The [Real] Cost Of Circumvention

When you get to the 'dance,' you ought to 'dance' with the one that brought you.

What is Circumvention?

Circumvention (To circumvent) results from [1] a freelance contractor or white-label supplier's intentional or unintentional action of bypassing his contracting client, and directly engaging or soliciting the end-client for the purpose of securing employment; [2] or allowing the end-client to bypass his supplier for the purpose of soliciting the freelance contractor's services directly, thereby "circumventing the individual or company that facilitated the opportunity.

So What Does That Mean?

When an AVL technician, engineer or other stagecraft professional is hired by a third party, such as staffing agency, and introduced to an employer like a production company, who then purposefully and deceptively solicits the production company for work, with the intention of avoiding or circumventing the staffing agency jobs, all of which is unknown to the staffing agent. Likewise, when the employer such as a production company uses contact info provided by the staffing agency to solicit the stagecraft professional directly, with the purposeful and deceitful intention of offering the stagehand work as a freelancer without the staffing agency's knowledge or consent.

What's Wrong With That?

Although the practice of circumventing one's client has been around for as long as there have been sales agents or agencies to broker goods and services, in the production management and event crewing business, we’ve noticed the trend has grown sharply in recent years. We've also witnessed an apparent negative impact for all stakeholders involved, not just the broker or agent. Frankly, it's gotten so prevalent and widespread that some aren't even denying or disguising their actions, as has been done in the past.  

Therefore, we wanted to share a little insight into what the behaviors do to the stakeholders involved and why this behavior has a long term negative effect on the individuals, the companies and the industry itself. 

Circumventing one's client and going directly to his client is widely considered unethical in most industries. Now, this shouldn't be confused with Non-Competes, whereas Circumvention is more about the improper use of trade secrets while actively employed. I'm personally not a fan of Non-Competes because I believe healthy competition is vital to the health industry. But absconding with a client's hard-earned lead is not competition. Most would consider it theft. Certainly, there are reasons to go around or go direct, such as the broker has acted in bad faith or illegally.

But legitimate reasons are specific and do not lend to the negative impact on morale or quality of service that overt circumvention can have.

For the most part, the overall event production community, and the companies that hire crew through crewing companies understand and respect the industry ethics surrounding their relationship with each other, as well as their union brothers. Sadly, sometimes an innocent stagehand can be adversely affected if the hiring company puts pressure on them, while they are trying to be noble. The crewperson may actually run the risk of losing the client either way [through the labor company and direct]. In short, it’s understood that stagehands are expected to protect the relationship between the end-client [the hiring company also referred to as Employers] and the contractor's client [the staffing agency, broker, labor company or independent labor coordinator].

Important to note: The Employer is NOT the contractor's client. The contractor's client is the staffing company or entity that booked him on the gig. That end-client/employer is that company's client, regardless of whether it's a new opportunity or a long-time relationship. The introduction and meeting were facilitated by the company and the contractor would not have the relationship had it not been facilitated by the company.

Still Doesn't Make Sense?

Imagine when we were kids, and we're all out on the playground, and you just happen to be an amazing friend that was generous and selfless in giving. You liked to see your friends happy, so every day you brought some brand new toy, never been touched, nothing broke off, everything perfect. And there was this one kid that every day, he would take the toy, push you down, and walk away laughing. But you being the amazing you that you are, keep bringing a new toy, every day, believing that the other boy must realize by now that his actions were selfish and destructive. He must see the folly of his ways now. This time, maybe he'll bring some of his toys, and we'll build a toy empire... 

But every day is much like the last one. The new toy is stripped away, you are pushed to the ground, your friends won't help you out and instead just laugh at you while, astonishingly enough, play with the other kid and with your toys. You may think this scenario is a bit far fetched or not aligned. Well, consider, just our company spent thousands on recruiting and onboarding last year and tripled that on marketing last year. Add to it the investment in Operations and even Service Recovery.

With all that investment, as well as the time spent, the resources allocated, well certainly we earned the right to monetize the relationships. So wouldn't it be unjust for a client to hire our company just long enough to engage our crew, in turn saving himself the time, money and resources necessary to recruit, vet, onboard, train, solicit and bring into compliance? Just another story of a schoolyard bully.

So You Don't Trust Your Crew?

No, not at all. As I stated earlier, most understand the ethics and compliance. And not all direct hires are considered circumvention. On occasion, the chemistry between a technician and hiring company is so strong that the hiring company may desire to add them to their regular staff. At that point, the etiquette generally is that the hiring company will approach the crewing company and announce their intention to hire the technician as a regular employee, an action the crewing company does not discourage. In fact, it’s always an honor, as it’s a reflection of the respect that the hiring company has for its crew. For us, it’s always a happy moment when we get to call the crew member and tell them about the offer.

How Does It Negatively Impact Stakeholders?

So I'll assume you accept that the practice is unacceptable for the time being, and move on. Admittedly, if the only negative effects on the industry were those born by the third party, I'd probably avoid writing this. In fact, to avoid sounding like a whiner, I have avoided writing this for some time now. But with recent changes to legislation and the increasingly watchful eye of regulators and revenue agencies, it's important that every side understands how they are possibly influencing the future.

Negative Impact On Crewing Companies

Every year, crewing companies invest a great deal of time and resources into the overall commercial operations of the company. A significant portion of the earned revenue is paid directly to the crew members working on the jobs. Another large portion is withheld for applicable taxes and a portion is set aside for employer taxes, as required.

From the remaining balance, the gross profit, that revenue is used to support business costs including office staff salaries, lease and utilities, and other operating expenses. It also supports our marketing expenses, cost of sales, expendables & consumables, recruiting efforts, sales expenses, and insurance premiums. Add to that the rising costs associated with regulatory and legal compliance and the rest of the various taxes, licenses, and permits.

The net profit from furnishing freelance or temporary employees as a service is not as much as some might believe. That doesn't include mistakes in payables or receivables or the cost of service recovery when tech fails to deliver and we have to refund a client yet still bear the cost of labor.

Therefore, we depend on the revenue that we earn from our clients, to cover the projected expenses and manage the cash flow. For each technician or engineer we have on our roster, there is a cost associated with their marketing and soliciting them, and we expect to be able to recoup that investment.

Even more so when our investment is what provided that crew member to hone their skills, to begin with. Many times, we'll get a stagehand when they are still green. By the time they learned enough and have the experience to charge higher rates, we've invested quite a bit into them and looking forward to reaping the reward with them.

These are among the primary ways that circumvention impacts labor companies' inability to effectively monetize its investment.

The Net Effect

Next, we share some of the direct and indirect impacts on stagehands and employers.

Crew Morale

Morale is always impacted when a community is given a set of rules and sees a smaller group openly defy those rules without noticeable repercussions. As they start to feel slighted or unbalanced, it will result in a further degrading of your reputation, the fueling of the surreptitious rumor mill and possibly even a bit of a revolt if more stagehands follow suit. The end result will be a crew that constantly eyes each other with suspicion on both sides of the tech table.

Reputation

It doesn't take long to earn a reputation for being one that goes around your contact to go direct. It's a small industry and we all seem to know each other or of each other. And today's communication makes booking labor nationally even easier. Once you start going around your client's back - directly to their clients, you'll find that other clients and even stagehands will hesitate to trust you with their clients.

Rising Costs

As discussed, the cost of recruiting, operations, sales, marketing, accounting, and compliance are fixed costs and a large percentage of the annual earnings. Therefore, when sales are impacted and we lose revenue, our only recourse is to raise prices, but not necessarily in line with increased service. When prices exceed the equilibrium point of what the market will bear, we start to lose more sales and the price to value ratio tips beyond our ability to stabilize the business. End of story.

Lower Rates & Benefits

Okay, the same scenario, but we don't want to give up without a fight. Since we can't raise prices, but we're still not profitable, our only other recourse is to cut costs. Since prices are still at the top of its equilibrium point, we can't cut services without pushback from the client, so we have to cut crew rates, the single largest line item in the budget. Now we're offering lower rates, with cranky and untrusting clients. And we're back to poor morale - and eventually.,.. yes, you guessed it... End of story.

Future Opportunity

But long before those two scenarios play through, the first thing you'll feel is fewer jobs and the jobs you are offered aren't the premium ones. Now, you might say, "Hey, don't punish me. I stayed loyal.' Yes, perhaps that's true, but it's not personal. You're getting crappier jobs and less of them because there just aren't any jobs to offer you. Your client stealing colleagues tied those up. At this point, who cares about Karma and the fact that you did it all right. You're broke, you're having a hard time finding legitimate work and not it's End of story for you.

So How Does This Affect The Industry

Okay, admittedly those are extreme scenarios but don't be fooled. They are very realistic. But I know what you're thinking, "Maybe crewing companies are a thing of the past and this is Darwinism eating up the weak?"

Yeah...not quite. What we haven't discussed yet is the legality of what these wayward colleagues are doing. Right now, in the US, and especially in California, legal battles are being fought that will change the face of how we crew shows. Regardless of the direction these battles fall, the process is already in motion as a regulating and revenue agencies all try to assert their standards and muddy the waters.

In the end, no matter how we are classified, legislation is going through that will make crewing companies more important than ever. Frankly, many of our California production company brothers are breaking the law every day with their hiring practices and payments to stagehands.

Don't believe me, research for yourself about independent contractor compliance and you'll be shocked to find out that even the most legitimate independent contractor, the high-value V1's, L1s and A1s cannot be hired in California legally without following California's Wage Orders, addressing the length of your workday, overtime, meals and breaks, and even reimbursable expenses. They also don't realize that if they hire an IC that doesn't have workers comp insurance, even if they are sole proprietors and exempt from having to cover themselves, the employer must list them on their policy and pay the appropriate percentage of their earnings - and if they don't, then liability can be extended to the end-client.

Confused?

But this is what we do and why you might not think we earn our paychecks, sitting in our soft chairs with a clean shirt on. But labor coordinators and crewing specialists have a hard job - that's getting guys to work - facing clients that prefer not to pay legit rates, while you guys bitch and whine. We have to hear it from both sides. But hey, we love the guys, and that's why we do it. As I hope you realize now... We certainly aren't getting rich from it.

I hope you'll have a better understanding of why we make you sign Non-Circumvent Agreements and why we're forced to enforce them. We're just trying to keep everyone happy and well-fed.

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For additional information or question, you may contact:

Brandon Cruz brandon@cruz-xp.com

Please note, this article was produced as informative and should not be used for the purpose of determining compliance or basis for legal action or response. If you have a legal or tax question, you should consult a licensed attorney or certified public accounting professional. 

• California Supreme Court Decision: Dynamex West v. S.C. (Lee)

• US Dept of Labor: Misclassification of Labor

• US 11th Circuit Coard Ruling: Crew One

• Workers Compensation Requirement

• California Wage Orders

• Determining Employee Status

• The Real Cost of Labor