Understanding How the IRS Classifies Your Group Exercise Instructors

For many small businesses, understanding employment law can be one of the most time consuming tasks. For health clubs, the rules defining independent contractors can cause a major headache. In fact, questions about independent contractors were the second most frequent legal question IHRSA has fielded from members in the past decade.

Understanding employee classification can be a tough subject. The financial implications of wrongly classifying employees are significant. In terms of employment law, the largest differences are that employees are eligible for benefits, and only employees are subject to withholding income tax.

Employee or Independent Contractor?

In terms of legal classification, group exercise instructors could be employees if the club determines class times and locations and provides a set routine with preselected music.

The IHRSA Health Club Employee Compensation & Benefits Report found that overall, the majority of clubs compensate their group fitness instructors as employees, rather than independent contractors. But how do you know which type of classification applies to your business?

There are a number of factors to consider when trying to determine how to classify your workers. The first one to consider is how much control the worker has over themselves and their schedule. For instance, are the activities within group classes dictated by the club or largely planned independently by the instructor? How much discretion do your instructors have over their hours and schedules?

Other considerations include but are not limited to:

• How many employers and locations the instructor works at
• Pay structure
• Job termination
• Reimbursement for business expenses
• Services rendered personally

Determining Employee Classification

In order to distinguish which type of employee you have, the Department of Labor (DOL) uses an “economic reality test” to determine employee eligibility. Their criteria emphasizes the role of independence and control within the professional relationship. Courts use a slightly different criteria to evaluate misclassification claims. Within the court evaluation, permanency of the relationship is examined along with independence and control.

It is important to understand that under any test, no single factor will be decisive in determining whether a worker should be classified as an independent contractor or an employee. The IRS and the courts make decisions based on all of the criteria within each test. So what are you waiting for? Download IHRSA’s full guide to understanding independent contractor laws.

Don’t have the time to read the briefing paper right now? Here are some abbreviated tips from the larger paper:

Tips for determining classification:

• When in doubt, classify workers as employees
• Don’t get involved in the independent contractor’s business transactions
• Establish boundaries by asking workers to sign an Independent Contractor Agreement, which allows you to delineate the roles and responsibilities within your professional relationship.
• Seek legal assistance in evaluating proper classification since IHRSA does not know your specific situation. Thus a lawyer might be better equipped to provide a more intimate assessment.

Still looking for more answers to your questions? Please consult the full paper and a lawyer for additional information.