In Cencast Services, L.P. v. United States, 729 F.3d 1352 (Fed. Cir. 2013), here, the Federal Circuit (Judge Dyk) held that
1. "Cencast's liability for employment taxes under the Federal Unemployment Tax Act ('FUTA') and the Federal Insurance Contribution Act ('FICA') is determined by reference to the employees' "employment" relationships with the common law employers for which Cencast remits taxes (i.e., the production companies), and that the common law employers cannot decrease their liability by retaining entities such as Cencast to actually make the wage payments to the employees."
2. Cencast is barred by the doctrine of variance from raising a theory in its refund suit not raised in its claim for refund. The new argument was that some of the workers were independent contractors rather than employees.
First, it is useful to note the role served by Cencast and the other companies involved in the suit because it offers a small window into the movie production business. Here is the background from the opinion:
The evolution of the motion picture and television industries over the past century has resulted in this tax case concerning FUTA and FICA tax liability. In the early part of the twentieth century, motion picture productions were primarily controlled by large, major motion picture and television studios, and production workers enjoyed long-term, continuous employment relationships with those studios. These studios paid wages to these employees, and, as the common law employers of these workers, were liable for employment taxes on those wages, and remitted those taxes directly to the Internal Revenue Service ("IRS").
Since the late 1970s, however, many smaller production companies have emerged and have created movies and television programs independently from the large studios. As a result of this trend, many production workers are now employed by several different production companies during the course of a year, rather than by a single large production studio. Thus, in any given year, a given production worker might earn wages from several production companies, all of whom (being common law employers) would be individually liable for employment taxes on those wages. The complex web of production companies and production workers that evolved made administration of payroll, benefits, collective bargaining agreements, and taxes increasingly difficult.
Entities like Cencast, which are also known as payroll service companies ("Service Companies"), emerged to address these problems. Over the last twenty-five years, virtually all independent production companies have contracted with Service Companies for payroll and related services. Cencast and other Service Companies compute and pay compensation to production workers, report and pay compensation to multi-employer pension and benefit funds, provide post-production financial reporting, and pay employment taxes to the IRS.
Although they contract with the Service Companies, production companies both hire and supervise the individual production workers—as they had done in the pre-Service Company era. In general, Cencast and other Service Companies have no role in selecting or supervising production workers. The only change is that entities like Cencast—and not the production companies—now pay the production workers and administer the production companies' payroll and employment tax obligations. It is undisputed in this case that Cencast is not the common law employer of production workers.
