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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
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Greg S. Bernstein |
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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
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
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
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
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
For the WGA and DGA, whether
the services of the writer or director, respectively, are being performed in or
outside of the
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
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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Greg S. Bernstein is an entertainment lawyer specializing in the finance and distribution of indie films. Each year Mr. Bernstein provides legal and/or producer representative services on dozens of indie films. Through his many years of experience in the industry, he has developed particular insights into the nature of the indie film business. For almost 15 years, Mr. Bernstein has made this insight available to students at UCLA Extension in a course he teaches called “From Packaging to Delivery” (taught each spring and fall). His entertainment industry clients include major and independent motion picture producers, distributors, sales agents, production companies, and financiers. For more info and copies of articles: www.thefilmlaw.com
Reprinted with permission by The Business of Film
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