In this article, we will focus on a specific part of financial compensation in connection with film production, being the payment of residuals to guild members. We will discuss specifically the traditional US guilds.
We will have a look at the mechanism of calculation and payment of residuals to actors, directors, and screenwriters, from the angle of the collection account manager.
US Guild Members and Obligation to pay Residuals
Creative workers are often organized in unions or guilds, who represent the collective interests of their members for labor-related matters. The same happens in the audiovisual industry.
Actors, directors, and screenwriters in the United States can be members of respectively the Screen Actors Guild (SAG-AFTRA), the Directors Guild of America (DGA), and the Writers Guild of America(WGA). These three are together often considered the traditional Guilds in Hollywood.
The Guilds represent the collective interests of respectively actors, directors, and screenwriters, which are the Guild Members, on all kind of labor related matters.
Payment of Residuals is one of such matters. Residuals include all additional compensation, including benefit plan contributions, that is or may become due under any applicable collective bargaining agreement when a film is exhibited, distributed, or otherwise exploited, domestically and/or internationally, other than for theatrical exploitation.
Residuals are payable on royalty payments under the distribution agreements for the film. These payments include advances and/or minimum guarantees, overages paidby distributors.
The producer whohires a Guild Member for a film production, is obliged to abide by the Basic Agreements. The basic agreements are collective bargaining agreements. Under the Basic Agreements, the producer has to comply with a severalobligations vis-à-vis the Guild Members.
In accordance with the Basic Agreements, the Guild Members are entitled to receive Residuals when they are employed in a film production.
The Guilds and the Security Interest
When a producer hires a Guild Member, customarily the producer of the film and the applicable Guild sign a Security Agreement.
Pursuant to the Security Agreement, the producer assigns to the Guild, by way of a security interest, among other things, the benefit of the proceeds of the exploitation, exhibition, or distribution of the film to secure the obligations of the producer to the Guilds under the Basic Agreements.
This means that the Guild obtains a security interest in the revenues of the film, to secure payment of Residuals by or on behalf of the producer to the Guild Members.
Paying Residuals up front, or from the Film’s Revenues
Generally speaking, there are two options for Producers to commit to payment ofResiduals to the Guild Members involved in the production:
- Residuals can be paid up front, out of the budget, or;
- Deferred, whereby the residuals become payable out of the revenues generated by domestic and international distribution of the film.
Managing Revenues with a Collection Account
For all practical purposes and not in the last place, to reduce budget and defer financial obligations, it is customary for independent film producers to pay Residuals out of revenues.
If Residuals are payable out of revenues, the Guilds will require a Collection Account to be set up for the film.
A Collection Account is a bank account opened in the name of a trusted third party, the so-called Collection Account Manager or simply the CAM. The CAM receives into the Collection Account the revenues generated by the worldwide exploitation of the film from the distributors on behalf of the producer and the beneficiaries of the film.
To make sure distributors pay to the Collection Account, the sales agent or producer (or, for that matter, whoever sells the distribution rights and controls the distribution agreements) will have to include the details of the Collection Account in the distribution agreements and the invoices sent to the distributors, or by means of sending a notice of assignment to the distributors advising them of the existence of a Collection Account for the film.
The producer, the Guilds, the sales agent, and any other party or parties with a major financial interest in the film (like financiers, investors, or talent), will together with the CAM enter into a collection account management agreement (CAM Agreement or CAMA).
The Recoupment Schedule and Residuals
The CAMA amongst others stipulates the rights and obligations of the CAM, the producer, and other parties vis-à-vis the Guilds, in connection with payment of Residuals, and includes the Recoupment Schedule for the film.
The Recoupment Schedule sets forth in which manner and order the revenues of the film are allocated and disbursed. It ensures that all beneficiaries, being all parties or persons who are entitled to receive a part of the revenues, including producers, sales agents, financiers, investors, talent, profit participants, and also the Guilds, actually receive their share.
Residuals are payable off the top in the Recoupment Schedule and are second only to payment of fees and expenses to the CAM.
Calculation and Payment of Residuals
The Guilds will also require the producer to hire a Payroll House and to enter into a Payroll House Agreement.
The Payroll House is an independent service provider specialized in the calculation of Residuals.
The Payroll House will gather all sorts of information related to the involvement of the Guild Members in the film, the distribution deals, the media allocation (between, amongst others, the following windows: theatrical, video, pay television, free television, and SVOD) set forth in the distribution agreements and in the CAM Agreement, the actual revenues received, and the existence of any Assumption Agreements.
Under an Assumption Agreement, the distributor for a particular distribution deal, provided that such distributor can be considered by the Guilds as a so-called qualified distributor, assumes payment of Residuals directly to the Guilds.
Under the CAMA, the CAM will create a reserve off the top in the Recoupment Schedule to hold funds for payment of Residuals. Such reserve is commonly referred to as the Residuals-Set-Aside. The CAM will set aside from every dollar received in the Collection Account, a standard percentage for payment of Residuals.
Subsequently, the Payroll House will calculate actual Residuals payable and will periodically send invoices to the CAM for the exact amounts of Residuals payable, and the CAM will pay out of the Residual-Set-Aside, the amounts due, to the Payroll House.
If there is a surplus in the Residual-Set-Aside after payment to the Payroll House, such surplus will be liquidated by the CAM in accordance with the remainder of the Recoupment Schedule.
Finally, once the Payroll House receives a lump sum Residuals payment from the CAM, the Payroll House will cut the checks and make payments to the individual Guild Members.
It is essential for independent film producers to have a basic understanding of how the calculation and payment of Residuals work.
For those productions with Guild Members involved, producers should take into account the payment of Residuals for financing modeling, when putting together the Recoupment Schedule, and when they set up revenue management for the film.
Finally, it is recommendable for producers to establish an early working relationship with both the CAM and the Payroll House, to make sure that once the distribution of the film starts and revenues are being generated, calculation and payment of Residuals will be a smooth process.