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MAY 2006 |
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The Visible & Invisible Costs Involved In Working With The American Guilds The
production world of independent motion pictures today is global in nature. Over
theyears, many independent producers have fought with the American Guilds while
shooting in |
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Greg S. Bernstein |
The production world of independent motion pictures today is global in nature. Where to shoot to take advantage of lower costs, subsidies or other financial benefits, as well as financial intricacies separate and apart from production,
results in most films being shot in one or more countries, post being done in another, the financing coming from several more, and the actors and crew hailing from many different nations. Over the years many independent producers have fought with the American Guilds while shooting in America. Over the last few years the American Guilds’ reach has stretched to international shores, and the problems have intensified as the need to use well-known actors to add ‘value’ accelerates for independent product. Greg S. Bernstein argues that it is way past time for the question of residuals to be re- looked at as they no longer bear any semblance to the product revenue stream and burden independent product unjustly.
Regardless of where a film is shooting, one thing has become clear in today’s market: actors, directors and writers with worldwide recognition are necessary to make the film a success. In all likelihood, that means employing an actor, writer or director who is a member of one of the American talent guilds, namely the Screen Actors Guild (SAG), Director’s Guild of America (DGA), and the Writer’s Guild of America (WGA). That in turn means subjecting the production to the costs and burdens of such affiliation.
Each of these guilds has rules for their members who are working on film projects anywhere in the world. Generally, if the member works for a production company that does not have a contract with the guild (called a signatory company), then the member can face fines, suspension or even expulsion from the guild. From the production company standpoint, there is no legal obligation for any production company to become a guild signatory, but there is pressure to do so if the production company wants to employ a particular actor, writer or director, and the talent insists it will not work for the production company until it becomes a signatory.
The thought of becoming a guild signatory typically elicits fear and loathing, particularly when time and money are paramount. The process of registering with a guild can run from a few days to weeks, and involve mountains of paper, deposits, security interests, and other requirements.
The agreements that are signed with the guilds require the production company to a) pay their members (writer, director, and/or actors) the minimum salaries and benefits (pension contributions) required by the applicable agreement, b) pay residuals, and c) comply with other terms and conditions concerning working conditions, credits, and so forth. There is no question that the guild registration process can daunting and the resulting contractual obligations costly. But, understanding the process and what is involved to properly plan can help.
Each of the guilds has developed different minimum salary rates applicable to different kinds of productions and budgets. For most international productions, if the production is employing American actors, director and/or writer, they are employing them because they are well known. That means the talent can command salaries well beyond the minimum guild rates. So, for the most part, the required minimum rates will not be an issue for an international production. That could be a different issue for an American production that will have to pay the entire cast the minimum rates (although lower rates tend to apply on lower budget films shooting in the US).
The guild agreements also have various rules on everything from how credits for members have to appear on the film and in ads, to travel requirements (first class in most cases), how long an actor can work each day, whether the director gets to edit, and other such minutia. Some rules, like the minimum editing period for directors, can have far reaching impacts on budgets and delivery dates. Keep in mind that the DGA, even if shooting outside the United States, has requirements to employ other DGA members (such as the first AD) on the film, at the minimum required salary and benefits. Local personnel, even if requested by the director, will not suffice.
Besides being required to pay minimum salaries, most producers don’t realize they also become obligated to pay something called Pension, Health, and Welfare (PH&W) to the guild pension and health plans. This is on top of the salary. For most of the guilds, on average, this amounts to 13.5% of the amount being paid as compensation (there are limits on the compensation to which it applies; for example, after $200,000, the rates either drop or eliminate). If the PH&W payments are not timely made, penalties and interest can be charged by the guilds. In addition, if the production is taking place in the United States, or the services of the actor, writer or director, are being rendered in the United States, American payroll taxes may also apply. On top of the salary and PH&W, guild agreements also require ongoing payments to their members (and the PH&W on top of those payments as well) based on the receipts the film earns.
Residuals are something that most people have a misconception about. Most people believe that residuals are payable from a share of the profits of a film. But this is not the case. Residuals are payable regardless of whether the film has recouped its costs or not. Residuals are based on a percentage of receipts, not profits. For theatrical films (as opposed to those made under guild agreements for TV), residuals are payable on the receipts from video and television. Not theatrical revenues. (There are some differences if the film was registered to be a television movie, and there are also some issues if the film was registered to be a “low budget” theatrical film and did not have a theatrical release). Different residual rates apply to revenues from video vs TV. There is also a big difference in what receipts are subject to these rates. For example, on video, the percentage rate applies to the amounts actually received by the production company from video exploitation. In the case of television revenues, the rate applies on the receipts of the distributor, regardless of whether or not the production company receives any of the revenues.
When you calculate the percentages for all three guilds (if you had all three) and the PH&W that would be due on top of the residuals for a film shot in the US (for SAG there is a pro-ration formula between US and non-US actors), the percentage amounts to about 10% of revenues from video and television. On most indie productions, that is most, if not all, expected revenues. That amounts to a very hefty percentage of gross!
Say you make your film for one million dollars. Since many indie films don’t really make much from theatrical, most of the revenue comes from video and TV. And, as we all know too well, many films don’t make back as much as they cost. Assume a film cost $1 million, but only earns $800,000 in gross receipts to the producer, all from video and television. 10% of the $800,000 would go to the union members as residuals. So a bad situation gets worse (and if the distributor of your film does not assume the obligation to pay ongoing residuals, which many don’t, you could be paying out residuals on TV revenues the distributor collects, for the life of the distribution agreement, even if you never see another dollar beyond the original minimum guarantee.)
Most of us in the world of independent film making believe that the original concept of residuals has gone awry, particularly for indie films. Not only should we not be paying out residuals before we recoup, we should not be paying residuals on video revenues, which have become the primary source of revenue for all films.
In the 1950’s when TV came on the scene, studios started to make money on top of their revenues and profits from theatrical. Actors, writers and directors demanded a piece of this supplemental income for their work on films. In the early 1960’s payments for revenues from media “supplemental” to theatrical revenues (i.e. residuals), came about. Back then, TV was truly supplemental to the main revenue source of theatrical for the studios. But for indie filmmakers, there was nothing beyond theatrical to earn a buck, so what did we care?
Later with cable and video, residuals were added for these supplemental markets that were adding to the profits from theatrical for the studios. By the 1990’s, video and TV had become the backbone of earnings for the indie filmmaker. Not so for the studios. The studios still earned most of their revenue and profit from theatrical. As the 1990’s progressed, this began to change. In the 21st century, the economics of movies has changed, both for the studios and the indies. Theatrical has become not the primary or secondary media, but the tertiary one, even though the total box office take for all films has grown over the years. Because the costs of advertisement and promotion have grown so rapidly, for 90% or more of the films released each year, theatrical is not a profit making enterprise in and of itself, as more is spent to advertise and promote a film than comes in to recoup those costs, let alone the cost of production. Distributors theatrical release their films partly because they hope for that lottery ticket winning film, but also because it’s one giant advertisement for video. In 2005, revenues (not profit) to the studios from worldwide theatrical amounted to less than 15% of total revenues! Video was almost 50%. And for most indie films, any level of theatrical revenue is infinitesimal.
If theatrical is just an advertisement for video, and the primary revenue on all films is video, then it would seem to be that there is a need to rewrite the residuals rules. There should be no residuals payable on video or on theatrical (since it’s just an advertisement mechanism, just as there is no extra payment for running ads for a film that feature the actors from the film) unless there are net theatrical earnings (theatrical rental less theatrical promo costs). And of course, TV should still be a supplemental source, in most cases. Then again, maybe the entire residuals rulebook needs to be thrown out and written from scratch. If the original premise was to compensate for earnings (I know it was for use beyond theatrical, but come on, everyone only cared about money) above and beyond theatrical profits, then maybe the entire basis for computation and application of residuals needs to be rethought with residuals being a profits-based payment, not gross receipts. (While some might argue that the TV agreements are more applicable for straight to video, they don’t really fit that thought either, especially with any level of theatrical.)
Given what the rules are today for residuals, we have to deal with the situation as it exists. If you have decided to employ a member of an American talent guild, your production company will need to register with that guild. None of the guilds will allow their members to start work until the production company has completed the registration process (you don’t have to become a signatory with all the guilds, just the ones you need). Both SAG and DGA also require deposits be made for the estimated salary before their members can begin work. In the case of a non-US production utilizing American actors, SAG requires that the entire amount of estimated payroll for the American actors, as well as the associated PH&W, be fully paid before the actor leaves the United States.
For the WGA and DGA, whether the services of the writer or director, respectively, are being performed in or outside of the United States, the registration process is exactly the same (applications and other information on the registration process can be found online at WGA.org, DGA.org and SAG.org). For SAG, however, if the film is shooting outside of the United States, there is a simplified process (they need to be congratulated for having established a fairly easy and relatively quick process). In general, all of the unions require the completion of an application, which requires information concerning the name of the production company, the budget for the film, chain of title, and other information relevant to the production. Once the information has been given to the guilds, they prepare standard documentation.
The form of contract (and other documents) between the guilds and the production company is not something that can be negotiated. It’s a form agreement that was negotiated by the studios and the indies are stuck with it. It’s a take it or leave it situation. The production company is signing on to the same form of agreement applicable to the studios and every other production company, depending upon the particular circumstances of the production. That said, there can be some negotiation on the amount of the deposit and collateral required to secure payments to the guild and its members. The registration process generally takes two to four weeks.
Other than SAG on a film shooting outside the United States (known as GR1), the guilds, generally, require a lien on the film to assure that their members receive the payments that are due to them, including residuals and PH&W. If payments are not timely made, the guild can foreclose on the film, just like a bank would if payments are not made on a loan. The guilds may also require deposits, personal guarantees, collection accounts, or other collateral to bolster the guild’s payment security, both to their members for the required salaries, as well as the payment of residuals and PH&W. This requirement for security, liens and/or personal guarantees, probably more than any other fact, is the most troubling for companies based outside the United States who are trying to do business with the guilds. While there is no way around the liens, deposits for salaries and pension contributions, a collection account at one of the recognized companies can help eliminate the need for corporate or personal guarantees relative to the ongoing payment of residuals.
In conclusion, a film cannot succeed in the world marketplace without particularly, well known actors. But employing that well-known actor, writer or director usually requires the production to become a signatory with SAG, DGA and/or WGA, as applicable. While there are benefits to employing such talent, the burdens of becoming a signatory company can be extensive, both in the obvious, like minimum salaries, and the unobvious, like residuals and working rules. The “Catch 22” of having to become a signatory in order to employ that well known writer, director or actor means being smart about the process, and understanding all aspects of what is involved.
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Reprinted with permission by The Business of Film
Law Offices of GREG S. BERNSTEIN, A Professional
Corporation
9601 Wilshire Boulevard, Suite 240, Beverly Hills,
California
90210-5288.
Phone: (310) 247-2790; Fax: (310) 247-2791; Internet: www.thefilmlaw.com
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