As expected, the U.S. Biden Administration finally issued its long-awaited Independent Contractor (IC) Classification Rule. And, as expected, this Department of Labor (DOL) rule brings back the six-factor “economic realities test” for determining if a worker is an IC or employee under the federal wage and hour law known as the Fair Labor Standards Act (FLSA). For clubs that use ICs (e.g., caddies, fitness instructors, massage therapists, and a host of other club workers) this new rule will likely force operational changes to ensure compliance.
The rule is scheduled to go into effect on March 11, but it will likely be subject to lawsuits that could postpone its implementation. Though some delay may occur, club leaders should begin taking a long, hard look at how they classify their workers and re-evaluate those classifications where necessary to minimize potential liability.
Under the rule, the following six factors will be the key to determining whether a worker is an independent contractor rather than an employee.
Does the worker have opportunities to generate profits/losses based on his managerial skill, judgment and business acumen? (Does he market the business to other clubs, set his fees based on market rates, and accept/decline work based on sound rationale?) If yes, then he’s an IC.
Does the worker make capital or entrepreneurial investments in the business? (Does he invest in ways to reduce costs or expand his marketability rather than simply paying the costs associated with doing a specific job?) If yes, then he’s an IC.
How permanent is the relationship between the club and worker? (Does he have a specific project or work for a short period of time at the club or does he work continuously at the club?) If little time is spent at the club, then he’s an IC.
What nature and degree of control does the club have over the worker? (Does he set his own schedule, fees, and does he have the ability to work for others, or is he supervised, trained, clothed or disciplined by club?) If there is little control by the club, then he’s an IC.
Is the work performed integral to the club’s business? (Does the club need this job to be done - is it critical, necessary or central to the club’s business?) If it is not integral, then he’s an IC.
Are the worker’s skills unique or specialized and does he use that fact in a business- like manner? (Does he bring something to the club it does not have and would not train its employees to do?) If the skills are unique and he uses that to his benefit, then he’s an IC.
In the end, this new rule focuses on whether the worker is economically dependent on the club for his work or, as a matter of economic reality, in business for himself. Unfortunately, these six factors may make it more difficult to classify workers as ICs moving forward.
Ultimately, DOL created this new rule to bolster the FLSA and help minimize “wage theft” from employers who wrongly classify workers as ICs rather than employees. As such, this rule has the effect of allowing DOL to investigate claims that you failed to pay minimum wage and overtime to workers you thought were independent contractors.
There is no doubt that the process of determining whether a worker is an IC or employee can be a tricky one, and it is fraught with liability if the wrong decision is made. While DOL penalties and fines are the primary concern with this new rule, there are potential federal employment tax issues that can arise with misclassification as well. Also, please be aware that this rule does not alter state IC classification laws, which have become more restrictive (especially in club states like California, New York and New Jersey). Furthermore, workers can file claims against your club themselves – usually as a class action lawsuit – if they feel they have been misclassified.
So, the release of this new DOL rule might serve as a good excuse to bring this IC/employee classification issue up for review with your senior staff and board sooner rather than later.
This article was originally written by Brad Steele, J.D., founder of Private Club Consultants, and shared for the benefit of HFTP club members and stakeholders.