Pay or Play

Question: Dear Alan: I was recently hired by a talent agency in Los Angeles as an Assistant to an agent. The offer letter I received says that it’s for one year, and is “Pay or Play.” Can you tell me what that means?

Randy
Altadena, California

Answer: Dear Randy: A “Pay or Play” provision is common in the sports, entertainment and media industries, and is becoming more common elsewhere. Even in those industries where it is common, it is often misunderstood.

a. “Pay or Play” is a commitment by the employer to employ and pay the employee for a period of time, but allows the employer to decide, part way through that period of time, to just pay the salary and benefits, but not actually use the employee’s services. Imagine this example: an employer agrees to employ an employee for one year, but retains the right to stop doing so at any time, so long as the employer continues to pay the employee’s salary, and continue providing the employee his or her benefits, until the year is up.

Incidentally, under most “Pay or Play provisions, the employer retains the right to resume using the employee’s services at a future date during the agreed period of the contract, if it again needs those services. So, if the Employer signed a 12 month “pay or play” agreement, the employer could stop using the employee’s services after 6 months, and then start again using them during month 10.

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b. Here is a typical “Pay or Play” provision in an employment offer letter or contract:

    “The agreed term of employment is 12 months, called the “Term.” However, the employer may cease using your services any time during the Term, provided it continues to pay your base salary and provide your benefits through the entire Term. If the employer ceases using your services during the Term, you will nonetheless continue to be available to the company throughout the full Term, and the employer will be free to resume using your services at any time during the Term.”

Note the employee’s “availability” obligation. This means that if he or she begins a new job during the Term, he or she will both (a) be in breach of contract, and – at a minimum – (b) may lose his or her right to continued salary and benefits.

c. “Pay or Play” originated in the film industry as a way to get certain actors to commit to a movie project that might or might not get funding. Say a producer says to herself, “This movie would be just perfect for Angelina Jolie, and that is how I will pitch the deal to investors. It sure would be more likely to get funding if Angelina Jolie has already agreed to do it, even though I don’t have the funding yet.”

If that producer wants Angelina Jolie to commit to the project – and maybe turn down other projects for a while, then Angelina Jolie would probably insist that “If you can’t raise the money for the film, you have to pay me anyway, in light of the time I reserved for it.”

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d. “Pay or Play” may give both the employer and employee certain advantages. First and foremost, “Pay or Play” gives the employer a chance to see how well the employee performs his or her job duties, without fear of a lawsuit if it is decided that the employee is not as effective or valuable as hoped.

Second, “Pay or Play” is often very favorable to the employee, especially an employee who is being hired for a specific project of potentially brief duration. Thus, it enables an employer to say to an employee, as an example, “We are interested in your services to help us wind down this company, which we believe should take no longer than 15 months. That said, we will promise to pay you for 24 months, no matter what.” For many employees, this covers their risk of doing such a good job – for example, winding down the company in 11 months – that they will soon be out of work. Additionally, the employee might feel more comfortable moving to the city in question, and signing a 24 month lease on a home.

Third, “Pay or Play” is seen by many as a sure signal to the employee that he or she has no expectation of an employment relation longer than the “pay or play” period.

e. Employees should be on the lookout for any stated exceptions to the employer’s “Pay or Play” obligations. It is quite common that “Pay or Play” employer contract provisions will include exceptions to the obligations being binding on the employer, including in case of (a) the employee’s disability, (b) the employee’s termination for bad conduct or breach of the contract, and (c) a Latin phrase called “force majeure,” which means an uncontrollable event that intervenes, such as an earthquake or what is sometimes called an “act of God” which makes the project impossible.

Exceptions to “Pay or Play” based on the employee’s disability, the employees misconduct or breach, and force majeure, are all reasonable. Others that may be inserted, such as (i) funding not being secured for a project, (ii) a change in control of a company, (iii) failure to achieve certain results during the Term, or similar “controllable” risks, should not be accepted by the employee.

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f. One last note about the possibly confusing name “Pay or Play”: The name “Pay or Play” confusing to some, as it may seem to suggest that, if the employer “plays” (that is, uses the employee’s services) then it does not have to pay for those services. That is exactly the opposite of what is intended.

Perhaps a better title for this contractual provision would be “Play and Pay, or Just Pay.” As they say, “Go figure.”

Randy, thanks for sending in your question. I hope this is helpful. Good luck on you new job. xplain something that many people do not fully understand. I hope this is helpful to you.

My Best,
Al Sklover 

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