In this tough economic climate, many clubs are looking for ways to ease the financial burden imposed by expensive employment relationships. Often the employers turn to the possibility of converting their employees to independent contractors.
Many country clubs and social clubs believe that converting their health and fitness staff into independent contractors is a legal, viable option to employing those individuals. This belief could be based on a history of industry practice and inspired by the economic advantages presented by not having to pay employment taxes or offer employment benefits to an entire class of workers.
Industry practice and economic savings notwithstanding, this is risky for a number of reasons:
First, industry practice no longer appears to be a factor to consider for state and federal auditors. Traditionally, the IRS and California regulators have considered industry practice as a factor in determining whether workers are properly classified. We anticipate that "industry practice" will not be considered as either a determinative or mitigating factor for much longer.
Our recent experiences with EDD auditors demonstrate that the auditors will not likely consider industry practice if the services provided by the workers in question are an "integral part of the employer's business." Thus, if the employer provides health and fitness services to its members, the EDD will likely reach the conclusion that the staff rendering the health and fitness services, such as personal trainers, massage therapists, tennis instructors, yoga instructors, etc. are employees, not independent contractors.
The EDD has specifically held that where the individuals are providing services that are integral to the employer's business, performing services on behalf of the employer for its members, performing services at the employer's place of business, using tools provided by the employer and being paid by the employer - as opposed to receiving payment directly from customers - the individuals in question are employees, not independent contractors.
Additionally, government auditors tend to be skeptical about the propriety of an independent contractor classification if the workers being deemed independent contractors were previously employees of the same employer. Unless the workers' duties have changed significantly, auditors will not uphold an independent contractor classification if they conclude that these individuals are performing the exact services as contractors that they did as employees.
The consequences of improper classification of employees are significant. Employers are subject to state and federal assessments for back taxes as well as fines and penalties for such things as failure to maintain workers' compensation insurance and possibly bad faith classification.
This is not to say that certain positions in a country club's health and fitness operations cannot properly be designated as independent contractor positions. However, reaching that determination requires a thorough analysis of both the state and federal independent contractor criteria and knowledge of the current analytical positions adopted by governmental regulators.
The attorneys at FitzGerald & Mulé LLP are experienced in assisting clients through classification audits and - better yet - avoiding these audits by advising clients on the proper classification of their workers. If you have questions regarding independent contractor and employee classifications, please contact David Mulé, Esq. or Vee Sotelo, Esq. at (760) 325-5055.
This article is intended for informational purposes only. Nothing herein should be construed to constitute legal advice. It is recommended that you seek legal counsel before making decisions regarding labor and employment matters.