Do you classify your staff as employees or independent contractors? Either way, you should know the law!
I just returned from IHRSA where I attended a session by an attorney who talked about the IRS crackdown on Fitness Clubs and Studios categorizing Trainers as Independent Contractors when they should be classified as Employees. All it takes is one disgruntled trainer or competitor to file a claim or report and the financial consequences, penalties and fees can be HUGE and into the 7-figures causing most businesses to file bankruptcy. Do it right from the beginning or it could spell trouble at your next audit. Here’s a couple slides from the presentation. California has created an A/B/C test and most clubs and studios would fail the test if they are trying to classify trainers as independent contractors.
A worker is an employee under the Wage Orders unless the hiring entity establishes that the worker:
A) Is free from control and direction
B) Performs work outside the usual course of the hiring entity’s business AND
c) Is customarily engaged in independently established trade, occupation or business
So…should you have Independent Contractors or Employees?
Here is my answer….
Reviewing the history of the personal training industry, pretty much all of us started as independent contractors operating our personal training businesses within existing health and fitness clubs. Slowly over the years, many of these facilities decided to bring the training department in-house and make all their trainers employees. Why would they do this?
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Right at the top of the page.
- ONE: having employees brings more control and standardization to your business. It can become extremely challenging to the business and confusing to the clientele when you have multiple trainers all running their own businesses within the same facility.
- TWO: the IRS has very strict guidelines for professions and who should be considered an independent contractor or an employee.
Here are more specifics (outside of the A/B/C test above) from the IRS:
You should have employees if:
- Your business establishes and evaluates program recommendations and training techniques
- Your business markets the program, books appointments and collects money
- Your business sets policies and procedures and schedules meetings
- If your trainers are employees, you are responsible for paying certain taxes and deducting employee tax contributions from pay checks
You should have Independent Contractors if:
- Trainers are self-employed operating their own business
- You cannot control program design, training techniques or administration
- Independent contractors are responsible for their own taxes, marketing, scheduling and money collection
One thing that is important to note is that the IRS of course would like every business to have employees vs. independent contractors because they are then guaranteed to receive the accurate tax deductions. So with the IRS there is no grey area and in the event of an audit, if you are operating in the grey (ie. Well we collect the money, and they wear our uniforms but they control their own schedule), the IRS will most likely rule that they should have been categorized as employees and you will be responsible for back taxes and penalties.
In the fitness industry, two IRS guidelines that really stand out are as follows:
- The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business would indicate an employer-employee relationship. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
So Personal Trainers within a Personal Training facility would indicate a key activity of the business. If the relationship is regular and ongoing as would be the case of Personal Trainers working within a gym, the IRS may qualify that arrangement as an employer/employee relationship.
Here is a link to specific criteria straight from the IRS. The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
- Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
We have had business owners tell us their horrible stories of incorrectly classifying their Personal Trainers and being forced to pay back taxes, penalties and some have even lost their business. So it’s best to make sure you’re doing this correctly from the beginning and we would strongly encourage you to get the advice and counsel from an employment attorney in your state to guarantee everything is established legally.
Yours in health, fitness & business,
Sherri McMillan
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