This is part of a series of book excerpts from Independent Filmmaking, The Law & Business Guide for Financing, Shooting & Distributing Independent & Digital Films designed as an introduction to the many legal issues involved in the filmmaking process.
Many independent films are created as professional stepping-stones, providing concrete evidence of one’s professional skills, and creating the first paid work experience. As a result, even modest payments become very important for many of the participants. Nonetheless, as mentioned earlier, truly modest payment raises employment law concerns because of minimum wage laws and other employment obligations.
For most participants in the independent film, however, these legal concerns take second place to the psychological and professional importance of working rather than volunteering on the film project. This need should be respected.
The basic payment system for most films is a flat fee. The cast members and crewmembers involved in the entire production are guaranteed a certain amount of money for the work. Payments of the fee are typically apportioned based on the planned number of weeks for the production. Except for those production members actively involved in pre-production, payments do not begin until principal photography. Some small payment can be made during the rehearsal period, if it is extensive.
These norms for payments track the traditional structure for most filmmaking, which assumes little rehearsal and tightly scheduled shoots. For independent filmmakers, these customs need not be followed. To the extent they are varied, the payment systems should also be varied. For example, if the filmmaker adopts a theatre-model for pre-production, then extensive rehearsals of the entire script may be done over a period of four to six weeks. The filming can then take place over a period of a few days rather than weeks. This model works best in a film that uses few sets and camera set-ups. A hand-held camera walking with the cast through the sets as the scenes unfold needs to be well choreographed, but once staged, the natural flow of the action seems organic to the film. For such a shoot, the rehearsals become integral to the production process, while the length of the principal photography is substantially reduced. They timing of payments must be varied to reflect these choices.
In addition to salaries, the cast members and crewmembers may be paid per diems. These are modest payments based on the number of days worked. With the possible exception of the above the line participants,1 the per diems are the same amount for everyone on the film. For non-union productions, per diems are not required, but often supplement craft services (food service on the set) or assist with significant travel to the shooting location. The amount is intended to cover food, gas, and lodging (if the shoot is away from the production center). Even if the entire salary is deferred, payments of per diems often help ensure that the cast and crew can afford the gas to get to the set.
One very effective way of extending the amount of money raised to make the film is to defer expenses. Theoretically, if all the costs were deferred, then the film could be produced for no money, and all budget expenses would be paid from the film’s future revenues. While this is not typically possible for all expenses, participants in the film project are often willing to defer all or part of their salaries. The true deferral simply puts the payments off until the film begins to receive revenues. Since the salaries are budgeted costs, they must be paid before any capital is returned to the investors or profits are paid to any parties.
A common source of confusion is the order of deferral payments. If the film is sold for an amount greater than the total deferred expenses outstanding, then everything is paid simultaneously. If, however, money trickles in, then it is important that the priority of payments be clearly spelled out in the employment contract or some other agreement incorporated into the employment agreement by reference.
First, each class of deferments should be treated “pro rata” or in proportion. This means that all salary deferrals for all participants are pooled together. If the film company receives $5,000 to be applied to the salaries, then the $5,000 would be distributed to all the participants on a dollar for dollar basis. If the total pool was $50,000 in deferrals, then each participant would receive a payment of ten percent of the amount deferred. The filmmaker could choose to pay the deferrals on the basis of the number of participants rather than the amount owed, but this would mean that some participants were paid in full before others. Either approach works so long as the system used is applied consistently and agreed upon in advance.
Second, any other classes of payments should also be spelled out. For example, it may be that all expenses, including equipment leases, credit card expenditures, invoices, etc., must be paid in full before any of the deferrals are paid. If this includes ongoing expenses like office rent, then that must also be specified. Theoretically, all costs other than the deferrals should have been covered by the capital investment, but in the frequent situation where there are budget overruns or not enough capital, then the agreement should state whether the credit cards are paid before or after the deferrals. In addition, the producer’s fee may be treated as a separate payment, to be made either before or after the other deferrals, depending on the needs of the producer.
Finally, the filmmaker may be receiving payment for many different aspects of the project. To the extent he is wearing different hats (director, actors, screenwriter, editor, producer, etc.) the tasks that entitle the filmmaker to additional compensation should also be clearly identified in advance. The filmmaker may provide that his producer’s fee is deferred until after all the other deferrals are paid in full, but he will still be entitled to his deferred fee as a cast member and as the screenwriter. To avoid bad feelings and legal problems, such a structure must be quite explicit in the budget and contracts. So long as the system selected is clear, fewer problems will arise later.
The other source of payment to the film participants flows from profit participation of the film. Studio films are notorious for definitions of profit participation twenty or more pages in length that make it almost unheard of for even the greatest blockbuster to actually turn a profit. For independent films, however, the successful project will return a profit that is not hidden in the studio overhead or other charges to the film.
Profit must still be defined. It comes after the expenses are paid in full, the entire investment is returned to the investors (often at 110-125% of the amount invested), and a reserve fund is made for ongoing operations of the film company. The remainder of income should be profit. Except as provided in the profit participation agreements, all profits belong to the film company and those, in turn, belong to the shareholders or members of the company. As a result, profit participation arrangements must be carefully specified in the offering documents for the film company.
Filmmakers may find it helpful to create a profit participation pool of some percentage of the profits, anywhere from ten to twenty-five percent. In this way, the investors can be told that ten percent of all profits are apportioned among the members of the cast and crew. That number will not change even though the exact participation within the pool may continue to fluctuate as participation points are allocated for cast and crew during negotiations. The filmmaker then designates that the pool has a certain number of points, say 100 or 1,000. These points are then incorporated in the employment agreement. The points not allocated can be returned to the investors, retained by the filmmaker or paid pro rata to the pool. Any of the options works, so long as the choice is made in writing as part of the initial employment contracts.
Although even more contingent than deferred salaries, profit participation may be the most valuable aspect of the compensation package. For those rare blockbuster films, the profit participation points can be exceptional income. The contract, therefore, should also be very clear about when they are earned — upon successful completion of the employment task rather than upon signing the employment contract. If an actor leaves the film because a paying job is suddenly available, that actor should not remain a profit participant. Instead, if the director can negotiate to shoot sufficient coverage to work around the actor in exchange for keeping some of the deferrals and profit participation, the contract provides the filmmaker with negotiating leverage.
Each union requires that a guaranteed minimum amount be paid as compensation, representing salaries and per diems. The unions require minimums, allowing their members to negotiate larger amounts and profit or revenue participation above those minimums. The unions will not allow deferred compensation.
Despite the basic rigidity of the union costs, there is some flexibility. SAG, for example, has low budget contracts that significantly reduce the minimum salary requirements for low budget films and allow actors to work without compensation on bona fide student projects.2 There are a number of different low budget agreements which vary primarily by the size of the budget, but also by the limitations imposed on distribution. As a result, some of these contracts may be more restrictive than the filmmaker wishes to use.
One technique that avoids this problem is to pay the union members their full wages, including all pension and health costs. The participants, in turn, agree to invest their entire net salary in the film. Such an arrangement must be established early in the negotiations, and the union participants should receive both generous profit participation in their compensation package as well as the same return as other cash investors. Given that many actors working on low-budget films are more concerned with remaining eligible for health benefits, financial concessions that protect those minimums are treated favorably. By reinvesting the actor’s net income, all financial union obligations are met, the cast members do not risk jeopardizing their union status by working on a non-union shoot, the professional quality of the production is generally improved, and the resources needed to make the film are not substantially reduced. Finally, as members of the production company, the participants should be sufficiently involved in the production to avoid most problems with the sale of securities to them.
* Jon Garon is admitted in New Hampshire, California and Minnesota.
1. Above the line participants are the stars and key personnel who are separately identified individually in the production budget.
2. Available at http://sag.org/.