than the latter (employees)? If the Internal Revenue Service (IRS) or applicable Department of Labor (DOL) challenges the characterization of the workers as independent contractors as opposed to employees, is there anything that the film production or recording studio could have done in retrospect to seek to prevent or withstand the challenge – aside from calling its entertainment lawyer at the point of hire and asking the entertainment lawyer, that is?

A signed written agreement between the music or film studio and each worker, which among other things characterized each of them as an “independent contractor”, prepared by the entertainment lawyer, might have been helpful. But do not believe for a minute that agencies like the DOL and the IRS will view that self-serving contractual “independent contractor” vs. employee characterization as fully-dispositive, even when drafted by the entertainment lawyer. These agencies decidedly will not. Rather, the actual facts and circumstances surrounding the worker’s services must give additional support to the contractual characterization of an independent contractor as opposed to an employee. Moreover, things change. The facts and circumstances of work in the latter year may differ from what the entertainment lawyer’s drafting predicted them to be in the former year’s signed contract. See, e.g.:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

In other words, the hiring company in the entertainment field should, at minimum, require all its independent contractor hires to sign independent contractor agreements prepared by the company’s entertainment lawyer, that among other things expressly disclaim an employee-employer relationship. But the smart company also further monitors the factual circumstances of that work relationship post-signature, to make sure that those facts continually support the contract and the “independent contractor” vs. employee characterization. Most independent contractor relationships themselves, as well as other forms of relationships, change over time and do not remain static. The entertainment lawyer can amend the pre-existing signed contract at the client’s further request.

This article will not rehash all factors in the past IRS “checklists” here, particularly because the governmental definition of independent contractor vs. employee continues to evolve and may have changed by the time you read this article. The hiring party should update itself on the IRS and DOL “independent contractor vs. employee” definitions anyway: (1) so to be sure to consider factors applicable to its own state and jurisdiction, and (2) so as to work off of the most updated definition Obviously it is wise to consult with one’s entertainment lawyer, accountant, and payroll company – particularly the latter two - before one rolls out an entertainment company payroll plan for independent contractors, employees or otherwise. Indeed, prospective advice should be obtained before the hiring party even make the hires. But below are some of the checklist factors which as an entertainment lawyer representing the hiring party I have found to have been given some significant weight in the context of past DOL actions. Query whether or not the hiring party will be able to “flip” any of them to its own favor and advantage, if the hiring party is ever challenged on its own characterizations of workers as independent contractors as opposed to employees:

A. Nature Of Services.

The entertainment lawyer first inquires of the hiring party, “What exact services or types of services does the claimed independent contractor worker perform?” If the hiring party is held to exercise or reserve the right to exercise sufficient supervision, direction, and control over the worker’s services, an “employer-employee” relationship may be established, even if such relationship was never intended by the hiring party thinking he or she was instead hiring an independent contractor rather than an employee. To this extent, a written job description in the agreement drafted by the entertainment lawyer suggesting that the worker toils independently, may support the company’s assertion of an “independent contractor” vs. an employee-employer relationship. But the written job description must be an accurate reflection of the facts, and must stay accurate going forward in time which is even more difficult. In any event the written job description scribed by the business owner’s entertainment lawyer, is not dispositive on “independent contractor vs. employee” question. Moreover, most media and entertainment hiring parties are unwilling to relinquish supervision, direction, and control over even its independent contractor hires, as a practical matter - much less instruct their entertainment lawyer do so in writing. Therefore, this “nature of services” item is a difficult checklist factor for the hiring party to “flip” to its own advantage in favor of an independent contractor adjudication as opposed to employee determination.

B. In Business For Himself/Herself.

The entertainment lawyer next asks, if this worker that the hiring party wishes to characterize as an independent contractor as opposed to employee, in business for himself or herself. For example, does this worker run his or her own business or corporation, or work through a “loan-out” entity? Does the worker have an independent consulting business? Does the worker advertise any business, or have the trappings or indicia of any self-standing business? If the worker is in business for himself or herself – and particularly if the worker can be documented by the hiring party’s entertainment lawyer to have been such, well-prior to the making of the hire in question – then that would be a strong suggestion that the worker is an independent contractor rather than an employee. In fact, the party wanting to hire a worker can choose to limit its hires only to those contractors that are already separately incorporated or functioning through a limited liability company, which the entertainment lawyer can normally confirm on-paper through the use of public-record databases. This “business for himself/herself” item is therefore a factor that can be flipped to the hiring party’s advantage in favor of an independent contractor determination over an employee characterization, if set-up carefully in advance, and a step in which it may be critical to involve the entertainment lawyer.

C. Invoicing Or Billing For Services.

Asks the entertainment lawyer to the hiring party, “Does the claimed independent contractor worker submit a bill or invoice for services?”. Most employees don’t. Most independent contractors do – or, should. Again, this is a factor that the hiring party can flip to its advantage in favor of an independent contractor characterization as opposed to an employee determination, if assessed and set-up carefully in advance, and a step with which the entertainment lawyer can help by assisting the documentation process. The party wanting to hire a worker can choose to limit its hires only to those claimed independent contractors that furnish or are willing to furnish periodic invoices. An employee would be unlikely to do so, and unlikely to be asked to do so. This “invoicing” factor will likely not be dispositive by itself, but could be helpful to the hiring party to support an independent contractor determination over an employee ruling.

D. Where, When And How Long.

The entertainment lawyer then asks the hiring party, “Is this worker claimed to be an independent contractor rater than an employee, told where to work each day? Or, when to work each day? Or, how long or how many hours to work each day?” The entertainment lawyer observes that a worker toiling off-premises is more likely to be characterized as an “independent contractor” rather than an employee. A worker on his or her own schedule is more likely to be characterized as an “independent contractor” rather than an employee. And, a worker who chooses his or her daily hour expenditure is more likely to be characterized as an “independent contractor” rather than an employee. But again, most hiring parties are unwilling to relinquish that kind of supervision, direction, and control over their hires much less instruct their entertainment lawyer do so in writing – be they employees or even independent contractors.

E. Review Of Work.

“Regarding the worker sought to be classified as an independent contractor rather than an employee”, asks the entertainment lawyer, “is this worker’s effort subject to review by anyone – particularly annual reviews? Is the worker’s effort reviewed as ‘satisfactory’ or ‘unsatisfactory’”? The more discretion of review that the company exercises, the more likely that this worker will be characterized as an “employee” rather than an independent contractor. One presumption would be that the remedy for a bad independent contractor would be simply to terminate rather than to review, which the hiring party might do through his or her counsel, or just on his or her own. But again, most hiring parties are unwilling to relinquish that kind of supervision, direction, and control over their hires, much less instruct their entertainment lawyer do so in writing – be they employees or even independent contractors.

F. Refusal Of Work Assignments.

This worker that the hiring party calls an independent contractor rather than an employee – the entertainment lawyer muses - can this worker refuse work assignments? Does this worker in fact refuse any work assignments? If so, what happens as a result? Though not an absolute, a worker entitled to refuse assignments is at least somewhat more likely to be characterized as an “independent contractor” rather than an employee. But again, most hiring parties are unwilling to relinquish that kind of supervision, direction, and control over their hires, much less instruct their entertainment lawyer do so in writing – be they employees or even independent contractors.

G. Tools And Office Space.

As for this worker that the hiring party claims to be an independent contractor as opposed to an employee, the entertainment lawyer inquires - what equipment or other tools or objects does this worker supply or bring to the job site by himself or herself, if any? Who provides the office space, if any? The more equipment and tools that the worker brings to the work site, the more likely it is that the worker will be characterized as an “independent contractor” rather than as an employee. If, on the other hand, the company provides an office, tools and equipment, the relationship looks more like an employee-employer employment relationship. In this day and age of laptop and telecommuting, we will more frequently see hiring parties try to flip this variable to their advantage in favor of an independent contractor determination as opposed to an employee determination. And this factor will not be ignored by the governmental authorities adjudicating the issue, or entertainment lawyers drafting the prospective agreements, either.

Again, please do not rely upon the excerpted list of “independent contractor vs. employee” factors above - it is only illustrative in the context of media and entertainment company hiring patterns in the past - and different tribunals may adjudicate different results. Any determination that a hiring party in the entertainment field makes about a worker’s status should be done only upon review with one’s own entertainment lawyer, one’s tax accountant, and one’s payroll company – particularly the latter two. The most important thing to remember is that the rule of “ipse dixit” does not apply to the “independent contractor vs. employee” question. In other words, just because the hiring party calls someone an “independent contractor” as opposed to an employee, does not make them so! (“Ipse dixit” is Latin for “he himself said so”).

There are structural modifications that the hiring party can make to the hiring relationship, as well as entertainment lawyer-drafted text, that will increase its chances of successfully claiming the worker to be an independent contractor rather than an employee. But there are seldom any absolutes in this regard. Finally, keep in mind that there is a real “Catch 22” to the “independent contractor v. employee” characterization. The entertainment lawyer will advise the hiring party that the hiring party must truly be willing to part with a substantial amount of supervision, direction, and control over a worker - and must in fact do so - in exchange for the privilege of paying them like an independent contractor rather than an employee. There is only a very limited extent to which a hiring party may be able to contract around this problem.

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My law practice as an entertainment attorney includes state and federal employment law matters relating to independent contractors and employees and other human resource matters as they arise in the fields of music, film, publishing, television, Internet, and other media and industries. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC
1324 Lexington Avenue, PMB 188
New York, NY 10128

USA

(212) 410-4142 (phone)
(212) 410-2380 (fax)
brightline@att.net
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Independent Contractors vs. Employees - Part II

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Independent Contractors vs. Employees - Part I: Written By New York Entertainment Lawyer And Employment Attorney John J. Tormey III, Esq.

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Law Office of John J. Tormey III, Esq. – Entertainment Lawyer, Entertainment Attorney

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Independent Contractors vs. Employees - Part I: Written By New York Entertainment Lawyer And Employment Attorney John J. Tormey III, Esq.

As an entertainment attorney practicing in New York, I see people and companies struggling to address the definition of independent contractor vs. employee, frequently. Anyone who hires workers or is thinking of doing so, in New York or elsewhere in the United States, should be aware of the following. Before hiring anyone, it is critical that one carefully determines with one’s accountant and entertainment attorney or other counsel whether the new hire is to be an “employee”; or, alternatively, an “independent contractor”. The terms have legal and financial import; they are mutually exclusive; and one should never use them interchangeably.

The distinction between the two types of workers is important because, among other things, it is usually more expensive and more administratively inconvenient to hire and pay “employees” as opposed to “independent contractors”. On the other hand, few persons or companies that hire workers are truly willing to relinquish control over their hires, to a sufficient degree to allow those workers to accurately be characterized as “independent contractors” as opposed to employees. As an entertainment attorney, I frequently encounter business projects of short duration such as a single film shoot, a single album recording, or a single pilot shoot. The question of “independent contractor vs. employee” therefore arises most often in the context of media and entertainment projects of multi-week or multi-month duration. Though the two constructs, “independent contractor” and “employee”, are not necessarily self-defining, the word “independent” is used for a reason, and truly translates to “loss of hiring-party control”. I’ll explain below.

The U.S. Internal Revenue Service in (former) “IRS Publication 937” identified 20 “checklist” factors that it considered when determining whether or not an individual worker is an “independent contractor” as opposed to an “employee”. The litmus test has apparently since evolved somewhat. See, e.g.:

http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

The hiring party should review the most updated version of the IRS criteria prior to any hires, and it is probably more important to do so with one’s payroll company and tax accountant, than one’s entertainment attorney. The hiring party should also be aware that the IRS is not the only institution with whom to be concerned regarding the all-important “independent contractor vs. employee” determination. Other governmental agencies have a stake in preventing mischaracterization of workers as independent contractors, too.

For example, the state Department of Labor (state “DOL”) in one’s own home state may apply its own checklist of criteria to distinguish independent contractors vs. employees. One needs to be aware that there is a federal [US] Department of Labor as well as a state Department of Labor. A hiring party needs to comply with the requirements of both. In a perfect world, there should be consistency between the respective “checklists” of the IRS and the applicable DOL, as well as consistency between each agency’s interpretation of those checklists. However, your entertainment attorney and tax accountant will opine to you that the world isn’t perfect, and those interpretations could differ as to what constitutes an independent contractor versus an employee. Therefore, one should be aware as to how a local state DOL characterizes the two different types of workers, too - if different than the IRS characterization. Additionally, from an enforcement perspective, the DOL could challenge a hiring business’ characterization of its workers as “independent contractors” vs. employees, without the IRS joining in on the contest. The IRS and the DOL are separate agencies, although there is a suggestion that they will more thoroughly share electronic data with each other on field data and this issue in the near future.

The “independent contractor” determination can be the proverbial unstable apple cart, easily tipped. An employer, as most know, should withhold taxes from an employee’s pay, and make unemployment contributions with respect to those employees, among other things. Hiring companies in the entertainment field, for example, even if they already have an entertainment attorney and a tax accountant, still often wisely use a “payroll company” to administrate payment obligations to workers, so as not to transgress. The cost of a hiring party mischaracterizing an employee as an independent contractor instead, could be high. If ever in doubt, payroll companies and accountants should skew cautious and conservative when making the distinction for their clients in favor of employees – and the entertainment attorney will usually tell the client to listen to his or her payroll company and tax accountant.

However, let’s say that a hypothetical music recording studio, or film production company, for that matter, hires 20 workers, characterizes them all (in reasonably good faith) as “independent contractors”, but uses no payroll company, tax accountant, or entertainment attorney initially. Let’s further assume that the film production or music studio pays no unemployment insurance or workers compensation contributions with respect to any of the hires, and does not withhold taxes from their paychecks. Then, one independent contractor worker is terminated, and vindictively files with the local state DOL for unemployment compensation, claiming to be a fired “employee” instead. Even after phoning the entertainment attorney and tax accountant to enlist their retroactive help, it may now be too late. The recording studio or film production could now find itself faced with a state DOL that characterizes not just the one claimant-worker - but all 20 workers - as “employees” as opposed to “independent contractors”. The apple cart tips. The camel’s nose is now in the tent.

The recording studio or film company may be required to litigate administrative hearings on the independent contractor v. employee question, and may thereupon be assessed retroactive unemployment insurance contributions, interest, and penalties with respect to the workers that “should have been paid as employees”. Other actions may also follow, such as a workers compensation audit, and perhaps even findings by the IRS and local tax authorities with respect to claimed monies that “should have been withheld” from the “employees” pay. The argument of, “But I told them they were independent contractors” may be considered a mere ipse dixit proposition and might not wash with the government. The entertainment attorney or the business owner can state the case to the authorities that short-term hires are the bread-and-butter of the local entertainment economy in the jurisdiction and so should be rewarded and not punished, but the adjudicating authorities may not accept that distinction between entertainment and non-entertainment sectors. Their only care may be to decrease the overall number of independent contractors and increase the total number of employees across all industries and sectors.

Could this nightmare have been avoided by the recording studio or film production company, through documentation, prospective use of its entertainment attorney, or otherwise? The answer is “Maybe yes, maybe no”. Please see Part II of this article for a further discussion.

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to return to the main Articles page.

My entertainment law practice includes state and federal employment law matters relating to independent contractors and employees and other human resource matters as they arise in the fields of film, music, television, publishing, Internet, and other media and industries. If you have questions about legal issues which affect your career, and require representation, please contact me:

Law Office of John J. Tormey III, Esq.

John J. Tormey III, PLLC

1324 Lexington Avenue, PMB 188

New York, NY 10128 USA

(212) 410-4142 (phone)

(212) 410-2380 (fax)