Legal Considerations for Fitness and Racquet Clubs When Hiring Independent Contractors

A significant and impactful strategy employed by fitness and racquet clubs to attract talent is to engage independent contractors rather than employees. While this approach can foster a mutually beneficial arrangement for all parties involved, there are substantial legal considerations that must be taken into account.

The independent contractor work force model presents significant advantages for both parties involved. By engaging the services of independent contractors, clubs can effectively reduce employment-related expenses. This is because independent contractors are exempt from a wide range of employer-employee regulations, including pension, workers’ compensation, wage and hour regulations, health insurance, and unemployment insurance.

Alternatively, independent contractors are self-employed individuals who typically engage in project-based work for various employers. They enjoy greater autonomy over their work hours and control over the quality of their work product compared to employees. For these reasons, many independent contractors find significant advantages in working within the gig economy.

While both clubs and contractors might prefer classifying workers as independent contractors, clubs should be cautious when making this classification, especially with regard to applicable Internal Revenue Service laws. Misclassification can lead to significant penalties, such as back taxes, civil fines, interest, and other damages.

Given the potential benefits and practicality of the independent contractor relationship for clubs, the Internal Revenue Service (IRS) has established guidelines to assist clubs in accurately classifying work relationships:

1. The “Common Law” Test: Serves as a crucial criterion for determining whether an employer-employee relationship exists. According to this test, an employer-employee relationship is established when the employer has the right to control and direct the worker’s performance, including providing detailed instructions and determining the appropriate methods to achieve specific results.
2. The “Reasonable Basis” Test: Safeguards clubs from Internal Revenue Service challenges to the classification of workers as independent contractors under specific conditions. If met, clubs are exempt from tax liability for misclassified workers under Section 503 and can avoid penalties.

To qualify for this exemption, clubs must have consistently and continuously treated the worker as an independent contractor and filed all necessary returns reflecting this status since 1978. Additionally, the employer must have a reasonable basis based on judicial precedent, published rulings, technical advice, prior IRS audits demonstrating no penalties, or recognized industry practice. If these conditions have not been met, the club and contractor can file Form SS-8 to obtain an IRS determination.

1. The Internal Revenue Service’s (IRS) “20-Factor” Test: An evaluation tool utilized by clubs to determine the employment status of an individual. While the IRS does not provide a specific formula for assigning weight to each factor, a substantial number of affirmative responses typically indicates an employment relationship, whereas a high number of negative responses may suggest contractor status. In instances of ambiguity, your club and its contractors are advised to file Form SS-8 to obtain IRS rulings.

If it is your club’s intention to establish a workforce comprised of independent contractors, you can and should proactively plan to ensure that your workforce is properly classified as independent contractors. It is crucial that your club develop, establish, and adhere to best practices regarding the hiring, supervision, and retention of independent contractors.

We have provided the IRS’s 20-Factor test below. For further reference, the IRS’s manual provides a detailed explanation of the 20-factor test and is available for download on the Internal Revenue Service website.