The Hamilton Ave Journal 08.16.08: Volume 1 – Issue 47

And where is Hamilton Ave? That is the location of the WWE Production Studio in Stamford, CT, and thus the most powerful place in the wrestling world. Besides, The East Main Street Journal just does not have the right ring to it.

Who am I? I am JP Prag: consultant, entrepreneur, businessman, journalist, and wrestling fan.

Now, ring the bell because the market is open.

LEAD STORY: Wrestlers to become employees?

News broke late last week that hidden in the WWE’s Q2 results was a new lawsuit filed against the company by Scott Levy (AKA Raven) and several other unnamed wrestlers. Many readers expressed great interest in the Journal’s take on this turn of events and other writers on the site have held off for the Journal’s perspective.

Although little details are known about the case at this time, Mr. Levy, et al are claiming the WWE erroneously classified them as “independent contractors” instead of “employees”. The WWE contracts talent as “independent contractors” to save a large amount of money. With Employees, a company is required to, according to the IRS:

[W]ithhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

That means that for several decades the WWE has not paid unemployment, disability, and workman’s compensation taxes because those are not needed for independent contractors. As Eric Bischoff said in his most recent blog:

If, as a result of this recent lawsuit, the IRS determines that WWE’s contract talent are employees and NOT independent contractors, that means that in addition to many other expenses relating to the cost of accounting changes, WWE will be required to contribute approximately 7.5% of the salaries paid to its newly minted talent/employees to OASDI (Old Age and Survivors Disability Insurance).

But what if, the IRS grabs their calculators, calendars, and teams of lawyers looking for press and attention and decides to go back 3, 5, 10 years or whatever the statute of limitations is and calculates monies due plus penalties and interest on the fees paid to former employees?

That is one of the main questions: how far would the IRS go? If on average a wrestler makes $200,000 a year, that means that $15,000 would have to be paid by the WWE in taxes. Multiply that times 80 wrestlers and the total comes out to $1.2 million dollars. That is less than 1/4th of a percentage point of the WWE’s top line for the year, so that is not a major issue. But should they decide to go back ten years, that total becomes $12 million, a nice chunk of change.

But how does that help the former wrestlers doing the suing? Helping the government get an extra few million dollars hardly seems worth the time and effort. Some people have assumed that if they were employees, the WWE would have to give them benefits like health insurance, dental, 401K, stock options, etc…. This is not the case as all of those are optional benefits the company has the right to negotiate or not even put on the table.

Sure, being an employee gives you a lower tax rate (7.5% FICA compared to 15%), so that will result in a bit of refund but hardly a long term impact. No, the large play here is two things: workmen’s compensation/disability and unemployment.

These wrestlers are not the best off financially, otherwise they would not be risking being ostracized from the industry and its biggest employer. But, if they were retro-actively classified as employees, many of them would receive unemployment benefits from when they were cut and other would be on disability for injuries they received while working for the WWE or any of the companies the WWE now owns. Do not forget that the WWE has essentially bought out all of the assets—and liabilities!—of the vast majority of their wrestling competition. They essentially own the history of the business and the responsibilities that go with it.

Should Mr. Levy and his cohorts be successful, they would be in line for some decent government benefits as well as a refund on back taxes already paid. For many of them, even a small amount of regular pay would be extremely beneficial; most especially those who are partially disability or are living with injuries that occurred while in the WWE.

So how does one determine if they are an employee? While Mr. Bischoff tried to use the 17-step test from 1992, the IRS actually uses a 3-prong test nowadays. Should the employer/worker relationship fall into just one of these categories that worker can easily be called an “employee”. Those categories are, according to the IRS:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Let’s break these down one at a time and answer some of the IRS’s sub-questions (IRS questions/comments in italics):

Behavioral

Types of Instructions Given

The WWE definitely controls where and when their contractors work. They decide what shows they are on and not and if they can take outside bookings. They also control the specific tasks (how a match is laid out, what to say in a promo, etc…) and the sequence of tasks. They also provide much of the supplies, such as outfits and work areas.

Degree of Instruction

Degree of Instruction means that the more detailed the instructions, the more control the business exercises over the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

In the past, the WWE would have fallen into the “less-detailed” category, but in recent years that has changed. Writers, producers, agents, managers, etc… all tell wrestlers how to specifically perform their jobs. Having a development system that “trains” the wrestlers in the style and method to work also controls how they are instructed.

Evaluation System

If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.

WWE performers are given feedback on their matches, promos, merchandise, backstage behavior, and more. There is no end-result to measure against since it is on-going work.

Training

If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a particular way. This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods.

FCW is enough proof of this one.

Financial Control

Significant investment

An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

WWE workers typically spend a lot of their own money to get where they are and have to pay their own way for training, vitamins, doctors, etc… that could all be considered their “tools”. Then again, the WWE provides everything else from the working environment to e-mail addresses.

Unreimbursed expenses

Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.

Generally, wrestlers pay their own way, although the WWE will book hotels and flights for them. Still, many wrestlers have in their contracts these items as perks. But, even as employee the wrestlers could still pay for flights, hotels, and such and write it off at the end of the year.

Opportunity for profit or loss

The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor.

In the WWE, workers have a downside guarantee but can still lose out of their expenses are too high.

Services available to the market

An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.

This is absolutely not possible. Workers have in their contract clauses that do not allow them to even speak to competition while they are under contract to the WWE. And even after release, most of the workers are not available for 90-days due to extended no-compete clauses.

Method of payment

An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.

Even while injured, WWE workers have a downside guarantee. So although they are providing so services, these people are still paid.

Type of Relationship

Written Contracts

Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.

Therefore, the contracts are meaningless in face of other evidence.

Employee Benefits

Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.

And this is the crux of the lawsuit.

Permanency of the Relationship

If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.

Contracts generally have determined lengths of time (3-5 years), but most expect to just negotiate new contracts and continue the relationship.

Services Provided as Key Activity of the Business

If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.

The WWE makes the vast majority of their revenue off of the work of the wrestlers, therefore the activity of the workers would be key to the business.

Overall, the evidence is extremely in favor of Mr. Levy and company. Most likely, the WWE will try to delay this case as much as possible using legal tactics (most likely 3-5 years), but will lose in the end. The other option for the WWE is to settle out of court with all of the individuals. But even if they do that, the case may match the attention of the IRS so much that they will still have to change how they do business.

Right now, the WWE already pays a 40% tax rate, but from 37% last year. The added cost of having employees will take them much higher and pick away at the bottom line even more. Still, the WWE will not be hurt by this since they are still profitable and are sitting on a pile of cash. It will force them to more cash conscious in the long run, but that is not a bad thing for investors and management.

Given the evidence, the Journal is in full-favor of having wrestling employees that are specifically contracted to organizations be classified as employees. This will results in social benefits and long-term saving options that they did not have otherwise. The early death and suicide rate among wrestlers is higher than most other professions, and anything that can help in the long run is beneficial. Although it will still be up to the individual to have a sensible life and save money, at least this way they will be treated with all of the benefits considering their sacrifices.

Those that do not sign with WWE, TNA, or any other organization can continue to operate as independent contractors. There is no danger to smaller independents and therefore makes sense for the longevity of the business.

WWE Q2 Financial Results Supplement

As mentioned by WWE CEO Linda McMahon last week, the WWE would be looking into ways to cut SG&A expenses. As usual, the immediate response was to lay off more wrestlers who were not in high use or who creative had “nothing for”. On the cut this week were: