Mike Warkentin: (00:02)
Employees and contractors, what are your legal exposures? It’s a hotly debated question in the gym world, and the answer is gonna have a huge effect on your business. I’ve got a lawyer with me. He owns a gym. He’s going to tell you exactly what your legal exposures might be and how to limit your risk. This is Run A Profitable Gym. I’m your host, Mike Warkentin. Do me a favor, hit the subscribe button, whatever platform you’re on. I would really appreciate it. Now my guest, Matthew Becker, he is the founder of GymLawyers.com and he runs Industrial Athletics in Pittsburgh. We’re gonna dig into employees and contractors so that you can reduce your risk and make smart decisions for your business. Matt, welcome to the show. How are you?
Matthew Becker: (00:44)
Hey, good morning, Mike. I’m doing really well. How are you this morning?
Mike Warkentin: (00:47)
I always love having a gym-owning lawyer here to answer questions that I wish I had the answer to 10 years ago, and that will help our listeners right now. So I’m gonna dig right in. Employees, contractors, third party contractors. Where do the risks arise? Where do the risks arise for gym owners and how can we limit them?
Matthew Becker: (01:04)
Okay. Yeah, so great question. So as we get into this, let me start just by saying what I’m gonna shy away from. It will be covered a little bit in conversation, but what I really don’t want to spend our time talking about today is what concerns we have to worry about with the IRS. ‘Cause there’s a million resources out. You go to my website, I think you and I have talked about it before, I’ve talked about it with Chris, about what we need to do in order to consider somebody an employee versus an independent contractor as far as control is concerned. Well, what I would like to focus on is what legal exposures we need to be concerned about as gym owners, depending on how we decide to classify our staff members for tax purposes.
Mike Warkentin: (01:52)
So you’ve got your ducks in a row, you know what you’re doing. You decided I’m either contractors, employees, third party. Now the question is, what are my risks and how do I limit them?
Matthew Becker: (02:00)
Mike Warkentin: (02:02)
Okay, let’s do it.
Matthew Becker: (02:03)
So we’re gonna break these down. Each staff member or person that we are dealing with is going to be falling into one of three categories. We’re either gonna have the employee, we’re gonna have an independent contractor, or technically this last category is an independent contractor, but it’s gonna be slightly different. It’s going to be a third party company that comes in and uses our facility under what we call a facility sublease agreement. Okay? And so what are all of our legal exposures through between those three categories? Let’s start with the employee.
Mike Warkentin: (02:43)
So this is going to be very common. Yeah. Super common one.
Matthew Becker: (02:45)
The staff member that comes in and we’re paying them as employees, which basically means we are paying them under tax purposes or we’re matching their federal contribution, and we can give them benefits and we can give them scheduled time off or sick leave or PTO, or anything like that. And this is by far the least concerning when it comes to legal exposure on our part as gym owners. However, it’s also the most costly for us as gym owners because of the tax purposes, right? We have to pay their federal matches, but also we have to maintain workers’ compensation and unemployment insurance. And so that’s where we come into play with, what are the legal exposures that we run the risk of when we have an employee? Okay. So whenever you have an employee, you have to have workers’ compensation insurance.
Matthew Becker: (03:43)
And that basically covers, if the employee comes in, trips, falls, and injures themselves, or is helping a member lift the weight or whatever, and injures themselves on the job. They can be compensated for their time off if they need to take that time off. Okay? So that protects us. That insurance protects us against an injury lawsuit that comes from the employee. Not completely protection, not a bulletproof protection, but protects us from them. Okay. But there’s a cost associated with that. That insurance policy, we have our general insurance policy for the gym itself, which oftentimes our general liability insurance policy is going to cover employees and trainers. I’m not talking about covering the employee and the trainer in the sense of an injury that the employee or the trainer gets involved in. I’m talking about that employee or that trainer injuring their client. Okay.
Mike Warkentin: (04:55)
So like liability insurance, essentially?
Matthew Becker: (04:57)
Yeah. Yeah, exactly. Your general liability policy is going to cover you from legal exposure when we’re dealing with employees or trainers. And I keep making that distinction because your general liability insurance policy will potentially cover your independent contractors. And we’re gonna talk about that more specifically when we talk about independent contractors. Okay. But we’re as protected as possible when we have an employee, because our general liability insurance is gonna cover us. We have workers’ comp insurance that is gonna cover us. If anybody goes to sue the employee for anything that they did, it automatically comes back on the business and we’re as covered as possible. Okay. The problem is, it’s also the most costly for us.
Mike Warkentin: (05:51)
Okay? So you could make mistakes there by just not filling out your paperwork and not paying the remittances that are due. Would that be an error that the gym owner could make?
Matthew Becker: (05:59)
Yes. If the gym owner doesn’t maintain workers’ compensation policy, that is gonna be a big, big issue. Because similar to the IRS, you can get audited sometimes by your workers’ compensation organization that governs that for your state, especially. This comes up if an employee gets injured and they go to make a worker’s compensation claim. Or if you go to fire an employee and they go to make an unemployment compensation claim and you don’t have those proper insurances in place, now you are really legally exposed.
Mike Warkentin: (06:41)
Matthew Becker: (06:42)
And sometimes in certain states, you’re more running a risk of being audited by worker’s compensation to make sure that you’re paying into worker’s compensation insurance than you are by the IRS. And the worker’s compensation can actually come in and they can start questioning how you have your tax designation for staff. Because if you’re considering everybody to be independent contractors and you’re not paying workers’ compensation, then the state’s losing out on money. And it’s losing out on money similarly to the way that the IRS is losing out on money and it wants its money. So you run the risk of getting an audit there.
Mike Warkentin: (07:23)
Ok. So employees: important considerations there, you have to get everything in line according to the standards in your jurisdiction. I’m up in Canada, we have similar stuff. It’s not exactly the same, but it’s pretty close. You have to make payroll withholding remittances and you have to do unemployment insurance and pension and all that other stuff. So make sure that you’re up to date on that. What else have we got?
Matthew Becker: (07:42)
Yeah, so we’ll take that as, you’re the most protected, but also, it’s the most costly. So gym owners have very, very thin profitable lines sometimes. So we’re gonna try to cut some of those costs. So the second category is we’re gonna decide that we’re now going to start to consider our staff members to be independent contractors. So we can reduce our costs now because we don’t have to pay for employment tax matching for the irs. We don’t have to maintain workers’ compensation policies, and we don’t have to maintain anything involving unemployment because you can’t technically fire an independent contractor. They don’t work for you really, right? I mean, this is where we kind of get in this little gray area, but they don’t technically work for you, so you don’t really fire them, you just sort of terminate your contract with them. And so they cannot turn around now and sue you for unemployment compensation. And I won’t go off in the weeds in that statement. Just they technically can’t sue you.
Mike Warkentin: (08:53)
It is a hot debate. I’ll tell you that.
Matthew Becker: (08:54)
You know, it. I’m not going down that road. I promise we’re gonna stick with the legal stuff here, not taxes. Anyway. Alright. So now we start to run into some concerns about, are we treating these staff members truly as independent contractors? And what are some legal stuff that starts to blend the lines between employee versus independent contractor? Yes. Tax purposes, we’re worried about that element of control, right? The more control we exhibit over the staff member, the more they’re an employee versus an independent contractor. But some of the discussions that we get involved with, with other gym owners when it comes to independent contractors is, how do we start to set these independent contractors up legally to protect the gym owners as much as possible legally? Okay? And first and foremost is, we need an independent contractor agreement.
Matthew Becker: (09:59)
So when we’re fighting against workers’ compensation, we’re fighting against the IRS, for tax purposes, the work, the independent contractor agreement will not be an end-all be-all of, well, I had this staff member sign an independent contractor agreement, so I’m good to go. They’re an independent contractor, I don’t have to worry about it. It doesn’t quite work that way. But the independent contractor agreement is sort of one layer of additional protection and help for your categorization of those people as independent contractors. And from an attorney’s perspective, paper everything, right? So we have this independent contractor agreement, and within that, we start to set the expectations that are going to be between us as the gym owner and you as the staff member that are going to, again, lean toward that independent contractor designation. One of those is having your independent contractors form their own LLCs, okay? And this is one that we get a lot of pushback on, okay? But if you think about it for a second, an independent contractor is a self-employed individual. I, as a gym owner, am a self-employed individual. I, as a gym owner have my own LLC. That’s one of the ways I designate myself as a self-employed individual to enjoy protection from a limited liability company. I want to treat my staff member as a self-employed individual, so they too should have their own LLCs, okay? And you should be paying into that LLC to protect you to show that you are paying another company for the services that they are providing
Mike Warkentin: (11:53)
Listeners. Matt has another show where he talks about the concept of piercing the corporate veil. I’m gonna put a link to that in the show notes because it tells you the things that you can mess up with a corporation that removes the protections that it should give you. So I’m gonna put a link to the show notes and that if you wanna learn more about that. All right. Sorry Matt, continue.
Matthew Becker: (12:12)
No, no. All, all good. All good. Okay. So that’s sort of legal requirement number one was: get the written agreement. Number two is now get them to do their own LLC. Number three is requiring your independent contractors to maintain their own insurance. And this is another one of these pushbacks we get, because you’re gonna have an hourly coach that comes in, let’s talk CrossFit, right? Majority of listeners probably have some sort of CrossFit group-based service here, right? You’re gonna have your coach come in and they’re gonna coach a class, right? Just an hourly class. And if you’re following the Two-Brain model or the State of the Industry book and you read that and you see that the average price to pay an hourly coach is $20 an hour.
Matthew Becker: (13:03)
So you pay your coaches $20 an hour, right? And then you get on the phone with me and I say, well, if you’re gonna treat that hourly coach as an independent contractor, that hourly coach really needs to have their own insurance policy. That’s a hard thing to do. And it gets even muddier when gyms are trading hourly coaching for free memberships with their coaches, and that’s how they’re getting paid, right? Because now you’re gonna go out and ask that that coach that’s kind of working for you for free, to maintain their own insurance policy. But here’s the problem. If you’re a staff member of mine and I’m treating you as an independent contractor and you injure somebody, okay? And the gym gets sued. I have to be prepared to accept the liability of that lawsuit for you as an independent contractor. Okay? And a lot of gyms are gonna say, well, okay, I get that, I’ll do that. But then I have to ask the question, well, if you were hiring any other business to come into your gym and they got sued, would you want to cover the liability for that business? And oftentimes the answer is no.
Mike Warkentin: (14:23)
For example, if you hired a contractor to come in and replace your plumbing, and all of a sudden a pipe burst and scalded, God forbid a client or something, would you wanna be responsible for the poor plumbing work? Yeah. Is that a fair example?
Matthew Becker: (14:35)
That’s a fair example because you’re paying that contractor as an independent contractor, right? Right. And so part of being an independent contractor means they maintain their own liability. And some states have real specific rules about this stuff. Wow. Okay. That they have to maintain their own liability. But if you are willing to cover that liability on behalf of your independent contractor, you’re now muddying the waters and you’re giving yourself a lot of legal exposure for somebody that you’re considering to be an independent contractor.
Mike Warkentin: (15:06)
Okay. So what I’m seeing here is that this arrangement to be as insulated as possible, is that you have to require of your independent contractors a little bit of extra work. They have to form an LLC. And up here in Canada, it’s quite a little bit different, but there is a cost associated doing that, right? Yeah. You have to file annual corporate tax returns, I believe, and I’m sure that’s the same down there. There is a legal cost of incorporation and so forth, and then liability insurance is another cost. So an independent contractor in that arrangement would have, the coach would have some additional costs, correct?
Matthew Becker: (15:38)
Yes, that’s correct.
Mike Warkentin: (15:40)
Many won’t wanna do that necessarily, I think, if you push them. Right?
Matthew Becker: (15:43)
No, they’re not gonna wanna absorb that cost. And the other potential issue that you walk into as a gym owner, and here’s where we can’t avoid the discussion of the taxes, okay? But we’re just not really going down that road. But we’ll go down that road for a second. So, you know, we have employees, we have independent contractors. What’s the proper tax designation? What’s the proper amount of control, or benefit that we can give to our staff member? And as soon as you start providing your staff members benefits, workers’ compensation insurance, unemployment compensation insurance, or general liability insurance, you start to walk that really fine line of: are you providing your staff member benefits? And as soon as you start to provide them benefits, they can no longer be categorized as an independent contractor. Ok? Okay. So we’ve got, you need the agreement, you need a written agreement. We really need them to be establishing themselves as LLCs. It’s the cheapest and most inexpensive way down here in the States to do it. And we really need them to maintain their own insurance policies because it’s gonna protect you as a gym owner, not only from these whole tax designation things, but from general liability. If the independent contractor gets sued, do you as the gym owner want to be pulled in to have to cover that?
Mike Warkentin: (17:16)
Okay. And I think I see some benefits to the contractor. I’m gonna lay ’em out as I see ’em. You tell me if I’m correct. One would be if they have an LLC and they’re set up as an LLC, a lawsuit is likely going to not be able to take their personal assets because their corporation would be at risk. Is that correct or no?
Matthew Becker: (17:36)
Yes, that’s correct. Okay. Go back and listen to the Piercing the Corporate Veil to make sure that we don’t just give an unqualified yes, if you file an LLC, you’re protected, right? Nothing in the laws.
Mike Warkentin: (17:47)
It offers some protection, not airtight, but it is better than not having it at all, especially if you follow the right procedures. Okay? And then the second thing is, and I’m gonna use a Canadian example, so correct me here on the US side. But if you’re a contractor and you’re not having withholding taxes and paying into pension plans and things like that, you now have that money that you can invest now as you see fit, potentially get a better return on the investment than the government might do with your money. And you can access it how you see fit. You still have to pay taxes. But I’m talking about pension kind of stuff. The other thing related to that is if, for example, if you’ve paid into a pension plan, the Canada Pension plan up here for years and you die, that’s it. Whereas if you have your own independent investments, those investments are gonna be passed on to someone else in a different way. So does that relate to the U.S. example as well?
Matthew Becker: (18:38)
Yeah. Yeah, a lot of that is very similar. Exactly how all the pensions and everything work. I can’t speak to individually. But yes, you take that extra money, you can now turn around and you can use it to benefit yourself, and not just hand it over to the government.
Mike Warkentin: (18:59)
It would be a self-directed retirement plan essentially, if you are following that path. And again, don’t take this as hardcore tax advice. Neither I nor Matt are experts in that. John Briggs Incite Tax and Accounting would be a great reference point for you if you have questions specific about this stuff. But we’re touching on it just as an idea of where there are some benefits from the contractor side. All right, keep going, Matt. Yeah.
Matthew Becker: (19:21)
Yeah. And frankly, if I ever end up having to go work for somebody else, God forbid, because none of these ideas ever pan out in the long run, I will probably go and ask that I could be an independent contractor or a self-employed individual with whoever wants me to work for them. Because once you get in involved in it, there’s a lot of tax benefits for being a self-employed individual, but you gotta follow the proper paths. Okay? And ultimately, the last caveat before we move on to subject number three is you as the gym owner, you also need to reach out to your accountant. If you’re with Incite Tax, good. John Briggs is gonna defend you until the day he dies about having your staff members as independent contractors.
Matthew Becker: (20:12)
And he’s gonna help you set it up that way. Other accountants are not so clear-cut and dry about the matter. And if you end up getting audited, it’s gonna be your accountant who ultimately has to produce the evidence that’s going to defend you one way or the other. And if you’ve got an accountant who is really uncertain about you categorizing your staff members as independent contractors, then you really need to take that into consideration whether you go ahead and categorize all of them as employees, or you find yourself a new accountant.
Mike Warkentin: (20:48)
That reminds me of a quick Tom Cruise story where apparently, Matt Damon was relaying this, says Tom Cruise was telling this crazy stunt he wanted do. His stunt man was like, you can’t do that. And Matt says, so what did you do instead? He’s like, I got a new safety guy. So you might wanna find a new accountant if you need it. I’m just joking. Of course. But that’s the point. So Matt, now let’s move on to third party kind of stuff. I’m guessing this would involve something like, I sublease an office to a physiotherapist or something like that. Am I right?
Matthew Becker: (21:14)
Mike Warkentin: (21:15)
Okay. How do we insulate ourselves here as best we can?
Matthew Becker: (21:17)
Okay, so this is like the true instance of an independent contractor. And where we oftentimes see this pop up is we have to ask the question of who is the gym client paying? So in the instance of the employee and in the instance of the independent contractor coach, or even your independent contractor personal trainer who’s working on some sort of a four-ninths model, okay? The money should come into the gym, and then the gym is moving this out, or paying the coach, okay? In instances where we see, well, the gym or the client is actually paying the coach or the trainer, and then the trainer is paying the gym, now we walk into an instance of sort of a true third-party independent contractor, and we’ve got other legal considerations now that we have to take on.
Matthew Becker: (22:15)
So yes, Mike, you said, we’ve got a physio who is renting space, or we have a high school football team who wants to come in and use the gym because you have access to various types of equipment that they can’t get at the high school. Or you have extra space, so you’re gonna have somebody come in and teach some other sort of class, but they’re coming in as their own business and they’re paying you a fee essentially in order to use your facility, okay? And we call these facility subleases, because now we have this person who’s coming in. They’re likely going to have their own LLC, so that’s a good start. And then let’s say they agree to pay you $300 a month in order to use your facility, or they say, we’re going to service your clients through our physio practice, and we’ll pay you $20 per client or something like that.
Matthew Becker: (23:20)
Great, cool, awesome way to get some passive income. However, there are three things now legally that we need with this individual. The first is this facility sublease agreement, okay? Similar to the independent contractor agreement. This is going to lay out the expectations with this third party so that we’re all on the same page about how much are they paying, what kind of access do they get? Do they get to use some of your equipment or do they get to only use their own equipment? Can they store things in your facility? How much of your facility do they get to use? How do we terminate this agreement, right? So we have to have this agreement that outlines all of these legal contracts or legal connections and relationships. Number two, go ahead, Mike.
Mike Warkentin: (24:16)
No, no, that’s that. It’s paperwork, guys. So get your paperwork done and make sure that it’s there. And if you don’t know how to do it, talk to a guy like Matt or a girl. Continue.
Matthew Becker: (24:24)
Paper this stuff. Number two, the second thing, this company or this person now needs their own liability waiver, okay? And you need a copy of that liability waiver so that you can have somebody like us or another attorney review it to make sure that it’s sufficient. Because again, rewind our conversation back about 10 minutes ago when we were talking about whether or not you as the gym owner want to cover the liability for your independent contractor. And when we were just talking about a group coach, we’re like, oh, yeah, yeah. You know Jim, he’s coaching for the gym, so sure. We’re gonna cover that in the liability. Well, now you’ve got some physio coming in and they’re working on your clients. If your client sues that physio, you gonna wanna uncover that liability?
Mike Warkentin: (25:11)
Matthew Becker: (25:11)
The answer should be no, ok? I do not ask my question for you. Your answer should be no, you do not wanna cover that liability. So they need their own liability waiver, and in case you aren’t guessing what’s up next, they need their own insurance. And you need to be named as an additional insured on that insurance. So we’ll have gyms and they come to us and they say, well, you know, we just have these personal trainers and yeah, they work for my gym, but the clients pay them and then they pay us. And we don’t wanna deal with that. And they’re independent contractors. And so we just want the money to go to them because we think it muddies the water if the money comes to us, the gym, and then we pay the trainer. Like, fine, that’s great, but now we need to layer this stuff in. Does that trainer have their own liability waiver? Does that trainer have their own insurance? Do you have some sort of a sublease agreement with this trainer outlining all of these terms? Because if you don’t, then you’re really exposing yourself legally to any problems that could come up if this third party company trainer injures somebody or has a contract dispute or something like that.
Mike Warkentin: (26:33)
Okay. So this stuff is interesting and as a gym owner sitting here, and in year one as well, you sit here and think this is pretty far away from teaching squats, right? You’re dealing with lawyers and contracts and accountants and tax codes and all this stuff, but that is the price of entrepreneurship, right? And it makes a strong case for two things. First is building in a profit margin in your business, right? Or an expense margin, we’ll call it, where you’ve set your rates so that you make enough to cover expenses like this because you need to. And you can do it yourself if you’re very clever. If you’re not, you would be wise to retain experts who can advise you and lead you through it, okay? So yeah, think about that for a second.
Mike Warkentin: (27:13)
You gotta make sure that your business is set up to cover all the bases that you need to cover. And if you don’t know how to do that, that’s where Two-Brain comes in. That’s another expert that will tell you how to do this. And then you’ve got a guy like Matt who can review this stuff for you. So Matt, if someone is like, okay, this is blowing my mind, but I wanna limit my risk. How do I get this fixed without, ’cause I don’t wanna learn the tax code, the legal requirements. How do they work with you to get this stuff sorted out?
Matthew Becker: (27:36)
Yeah. Yeah. So of course, I wouldn’t be surprised if somebody’s head’s spinning right now with trying to figure out how to resolve all of this stuff. And so we welcome gym owners to just call us. You can go to the website, Gym Lawyers, plural, GymLawyers.com and, and request a consultation. It’s all free. You can go to the contact site portion of the website, my cell phone’s right there, you can text me or call me. An email address is there, you can send me an email. Any way you want to get ahold of me, because I’m happy and more than willing to get on the phone and have another 30 minute conversation to hear about your gym, your trainers, how you’re setting this stuff up, and then make suggestions about what you need to add, whether it’s a written agreement, whether it’s requirements that they need to get their own LLC, whether it’s simply a requirement that the clients have to now start paying you, the gym owner, instead of your trainer.
Matthew Becker: (28:36)
So that we’d avoid some of those other legal exposures that we have. I’m happy to talk about any of this stuff more in depth.
Mike Warkentin: (28:43)
Risk limitation isn’t a problem when bad things aren’t happening. When bad things happen, you would’ve wished you had taken some steps. So that’s the thing, guys. If you are thinking about making this a serious business and taking all the steps you can to reduce your risk limit exposure, check out GymLawyers.com and then same thing, John Briggs, Incite Tax and Accounting. Another good one with the tax code. If you wanna dig into that kind of stuff, check this stuff out and get your paperwork in order. So this has been Run A Profitable Gym. That was gym owning lawyer Matthew Becker. He’s from GymLawyers.com. Check him out. Thanks for listening. On your way out, I would love it if you guys would subscribe or hit like, or leave a comment or review, whatever platform you’re on. Give us a little bit of love. It would help us out a lot. Now here’s Chris Cooper with a final message.
Chris Cooper: (29:27)
Hey, it’s Two-Brain founder Chris Cooper with a quick note. We created the Gym Owners United Facebook group to help you run a profitable gym. Thousands of gym owners just like you have already joined in the group. We share sound advice about the the business of fitness. Every day I answer questions, I run free webinars and I give away all kinds of great resources to help you grow your gym. I’d love to have you in that group. It’s Gym Owners United on Facebook, or go to GymOwnersUnited.com to join. Do it today.