What are residuals and how do they work? A Hollywood strike battleground, explained

A major focus is the system of payouts that writers and actors earn when a project they’ve worked on gets replayed.

It’s not often that people get worked up about nitty-gritty financial mechanisms, but that’s exactly what’s been going on in Hollywood for the last 412 months.

As members of the Writers Guild of America and the actors’ union SAG-AFTRA march down picket lines and shut down studio productions, one of their main targets has been the system of payouts that writers and actors receive when a project they worked on is remade.

These residuals, as they are known, are less eye-catching than some of the unions’ other priorities, such as artificial intelligence.

However, the importance of residuals to the wallets of showbiz employees is direct and undeniable. The checks can be comically small — less than a dollar gets you a drink at Studio City’s aptly named Residuals Tavern — and entertainment workers say the industry’s shift toward streaming has made them especially untrustworthy.

“To be completely honest, I don’t get a piece from Netflix on ‘Breaking Bad,'” said Aaron Paul, co-star of the wildly popular AMC drama, which found a wider audience thanks to Netflix. “A lot of these streamers know they’ve been getting away with not paying people a fair wage for a long time, and now it’s time to pay up.”

With no end in sight to the strikes, understanding residuals is critical to understanding the labor-management divide in Hollywood.

So, what exactly are residuals?

Residuals are payments made to a writer, actor, or director when their work is reused, such as when a movie starring them airs on cable or a show they created finds a second life on streaming. Physical media sales such as DVDs, in-flight movies, and digital rentals can all generate residuals.

“After the initial exhibition of whatever the work is — whether it’s theatrical or on television — any subsequent use of the work generates a residual,” said Joshua Edwards, a Fox Rothschild LLP partner and entertainment lawyer. Each new market triggers additional payments as the content moves through subsequent stages of distribution, according to Edwards.

Not everyone who works on a television show or film receives residuals. According to the WGA, writing residuals are only available to credited writers, whereas SAG-AFTRA extends them to “principal” performers such as actors, stunt performers, pilots, and puppeteers. Background performers are not eligible.

Why are they there?

Residuals give creative professionals a cut of the profits when something they worked on is popular for a long time.

Television residuals first appeared in the 1950s, and the system grew in 1960, when a joint strike by writers and SAG members secured actors a cut of profits when movies were reaired on network TV. Subsequent labor negotiations broadened their scope even more.

“If a title has a long shelf life and is continually licensed to different platforms, then that actor or writer should continue to benefit,” Edwards said.

This is especially true in an industry where work can be inconsistent. Residuals provide people in the entertainment industry with passive income, which can help them weather difficult times, such as a long strike.

How are residuals determined?

Residuals are calculated using rules developed by unions such as SAG-AFTRA, the WGA, and the Directors Guild of America, or DGA.

The precise formula for calculating residuals can be complicated.

According to the various unions, some of the factors that go into the calculation are: the type of production, the distribution medium, the union contract at the time, how long the production took, and the type of work someone did.

According to the film industry finance and management firm Entertainment Partners, there are two types of residuals. Some are a percentage of a project’s gross revenue, while others are a fixed payment derived from a formula based on the characteristics of a given role and distribution model and applied “every time a title reruns in a particular market.”

For example, under WGA policy, residuals from made-for-TV projects can be based on either the project’s revenue or a combination of other factors such as the project’s type, length, and budget. According to the union, residuals for films intended for theatrical release are always revenue-based.

“There’s no negotiation over the residual,” said Simon Pulman, a partner and co-chair of Pryor Cashman LLP’s entertainment group.

What effect did streaming have on residuals?

It’s relatively simple to link viewership to profitability in traditional film and television projects, such as by tracking box office ticket sales or Nielsen ratings.

However, that process has become more difficult since Hollywood jumped headfirst into the world of subscription-based streaming platforms, where, for example, watching an episode of “Stranger Things” on Netflix is less directly linked to revenue (a monthly subscription fee that grants access to the entire Netflix library).

“You could always connect entertainment and the consumption of entertainment with money,” said one former agent, who requested anonymity due to the strike’s tenor. However, because streamers now “make their money off subscriptions, there’s no way of knowing whether or not my show… is directly correlated to a subscriber coming on board and generating revenue.”

In order to adapt residuals to a streaming-centric world, industry stakeholders devised a “enormously complicated” formula that took into account the length of a show or film as well as how long it had been on the platform, according to Pulman. However, that calculation is not based on whether something is a hit or not, according to Pulman, which means that an extremely popular show could pay out the same amount in residuals as a flop.

According to Edwards, residuals from high-end streaming platforms are based on fixed rates rather than revenue, and the platforms have 90 days before they owe actors residuals. That’s one of the reasons why streaming platforms frequently remove titles after a few months; any later, and residuals kick in.

Furthermore, high-budget streaming residuals are only paid out once per year.

“What they’ve tried to do with streaming is buy out the back end, and buy out the residuals, by paying people more upfront,” the former agent explained. “You get overpaid for failure and underpaid for success.”

What would the unions like to see changed?

Whereas a writer for a popular network television show might have received six-figure residuals from reruns and syndication in the past, streaming residuals are generally lower. One actor told The New York Times this summer that his minor role in the 2015 dinosaur adventure “Jurassic World” earned him $1,400 in cable residuals but only $40 in streaming.

SAG-AFTRA has called for the casts of series on streaming platforms to share in the revenue generated by those shows. The Alliance of Motion Picture and Television Producers, which represents the major Hollywood studios in contract negotiations, rejected that proposal, arguing that it gave actors all the reward with none of the risk, and instead proposed higher residuals for high-budget streaming shows.

Meanwhile, the WGA has advocated for higher residuals, including for high-budget streaming movies and international streaming, as well as a new “viewership-based streaming residual” to reward hits. In August, the AMPTP responded with a proposal that included higher residuals for high-budget streaming movies and international streams, but no viewership-based streaming residual. The WGA rejected the counter, which the AMPTP later made public after more back-and-forth.

Furthermore, because streaming platforms are generally hesitant to share exact viewership numbers, unions say it’s difficult for workers to demand pay commensurate with the popularity of their work. SAG-AFTRA has proposed that a third-party company assess the performance of various streaming shows and determine residuals accordingly.

That idea has been rejected by AMPTP member companies. Instead, the studios have proposed confidential quarterly watch-time reports so that the writers guild can submit a new residuals proposal in the future — a solution that the WGA said would not provide the level of specificity required for individual writers to know how well their work is performing or what kind of residuals they might deserve.