The IRS just sent you a letter demanding back taxes. Street vendors in Times Square are selling merchandise with your club’s valuable logo on it. Your tennis pro is leaving and wants to take pro shop inventory with him.
These are just some of the many unforeseen and unfortunate outcomes that can occur as a result of inadequately drafted employment and/or independent contractor agreements.
Times have changed in the private club industry. For example, you only need to perform a cursory Internet search to see that, in most respects, the operation of a club is now considered “big business.” Organizations such as Kemper Sports, Western Golf Properties, SunCor Golf, and ClubCorp are reaping billions of dollars from the development and management of hundreds of public and private golf and tennis clubs. According to the Kemper site, golf is a “booming multibillion dollar industry … an industry that increasingly values the forces of commerce over the traditions of sport.”
Commercialism has even reached the links. Many golfers now enjoy global positioning satellite services to help determine the exact location of their balls on the course. This service also provides merchandisers with on-course advertising. As one company’s Web site states, its business philosophy is to “increas[e] current revenue streams and creat[e] new profit centers for golf courses.”
With the latest changes and the increasing use of contactor agreements, a review of new contractual issues and how to address them can help ensure club boards have done their due diligence in protecting the interests of the club.
From Handshake to Iron-Clad Agreements
Financial arrangements for club professionals and other key employees can now reach seven figures before expenses. Yet, contractual relationships between clubs and their senior staffs are still at the “hand-shake” level. Chances are the employment and independent contractor agreements your club has in place are only two to four pages long. Though standard industry practice, these agreements are usually vague and do not address all the items necessary to establish a clear relationship between the parties and protect the clubs from the problems that can arise in the current big business milieu.
Well-crafted, detailed agreements benefit the employee/independent contractor as well as the club. By entering into agreements of sufficient breadth and detail, the clubs and the independent contractor/employee can avoid uncertainties about the duties and obligations of the respective parties. The individual will get a clear sense of his or her responsibilities and rights. It also sets forth the parameters of club oversight, which helps avoid the problem of board micromanagement.
Today’s new agreements are sometimes 25 to 30 pages in length. Although that may sound like a lot, keep in mind that contracts of this length are not at all unusual in the business world and have been found to benefit both parties greatly as they establish obligations and rights in sufficient detail so that second-guessing can be all but completely avoided.
In order to obtain the greatest value from an agreement, the club should consider the following items for inclusion. However, it is important to note not all of these points must be addressed in any one contract. Some of these issues can be considered part of an “a la carte” menu—you should review the items and determine which of them are important and specific to your club.
Business Items and Duties Checklist
Business items and duties will likely apply to most club agreements. The agreement with the golf/tennis professional should set forth his or her obligations and rights in detail, including those dealing with:
- “Ownership” and operation of the golf/tennis shop
- Operation of the golf club’s bag room
- Operation and maintenance of the golf club’s driving range
- Scheduling and administration of intra-club tournaments
- Golf/tennis instruction (different rules being applicable to members and non-members)
- Golf/tennis outings sponsored by other organizations
- Necessary staffing and general conduct of the professional staff
- Agreements with the grounds superintendents should set forth their duties and responsibilities with regard to the maintenance of the golf course and club grounds and the safeguarding and use of chemicals in accordance with state and federal laws, as well as with staffing and management issues.
General managers should be presented with contracts specifying the duties and obligations they take on with respect to the overall operation of the club, including, but not limited to, the maintenance and operation of the facilities; dealing with the club’s finances; overseeing food and beverage services as well as social events, including golf and tennis outings; and the supervision of the club professional, greens superintendent, and other members of the club’s staff.
Compensation and Severance Agreements
The club professional’s contract should set forth the components and timing of his/her compensation. Specifically, the agreement should address the amount of his/her stipend, lesson fees and bag room fees.
Lastly, the method of compensating the professional from the proceeds from golf/tennis shop purchases charged to members’ accounts must be determined. For general managers and grounds superintendents, the amount and timing of salary and any bonus should also be determined in their agreements.
Obviously, establishing compensation is important, but what do you do when the relationship with the independent contractor/employee ends, and the club or the individual decide to part ways? How do you design a severance program to treat the individual in an equitable manner?
These issues are of importance to virtually all clubs. To address them satisfactorily, the agreement with the key individuals should specify the amounts, if any, that will be paid to the individuals on termination due to “Cause” (or not for “Cause”), voluntary termination (with or without “Good Reason,” i.e., voluntary termination if the club engages in certain improper acts vis-à-vis the professional/employee), or termination due to death or disability.
In the case of a golf or tennis professional, the agreement should also deal with the disposition of unsold inventory in the golf/tennis shop at the time the relationship ends. The definitions of “Cause” and “Good Reason” must also be specified in the appropriate agreements.
A covenant not to solicit employees should also be included when considering termination issues. The agreements with the club professional, general manager and the grounds superintendent should contain provisions preventing the individual from “stealing” club employees when they move on to their next position.
Avoiding Knock-offs
Highly visible clubs should have concerns about the improper use of their logos. The last thing they want is to have items containing the club logo, such as golf caps, golf balls and shirts, sold on street corners, in a discount shop, or on eBay.
Accordingly, the agreement with the club professional should provide the club with adequate protection regarding the professional’s sale of items containing the logo or other intellectual property. For example, make clear the types of items on which the logo can be used, the quality standards, and where the items can be sold, i.e., only from the golf/tennis shop or from a specific shop off premises.
The issue of production overruns and gray market sales should also be addressed in contracting with vendors and manufacturers, as well as regarding the payment of royalties to the club for the use of the logo.
Lastly, agreements with the club professional should include, as an attachment or exhibit, a form of vendor agreement highly protective of the club’s interests for the professional to use when contracting with third-party vendors.
Tax Implications
Many golf/tennis professionals are considered independent contractors. This saves the clubs considerable amounts of money because they are not required to pay the employer’s share of FICA and related taxes, provide health insurance, or other benefits.
However, clubs almost always want to impose strict controls over the professional’s activities, controls that usually lead to his or her classification as an employee.
The trick is to “thread the needle” between employee status and too much freedom as an independent contractor. The agreement with the club professional must be carefully drafted so that a good faith claim to independent contractor status can be maintained in the event of an IRS inquiry, while at the same time giving the club adequate protection and powers to direct the professional’s activities. The club should also insure that, if applicable, the grandfathering provisions set forth under federal tax law are satisfied in order to give the club the greatest assurance that the professional is treated as an independent contractor.
Deferred compensation for employees and independent contractors is another issue that has tax implications and should be carefully addressed in an employment or independent contractor agreement. A new section of the Internal Revenue Code imposes severe tax penalties on individuals, both employees and independent contractors, who are participating in a deferred compensation plan that doesn’t comply with very detailed payment and timing rules.
Many clubs don’t realize that part of the compensation they provide to their professionals, general managers, and grounds superintendents may constitute “deferred compensation” because that concept is construed very broadly. Generally, it includes the payment of any amounts in a taxable year after the year in which earned. For example, the new rules would apply to the receipt of fees in “Year 2” for golf lessons given in “Year 1,” as well as to any payments made after the termination of the employment or independent contractor arrangement, including severance compensation.
The penalties for failing to comply with this section of the Internal Revenue Code are very severe and could lead to significant legal issues between the individual and the club.
Final Considerations for Your Agreement
Your club’s employment/independent contractor agreement should include several other items of a technical, legal nature in order to give the club the greatest protection against adverse circumstances, such as an individual’s violation of any of the terms of the agreement, club rules, or an individual’s failure to carry out his or her duties and responsibilities, etc.
The agreement should also include provisions protecting the club for any liability arising out of an individual’s violation of the terms of a prior employment/independent contractor agreement; indemnifying the club for losses caused by a violation of the terms of the license to use the club logo and other intellectual property; and allowing the club to use injunctive relief to enforce certain important terms of the contract.
Though these recommendations may represent a drastic change from current agreement practices at most clubs, they should be considered a standard upgrade to keep pace with the changing club industry. A failure to make many of these changes can lead to a breakdown in the relationships between the club and the independent contractor/key employee, as well as to significant potential fines and other losses being incurred by the clubs.
Sound and thorough employment and independent contractor agreements can ensure the club has met its obligation to protect the organization’s interests, while providing a comprehensive framework for successful performance from employees and independent contractors.
Robert M. Fields a compensation and tax attorney based in New York City. Contact him at [email protected] or 212-672-1672.
Factors in Evaluating Employment Status:
The 20 Factor Test
For at least 30 years, the IRS has used a list of 20 factors to evaluate whether a worker is an employee or an independent contractor. Although some factors are more important than others, no single factor is determinative, and the weight given to each factor may vary from case to case.
1. Instructions: May the club require the worker to comply with instructions about when, where and how to work?
2. Training: Does the club require training?
3. Integration: Are the worker’s services an integral part of the financial success of the club’s activities, or are they a separate economic business?
4. Personal Services: Is the worker required to render services personally?
5. Assistants: Does the club employ and pay assistant pros, instructors or shop clerks?
6. Continuing Relationship: Does the worker have a continuing relationship with the club?
7. Hours: Does the club have the right to establish shop hours, lesson times, or caddie shifts?
8. Full-time Required: May the club require the pro or caddie to devote full time to its activities?
9. Location of Work: Is the worker required to perform services on the club’s premises, even if they could be performed elsewhere?
10. Order of Work: May the club establish an order or sequence in which the worker performs services?
11. Reports: Is the pro required to submit oral or written reports to the board or membership on a regular basis?
12. Compensation: Does the worker receive a regular weekly or monthly salary instead of compensation for a particular task?
13. Payment of Business Expenses: Does the club reimburse business expenses incurred by the pro or caddie?
14. Materials: Does the club provide the worker with materials necessary to do the work?
15. Significant Investments: Does the club furnish office equipment, space and other assets necessary to accomplish the work?
16. Profit or Loss Risk: Does the club pro have only an insubstantial risk of profit or loss from any capital investment?
17. Multiple Clients: Does the worker normally perform services for more than one client?
18. Availability: Does the worker normally make his or her services available to the general public?
19. Right to Discharge: May the club discharge the worker without incurring liability?
20. Right to Terminate: May the worker terminate the relationship with the club without further liability to the club?