Employees vs. Independent Contractors

There is a lot of confusion on how to legally classify an individual who is working for you with regards to Workers’ Compensation. Are they a W-2 employee or a 10-99 contractor? Every state has a different definition of how to classify an employee or contractor and the way you classify them for tax purposes does not automatically define their Workers’ Compensation status.

In order to help sort some of these issues out, lets go over the basics:

What is an employee?

In most states, an employee is defined as “anyone who performs services for you…if you can control what will be done and how it will be done.”[1] This includes any “freedom of action” that you may give them because you ultimately “have the right to control the details of how the services are performed.”[2]

What is an independent contractor?

A person is typically considered a contractor when the person paying them has “the right to control…the result of the work [but] not what will be done and how it will be done.”[3] Essentially, an independent contractor is self-employed.

Tips on Classification

If you need help deciding how to classify your trainers, we have listed the main factors to consider below.

Behavioral Control

When you can control and direct how an individual does their job then they are considered an employee, even if you don’t exercise that right. This includes the type and degree of instruction you provide, an evaluation system you implement, uniforms, time they are scheduled to come in, and any job training you provide. The less you control the way an individual does their job, the more likely they are going to be considered a contractor.[4]

Financial Control

How much financial control do you have over your coaches? When an employee has a work-related expense, they can get reimbursed, but a contractor would not. Also, if your coach can take an income loss or if their services are available to the general public, they are likely an independent contractor. Lastly, employees are typically paid on a regularly scheduled basis whereas contractors are usually paid a flat fee for their work. Occasionally, they receive payment from the client and pay you a cut for utilizing your facility. Either way, it is a flat fee for a service rather than a clock-in/clock-out or salary scenario.[5]

Relationship

Your relationship with your coaches is an important factor. This includes benefits as well as the permanency and services of employment.

Benefits[6] offered by a business are not typically offered to independent contractors. This is usually connected to their non-permanent nature. If you hire someone expecting your relationship to continue indefinitely, as opposed to a specified project or timeframe, they are an employee.[7]

If a trainer is a key player to your business structure, you are likely going to consider them an employee. Contractors typically don’t hold this role due to their temporary nature.

Also, if you have a written contract in place stating whether a coach is an employee or contractor, it may not be enough to define the coach’s status according to state guidelines. The state and the IRS are “not required to follow a contract stating that a worker is an independent contractor, responsible for paying his or her own self-employment tax.” [8] The relationship between the business and the worker is how employment status is determined. [9]

Businesses in California

California has some of the strictest rules regarding employee vs. independent contractor relationships in the country. To help business owners in California, they created an ABC Test which was put into effect January 1, 2020.

It specifically outlines that all workers are classified as employees. The hiring entity can test workers out of employee status based on the following factors:

1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
2. The person performs work that is outside the usual course of the hiring entity’s business.
3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.[10]

Are there any consequences of misclassification?

Yes! Misclassifying a coach or worker as an independent contractor rather than an employee may result in steep fines and you may be held liability for payment of employment taxes.[11] In California, willful misclassification[12] penalties range from $5,000 to $25,000, per violation.[13]

Do I need to include my contractors in Workers’ Compensation coverage?

Maybe. As every state has different rules and regulations, your best bet would be to take a deeper dive into your state labor laws to find out what is required of you as an owner. For example, in California Workers’ Compensation is required for all independent contractors unless they purchase their own coverage and provide proof to the business owner. If they aren’t already included in coverage, you may be forced to add them in your annual audit. Depending on how many contractors were omitted from the policy when it was placed, you may be hit with a hefty additional premium to include them in coverage at the end of your policy term.

If needed, we have a sample Independent Contractor Agreement. If you’d like a copy to review as you create your own, please let us know.

What if I am still not sure?

If you are still not sure whether your worker is a contractor or an employee, always lean towards the side of caution and have them work as a W-2 employee. You can also reach out to your local attorney who will be able to advise you best. As mentioned above,

You mentioned having a solution. Can you get to the point?

Sorry, but we wanted to save the best for last!

We recently launched NEXOSync which is a one-stop-shop for Workers’ Compensation, payroll, health insurance, benefits, and Human Resources. It is a Professional Employer Organization so everyone who signs up becomes an employee of NEXOSync. It is the only program in the country designed specifically for fitness facilities.

Owners, employees and contractors alike can all be included in coverage and like a standard Workers’ Compensation policy, premium based on the total payroll. The difference is that as payroll is process through NEXOSync, there are no annual audits! This also minimizes administrative duties for payroll and owner inclusion/exclusion forms.

A full overview of the program can be found here. If you are interested, you are welcome to email our NEXOSync guru, Steve Brown, who is available to provide more information and answer any questions you may have. He will lead you through any questions and concerns.

You can set up a time to speak with Steve via his online calendar or give him a call at (405) 210-6941. If he's unavailable he will give you a call back as soon as possible. If you'd prefer to connect with him via email, you can reach him at sbrown@nexoins.com if that works for you.

If you'd like to get ahead of the curve and provide the data needed for a quote right away, you can complete this application. The application will be needed to provide you with pricing options.

[1] Employee (Common-Law Employee). IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/employee-common-law-employee.

[2] Independent Contractor Defined. IRS, January 23, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined.

[3] Independent Contractor Defined. IRS, January 23, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined.

[4] Behavioral Control. IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/behavioral-control.

[5] Financial Control. IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/financial-control.

[6] Can include insurance, pension plans, paid vacation, sick days, disability insurance, etc.

[7] Type of Relationship. IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/type-of-relationship.

[8] Type of Relationship. IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/type-of-relationship.

[9] Type of Relationship. IRS, January 16, 2020. https://www.irs.gov/businesses/small-businesses-self-employed/type-of-relationship.

[10] Independent Contractor versus employee. State of California Department of Industrial Relations, January 2020. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm.

[11] Understanding Employee vs. Contractor Designation. IRS, December 16, 2019. https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation

[12] Willful misclassification is specified as “voluntarily and knowingly misclassifying an employee as an independent contractor.” Independent Contractor versus employee. State of California Department of Industrial Relations, January 2020. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm.

[13] Independent Contractor versus employee. State of California Department of Industrial Relations, January 2020. https://www.dir.ca.gov/dlse/faq_independentcontractor.htm.