Are some of your club’s independent contractors really employees?
ECLUB NEWS |
When it comes to classifying an individual as an employee or an independent contractor, there is no defined line drawn in the sand on how to make the determination. In the club industry, individuals such as massage therapists, fitness center trainers and golf pros have often been debated as to whether they should be treated as employees or independent contractor.
On July 15, 2015, the Department of Labor (DOL) published a broader interpretation that might sway some of these individuals, as well as others, to be classified as employees. In the interpretation, the DOL cited that the Wage and Hour Division has received numerous complaints from workers alleging misclassification and that the DOL has and continues to bring successful enforcement actions against employers who misclassify workers. Additionally in this publication, the DOL disclosed they have entered into a memoranda of understanding with many states as well as the IRS regarding policing the growing number of misclassifications.
For those of you who are wondering, a memorandum of understanding is defined as a formal agreement of working with another organization or organizations toward a common goal. With the DOL's new broader interpretation of an independent contractor as well as teaming up with various states and the IRS, it most likely is time to review who your club has currently classified as independent contractors to ensure they still fit the definition.
I'm sure most of you have at least heard of the 20 factors test which was developed by the IRS in 1987. This information was published to help employers determine whether an employer-employee relationship exists and therefore, the individual should be classified as an employee. More recently, the IRS has added the common law rules as additional guidelines to classify an individual as an employee or independent contractor. The three categories for the common law rules are:
- Behavioral: Does the company control, or have the right to control, what the individual does and how they do it related to the job?
- Financial: Are the business aspects of the worker's job controlled by the employer?
- Type of relationship: Are there written contracts or employee type benefits and is the work performed a key aspect of the business?
According to current published guidelines, the IRS will use the responses to these three categories, in addition to the 20 factors test, to help determine the classification of an individual as an employee or independent contractor.
The DOL's new interpretation uses a broader multifactorial economic realities test which focuses on whether the worker is economically dependent on the employer or in business for him or herself. The six factors published in the DOL's interpretation which are used in determining an individual's status are:
- Is the work an integral part of the employer's business?
- Does the worker's managerial skills affect the worker's opportunity for profit or loss?
- How does the worker's relative investment compare to the employer's investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer's control?
According to the DOL, all the factors must be considered in each situation and they should be applied with an understanding that the factors are indicators of the broader concept of economic dependence. The more it appears the worker is economically dependent on the employer, the more likely the DOL will rule in favor of the worker being classified as an employee.
If the IRS and states join together with the DOL in enforcing this new interpretation as suggested, the use of the economic realities test will most likely lead to clubs classifying more individuals as employees and not independent contractors. If your club currently has anyone who might be economically dependent on the club and being treated as an independent contractor, the club should review these individuals separately to make sure they still fit the definition of an independent contractor.