How many golf professionals, tennis pros or fitness instructors do you have on staff? Does your club require the use of caddies? Most importantly, are these workers classified as employees or independent contractors (ICs)? With the Department of Labor’s (DOL) newly released guidance on classifying workers, the answers to these questions will likely change for most clubs.
For the past few years, leadership in DOL has said the misclassification of workers is one of the worst problems in the American workplace. To rectify this, DOL’s Wage and Hour Division has been working to establish a better way for employers to correctly classify workers as either employees or ICs. In July, it issued its report and there is little doubt it will have a significant impact on the private club industry.
Not only has DOL decided to make worker misclassification a primary focus of enforcement, but it also has recruited the Internal Revenue Service (IRS) and many individual states to focus more on this issue. We now have two federal agencies and possibly your state working hand-in-hand to make sure you classify your workers correctly. To say the least, there is now more pressure to get it right.
Under this new guidance, DOL requires club leaders to consider a multifactor “economic realities” test when classifying workers. The old “control test” is no longer a valid fallback position—and it hasn’t been for a while. These new factors will help establish whether the worker is economically dependent on the club or whether he is truly in business for himself and economically independent from the club.
The factors outlined by DOL are:
- Is the work performed an integral part of the club’s business? If the task your worker performs is integral to the club, then he is likely an employee and not an IC. Work can be integral even if it is just one component of the club’s business. Thus, if a club requires the use of caddies then they would likely be seen as integral to the club’s business, and it is highly likely those caddies would be considered employees.
- What is the worker’s opportunity for profit or loss depending on his own managerial skills?
If your worker does not have the ability to make business decisions and use his initiative to affect his profits or losses, then he is likely an employee and not an IC. This factor does not refer to someone deciding to work more hours to make more money (like a golf pro deciding to give more lessons), but rather his use of managerial skills and business acumen to impact his success. The guidance also stresses that the worker’s ability to incur a loss is just as critical as his ability to make a profit and without it the worker is likely an employee.
- What is the extent of relative investment in each business by the club and the worker?
If your worker makes only a minimal investment in his business, then he is likely an employee not an IC. Investments in advertising and marketing provide better indication that he is in business for himself and an IC. A golf pro’s investment in golf clubs and teaching equipment, alone, would not be enough for him to be considered an IC when compared to the club’s investment in the course.
- Does the work performed require special skills and initiative?
This does not refer solely to the worker’s technical skills, but his business skills, judgment and initiative, too. If he needs specialized skills to do the work, then he could be an IC. However, you will need to determine whether he exercises independent judgment and initiative when using those skills before classifying him as such. If the club hires a pastry chef who decides what to make and when to make it and if he has his own pastry shop and markets his services to others, then he would be an IC. In contrast, that same specialized pastry chef who is brought in by the club each week and told what to make and when to make it would be classified as an employee.
This factor closely resembles number two, but is more directed to workers with a specialized skill. The goal is to ensure a club does not automatically classify a worker as an IC simply because he is skilled at a certain task.
- How permanent is the relationship?
If your worker stays with the club until he decides to quit or is fired, then he is likely an employee and not an IC. A worker in business for himself does not want to be tied down to one club. He will come and go as he pleases based on his best business judgment. If a fitness instructor only works for the club and does not seek other clients, then she would be seen as an employee. On the other hand, if such a worker provides services for numerous clubs and other fitness facilities, negotiates different rates as well as different terms of engagement, then she would be seen as an IC.
- What is the degree of control exercised by the club over the worker?
If your worker does not control crucial aspects of the job, then he is likely an employee and not an IC. The nature of control by the club will be determinative here. Thus, the mere fact that a tennis pro may schedule his own lessons will not cause him to be an IC if the club controls when and where those lessons may occur and how much he may charge.
Most importantly, this DOL guidance emphasizes that no single factor will be determinative. Instead, a club must look at all of these factors together to determine how economically dependent or independent the worker is from your club. For most club leaders, the key to correctly classifying a worker as an independent contractor will be whether you can prove he is in business for himself.
Unfortunately, in its report DOL made clear that the definition of “employee” found in the Fair Labor Standards Act (FLSA) is to be liberally construed to “provide broad coverage for workers.” DOL also stressed that the basic intent of the FLSA is to label most workers as “employees.” As such, it seems clear that the bar has been raised and there is little doubt that classifying a worker as an independent contractor has now become much more difficult.
Clubs that have caddies, golf pros, tennis pros and fitness instructors (or even cleaning crews and landscapers) working as independent contractors may be forced into major changes to comply with this new guidance.
Outlook
During the past six years, we have seen the Department of Labor become far more aggressive in its enforcement of the law. While we agree that those businesses failing to comply with the FLSA should be punished, it is probable this guidance will cause many private clubs to now fall squarely into DOL’s crosshairs.
Regrettably, DOL did not issue this new guidance as a proposed regulation to the FLSA or even as an amendment to that law. Instead, it was issued as an interpretation of the FLSA and as a signpost indicating how DOL will now enforce the law. By so doing, DOL did not give our industry an opportunity to comment on the guidance or help craft an implementation plan. Thus, no changes will be made and it is now the law of the land for the foreseeable future.
As such, we strongly urge all members currently using independent contractors to discuss this new DOL interpretation with their club counsel. In addition, club leaders should begin to review their worker classifications and make appropriate changes where necessary. On top of this, club leaders must also be aware that any newly classified employees could be due overtime pay as a result of DOL’s proposed changes to the overtime regulations—see Thomas Lenz’s Point of View article on page 4.
In the end, the traditional staff makeup of private clubs may have been permanently altered by a stroke of the pen from the Department of Labor. Naturally, NCA will continue to fight against such a result, but until there is a change in DOL’s perspective, be prepared to make changes as needed.
Brad D. Steele is NCA’s vice president of government relations & general counsel.