On Monday, Gov. Gavin Newsom signed a bill supported by labor unions that protects loan-out companies, which faced scrutiny from a state audit earlier this year.

Actors, writers, and crew members are typically not considered employees of major studios. Instead, they are paid through their personal service companies, which “lend” their services to the studios.

That set-up, which has existed for decades, allows creatives to deduct agent and manager commissions and other expenses from their income tax. But in May, the arrangement came into question when the California Employment Development Department conducted an audit of Cast & Crew, one of the major payroll services companies in the industry.

During the COVID-19 pandemic, the EDD encountered a surge in unemployment claims, particularly from entertainment workers who faced industry-wide shutdowns.

In response, the agency conducted audits to verify whether loan-out companies had properly paid the payroll taxes that fund the unemployment insurance system, as mandated by law.

Cast & Crew issues payments to loan-out companies on behalf of their clients, the studios. During the audit, the EDD argued that Cast & Crew — not the loan-outs — should have been responsible for paying the payroll taxes.

Cast & Crew informed the Hollywood unions in May that the EDD was effectively ignoring the loan-out structure, and treating workers as employees of Cast & Crew. The unions in turn warned their members that the EDD was aiming to “fundamentally change” the way the industry operates.

This sparked concerns, prompting the EDD to clarify that they were “not prohibiting” loan outs, but were striving to ensure that all taxes were collected.

Newsom’s team and industry representatives then spent the following months working diligently to find a solution.

Sen. Anthony Portantino, D-Burbank, a strong supporter of the industry in Sacramento, introduced and passed a bill, SB 422, in the final days of the legislative session in August. Newsom signed the bill on Monday, the final day to take action on legislation.

The bill officially acknowledges the loan-out structure in state law. Additionally, the bill clarifies that loan-out companies, not payroll services, are responsible for paying payroll taxes.

“This is a beneficial outcome for everyone,” Portantino remarked in an interview. “We required legislation to clarify the unique nature of these situations, to define responsibilities, and to ensure that EDD handles them appropriately.”

To assist in tax collection, the bill mandates that payroll companies, such as Cast & Crew, submit quarterly reports to the EDD regarding payments to loan-outs, beginning in 2026.

In a statement backing the bill, a coalition of Hollywood unions stated that it would “prevent any disruption of our industry at a time when we face significant challenges and widespread unemployment among our members.”

Cast & Crew executives informed Variety in May that the audit impacted approximately 2,000 loan-out companies. At that time, Cast & Crew was disputing the EDD's decision in a private hearing before an administrative law judge.

Notices informing the 2,000 companies of the audit were expected to be sent out. However, this action was halted as stakeholders reached a legislative solution to the issue.