When we talked with Sandra Calm over at the Float Shoppe about what it’s like running a center with “additional services”, we talked about one topic in particular that quickly became a minefield of complexity. It was too daunting to include in the last post , so we’re dedicating this entirely to the differences between hiring employees vs. independent contractors. I apologize in advance that this information is so totally Amerocentric, but including even one other country in this information would’ve also derailed this topic too quickly. Fortunately, most countries have laws that follow similar guidelines, so this should give those of you outside the U.S. a rough idea of what your country’s laws are as well as you do your own research.
Deciding how to classify specialists like massage therapists can be a headache for anyone looking to hire someone to work in their center. When I asked Sandra about it, I was hoping for a clear cut answer but, as it turns out, it really depends on what you’re looking for from people who are working in your center.
First off, it’s important to note the major differences that come with independent contractors over standard employees. There is a tax benefit to having independent contractors. Basically, you pay a flat rate to the contractor and they are responsible for handling all taxes with the State and Federal government. It certainly simplifies the process quite a bit and can be very appealing to businesses. However, that does place a lot of restrictions on the type of work that you can ask of them and your relationship between the service provider and your business. Determining that relationship isn’t very cut and dry, either.
Part of what makes all of this so confusing is there isn’t a one-size-fits-all set of actions that differentiates a standard employee from an independent contractor. Your State regulators, the federal Department of Labor, and the IRS all have their own criteria for what constitutes an “independent contractor”. Here, we’ll just be using the IRS definitions as a sort of jumping off point to the issue. If the status of employees is ever challenged, the IRS determines the status on a case-by-case basis over several criteria by a panel of judges, very similar to American Idol.
Basically it comes down to who is in control of the work. How much control does the company have over the type of job being done vs. how much control does the person providing the service. This manifests in different ways, but to fit the definition of an independent contractor, a service provider really does have to be independent. Beyond just using this guide, you should always consult an HR lawyer if you feel like there’s any confusion or ambiguity.
Basically, the rules fall into three main categories:
This refers to the direct control that the business has over the worker. The more actions that you directly control as the business, the more you would probably consider that person an employee. Do you determine when they work or what the scope of their job is? Do you schedule them shifts? Require certain availability? Do you determine who their clients are? What about a system of evaluation? Do you rate their performance or just the end result? Do you provide training? Do you decide what tools they can use for their job?
These types of things can get extraordinarily intricate and the more decisions the company makes, down to determining what oils the therapist uses in massage (if you have a preference for any reason), the more it appears to be an employee/employer relationship. It should be noted that while independent contractors bring their own experience and knowledge, that in an of itself doesn’t mean they aren’t employees, but it’s pretty critical.
Independent contractors usually have a significant investment in the tools required to do the job. This isn’t always true and there isn’t a specific dollar amount to point to, but again, it is one indicator. Also, do they have unreimbursed expenses? If they have fixed ongoing costs regardless of whether or not work is currently being performed, then that could also point to independent contractor territory.
Another big clue is the opportunity for profit and loss. If all the little expenses that the worker can possibly exceed their income from the work, then they might be an independent contractor. Are they free to seek out other business opportunities? If not, then that could be an employee relationship. Naturally, payment is a huge factor. If they’re paid an hourly wage, that points strongly towards employee while an independent contractor is usually paid a flat fee. Again, there are some exceptions in certain professionals like consulting or law, where they charge an hourly rate while maintaining an independent contractor status.
3. Type of Relationship
Sometimes a contract can be a factor in how a worker and business see their relationship, whether that’s as employer/employee or independent contractor. However, this doesn’t necessarily determine how the IRS sees it. Another indicator is whether or not a worker receives benefits. Independent contractors typically don’t receive insurance or other privileges from employees.
Another big clue is if there’s a sense of permanency in the relationship between worker and business. If there’s no definitive timeframe for the scope of work, it again strongly points to an employee/employer relationship.
Does the service provided count as a key activity of the business? Do you take credit for this work as your own. If your business is called “Gotham City Float & Massage”, then the massage is an integral part of your business. Those massage therapists are providing a key element. That can point to a clear employer-employee relationship.
As you can see, this is a complicated question and is a very delicate line to walk. There isn’t any one thing here that definitively says “obviously employee” or “obviously independent contractor”, however, if you write a schedule for your service provider, provide training, take payment, and advertise the service yourself while paying them an hourly wage, it might be difficult to argue that they’re an independent contractor and you could face a fine.
Real World Applications
Okay – so back to our conversation with Sandra. I kinda assumed that she would have it one way or the other, finding a way for her service providers to work either entirely as employees or entirely as contractors. This… apparently isn’t the case, and they’ve taken years to find a way to make this work.
For their massage therapists, they tried letting them be independent contractors but there were too many issues with that. They needed to have set rates for massage, they needed reliable regular availability from their massage therapists, and needed to integrate with their payment and scheduling systems. So that didn’t work.
Their counselors at The Float Shoppe, however, are completely different. The service is completely independent from the others. The Float Shoppe doesn’t take any money on their behalf or schedule them in their service either. Basically, all they do is provide the space for the counselors to work and let them advertise, schedule, and cover their own payment systems.
For an inverse perspective we also talked with Nick Ashfield, who has run the Toronto Healing Arts Center for 35 years. It’s a dedicated space for professionals and services ranging from psychologists to massage therapists to float tanks. He has a very different approach that works for him.
At the Toronto Healing Arts Center, the service providers are completely independent. Nick basically just rents them a space and they get to be their own boss. He doesn’t handle scheduling, their money, or their clients at all. They’re all separate entities working in the same building – that’s it. This means that there is no shared marketing, scheduling, or clients between practitioners. It definitely creates a different dynamic with it’s own problems, but Nick likes it because he doesn’t want to feel like he has to be responsible for the businesses that work in his center.
The whole point is to remove ambiguity from the relationship. Could The Float Shoppe make the case that their massage therapists are independent contractors instead of employees? Not really. Likewise, could a therapist at Nick’s Healing Arts Center say they are an employee? Nope. Likely not. They’ve created a clear delineation between their contractors and their employees to remove any confusion in the case of an audit.
Hopefully this slightly dense read is helpful in untangling your own situation if you plan on offering additional services and hiring on service providers. Independent contractors can work well with a float center, but that relationship has to be one of mutual growth. Like Nick says, he doesn’t want to be responsible for them or their lack of business, he just wants good tenants who pay him. The decreased tax burden does come with a lot of stipulations. It’s also important to remember that if there’s any ambiguity with the relationship, it can land you in hot water with the IRS. And no one wants that.
This has all been based of how the IRS classifies independent contractors, but the Department of Labor and your State’s regulators also have their own guidelines and penalties for misclassification. This is really the tip of the iceberg on what to look out for in independent contractors. Below, we’ve included some helpful resources for further reading on this topic.