Irene Diamond
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Are You Really An IC or Employee?

IRS 1099 question

It hurts me to read about therapists, instructors, and trainers who are getting a bum deal, ripped off, and in some cases exploited.

And, I know it is being played out all over the country.

A therapist in one of my FaceBook groups asks:

“I work at this place I get paid by commission. Usually on Wednesdays I don’t have anybody and when I only have one client my boss wants me to be there at 10am even if my clients appt is at 5 she makes me answer phone calls and do laundry without getting paid is this legal?”

Some of these scenarios I hear about are obviously illegal!

I’m not an attorney, but have been involved with worker classification issues for over 15 years.

  • An Independent Contractor is a person running their own business who is contracted to provide specific services for another business. The IC is responsible for getting their own permits, insurance, tools of the trade and paying their own taxes. The IC is in a business that is different from the business hiring them, and their services are not an integral part of the day-to-day operations of the business. (Think accountant who comes in and does the bookkeeping for a restaurant, if they don’t show up, the restaurant can continue providing food.)
  • An Employee is a person who works for another business, providing services that are integral for the business. If the worker does not show up, the business may be effected.

There are many different criteria that both your state and the IRS look at when determining how a worker should be classified. (The examples above are just to give you a starting place)

When I started my San Francisco Wellness Center, I looked around and saw how other places were structuring their workers. I copied how they were doing it as my business model.

There were not many massage places ‘way back’ in 1998, so I copied personal training facilities and physical therapy clinics.

Because I am a therapist too, I tried to do the right thing for wellness providers by doing as much as I could for them:

  • I printed up individual business cards with their name
  • put their head-shot glamor picture on our wall
  • had them sign an independent contractor contract.  I copied the contract from some place I can’t even remember where and modified it to fit our situation. (Found out later the contract was totally wrong on so-many counts!)
  • I let the therapists call the shots — they told me when they wanted to work
  • they came and went as they pleased
  • I provided all the equipment, sheets and music players
  • they wore what they wanted
  • they even told me what they wanted us to charge for their sessions
  • When they didn’t have clients they could do whatever they wanted — no cleaning, laundry or anything other than keeping their therapy room in order.
  • AND, to make it ‘worse’ I thought I was super-swell when I established what I called a Professional Educational Development Account for each of them. The PEDA rewarded them with $5 for every client request to be used for continuing education.

Guess what happened?

We were audited by the Employee Development Department, which is the agency that handles worker’s classification in San Francisco.

The EDD was making the rounds in different industries. A few years earlier, when I was an aerobic instructor at health clubs, we all were ICs and then all the health clubs and gyms got audited so ‘poof’ all class instructors were switched to employees. (WHY? Because they had us structured wrong, as they told us what time class started and ended, provided the equipment, designated what type of class I taught, etc.)

Fast-forward to our audit of 3 years.

The EDD began looking into the spa and wellness world since our industry started to really boom and there were so many mis-classified workers.

They came to investigate my business to see if the therapists and front desk staff were properly classified.

Turns out there was no doubt I had misclassified the front desk/managers. They clearly should have been employees as they used my computer equipment, my office, and handled The Center the way I asked them to. I owed back taxes, penalties and fines on them.

But the way I handled the therapists was more of a “gray area’.

To make a reeeealy long story- short, it cost me over 2 years of fighting and stress and over $40,000 in legal fees.

Luckily the IRS didn’t get involved in my case, but it very well could have led to that which would have made it an even bigger mess.

Eventually we settled out of court because there were variables that the state couldn’t prove. Not sure what would have happened if I continued to fight it all the way, but at that point I just wanted to be done and move on.

It ended with a huge reduction in my penalties and back taxes, but still tons of money, anxiety and lost time.

If I had only had someone advise me on classification of independent contractors in the massage industry back then, this could have all been avoided!

Suffice it to say, I am now pretty well-versed in the ‘proper treatment of workers. I’ve interviewed advisers and consultants and actually have another interview coming up with a top attorney in Labor and Tax Law.

The classification, treatment, and requirements of IC vs Employee falls under the jurisdiction of many government agencies from the federal to the state to the city level.

There are many online resources I advise you to research, whether you are paying others to work for you, or being paid by another business or person.

Some of my favorite links to Check out:
Nolo Press– self help books
IRS (United States)
The Independent Contractor’s Report

In reality, as a business owner it will be a difficult argument to defend having therapists as ICs when you are running a therapy business, as they are performing the same work as your business category, and not a supporting service.
You also cannot tell them what to do or how to do their session, nor provide their tools, table, sheets, etc.

As a business owner of ICs you really have very little control over the IC.

This is why some businesses go with employees becuase then you have COMPLETE control over when, where, how, who and what the practitioner provides.

As an employer, your clients, patients and customer are more likely to receive consistent level of service, as the practitioners are providing the service, dressing the way you want them to, saying the exact words (if you wish) all under your direction.

 

 My (unofficial, non-legal) Advice To You As A Worker:

If you are an employee
You will know it. You will be hired and required to fill in the legal documents required by both your state and the federal government. Each state has different laws regarding the minimum wage they have to pay you, your breaks, your lunch, your vacation and everything else that is required. The employer is required to carry workers’ compensation insurance on you.

There are very strict laws put in place to protect employees. (believe it or not, fewer than half the states require employers to provide a meal break.) Your employee is allowed to dictate everything about your job (within the law). They will pay payroll taxes, social security, and all the rest for you. You only pay income tax on the money you earn.

If you are an IC
Please remember, YOU can (and should) negotiate everything. If they TELL you what they expect you to do, how to get paid, what to wear, when to come, etc, it is in your right to negotiate and come to a mutually agreeable solution. They certainly can ask you to do stuff, but you can say no!

Please remember, as an IC, you are running your own biz and they are merely contracting you to do work for them.

My unscientific guess is 95% of therapist IC relationships are classified wrong, so speak up.

BUT, when you do speak up, know that it will probably ruffle their feathers and they might simply say, “No Thanks” to you. Be prepared –  you must be willing to walk away if the arrangement is not what you think is fair or appropriate for your career path.

It is often easier to see how this plays out when we look at other industries.

To help you see if your situation is accurately classified as a contract worker, I often make the comparison to you as someone who needs to have your house painted.

Example of IC & Employee from out-side our industry:
Say you hire a contractor to paint the outside of your house. You tell them what colors and maybe even tell them you want them to do it on Thursday and not Tuesday. You ask them to put a tarp cover over the cars in the front so the paint doesn’t get on them, and you even tell them you want non-toxic paint used. BUT, they either tell you what it will cost or you negotiate the price, they invoice you, they provide their own tools, drop cloths and ladders. They can sub-contract to their buddies to do the work (and you don’t have to approve it) AND, if they don’t show up to do the job, they have the risk of loss.

Can you see how the painter is truly an independent contractor, not an employee?

Now, let’s consider that you hire a nanny who works out of your home, takes care of your kids, follows everything you instruct, and maybe even drives the kids to violin lessons in your car. Plus the nanny gets paid on an on-going basis. You can probably see how the nanny is clearly an employee.

Red Flags that you are an employee, even though they are calling you an IC: (These are just a few)

  • Your boss is asking you to do things that were not in your job description
  • You are asked to be available, but are not being paid for work or time on the job.
  • You are provided with your equipment.
  • You are told what to wear.
  • You are told you cannot solicit ‘their’ clients.
  • You are told what to do or how to do the service.
  • You are in the same business as the business paying you.
  • You are required to attend meetings, trainings or anything else.
  • You are trained by them in how they want you to sell, speak, act, or anything else.

So, look at your situation.
Decide if you like it or if you want to make changes. Decide if you are better suited as an IC (this means there is NO guarantee of income, you call the shots, and they can decide at any time to not contract with you.) Or would you prefer the stability and security of a guaranteed income, recognizing you may give up some freedom.

See what you can negotiate to make it a win for both sides.

I hope you’ll be lucky and have a conversation built on respect and learning more information pertaining to worker’s classification and rights, where both of you benefit from knowing the laws more clearly and having the mutual goal to do the right thing.

Again, to be clear, this is not legal advice. I am just sharing my experience in the hope that you will not be caught in the same trap.

Tell us below: Do you think you are a correctly classified worker? If not, what you plan to do about it?

About the Author Irene Diamond

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16 comments
Kim Rogers says May 2, 2014

Thank you for your information, Irene!

Another LMT & I are struggling with this issue at the office we work out of. The business owners “let go” their P/T receptionist claiming they couldn’t afford to keep her. Even after I explained her (minimum wage)weekly wages would be paid by (5-7) 1-hour massages — I often do 5 in one day! Since the receptionist has been gone, the office has become a free-for-all. Instead of stepping up and taking over the duties, the owners have neglected the office. And it has affected my and the other LMT’s bottom-line. In order to get clients to continue to come in to see us at that location, we have stepped in to clean the office, do laundry, answer the phones, do the paperwork/filing AND most of the marketing…when we put our hours down and ask to reimbursed for our non-massage time — we often get the run-around before they grudgingly pay. Currently we are paid a commission of 60% of each massage/bodywork session. Non-massage time is minimum wage ($7,25/hr). Our IC agreements are the “standard” copied off of some .gov website and doesn’t have any amendments for negotiation for us to mutually agree to. When I asked to sign a new IC agreement with amendments, I was told it wasn’t needed. The one I signed over 3 years ago was good enough…

I don’t know if this is correct, but if there was an amendment added to the generic IC, and that both myself and the owners mutually agree and sign the IC + the amendment, wouldn’t that fall under contract law? This is SO confusing! I want to do the right thing, but I also don’t want to be shafted. I think that is the main problem with both LMTs (other bodyworkers, etc.) and business owners.

As much as the other LMT & I would like to leave, we are “stuck” there until a new opportunity comes up and my financial situation changes (my husband lost his job). The good news is that the other LMT & I are planning on striking out on our own and are in the process of making up a business plan…but when it comes to hiring IC vs. Employee vs. Renters, we do have questions. Your story and the stories the others have shared here are just what we need to hear of what NOT to do. I hope you will put together a training program on this issue. I have looked at other programs on IC vs. Employee, but they don’t have a clue how to cover the issues specific to our industry. Thanks for reading my super-long comment. I look forward to seeing more in your blog posts. — Kim ☺

Reply
    Irene Diamond, RT says May 3, 2014

    Hi Kim,
    Glad you are finding this info helpful.

    I think the main thing to remember for you and other ICs is as an IC you are your own biz owner, and therefore it is acceptable and appropriate for you to negotiate an arrangement that works for both you and the biz.

    If they tell you it’s not needed, again, you can simply say you would like to work out an arrangement that suits you both.

    They may not like it, but it is still your choice. I understand many practitioners may just be happy to take what they can get, but ultimately it benefits everyone to have happy workers. (as long as the arrangement can be sustainable for the business expenses/revenue.)

    Good luck!

    Reply
      Kimberly Rogers says May 9, 2014

      Thank you very much for your insight, Irene. I’m glad to know that I’m not being “unreasonable” when requesting an agreement that is beneficial for both myself & the current establishment I work at. Don’t know if the current business owners will want to work out a new agreement. But heck, I’ve got to give it a try. Thanks for your help! ☺

      Reply
André Cross LMT, CNMT says March 4, 2014

I’ve been in practice for 5 years. Of all the “contracts” I’ve had I have only signed 1 agreement. All others were verbal agreements. In retrospect none of them were “IC” scenarios. Some required wearing shirts with their logos, among other seemingly minute details that clearly are not true to an IC scenario. There were definitely resemblances of “IC” but in actuality only the one I now have is an official IC agreement.

Reply
    Irene Diamond says March 5, 2014

    There are thousands of businesses large & small hiring practitioners every day and getting it wrong.

    Hopefully this info will help both sides a little.

    Reply
Robin Doerr says March 4, 2014

I am looking to hire employees along side my ICs until I have all employees. How do I transition? I have asked my renters to become employees and they will leave since they “feel” they make less. If I am paying salaries, taking out taxes etc., they will leave. I need coverage to avoid being there 7 days a week. How can I make the switch? I do want to be compliant.

Reply
    Irene Diamond says March 5, 2014

    Robin,
    It’s a huge red flag to have different classifications for people performing the same job.

    Make a decision on which way you want to go, and do it.

    Renter, and employee are least legal exposure, but take more work and book keeping and expense.

    It’s not easy, but you don’t want to be assessed back taxes and fines down the road if you are ever audited.

    Reply
Karen says February 28, 2014

My situation was a little backwards. I worked at a spa that utilized an IC’s pay-structure (paid per service only). This violated the minimum wage laws as there were many times when therapists did not receive enough appointments to cover the minimum wage and the owner did not cover the difference. Some employees would receive NO pay for a pay period. The owner flat out said that she did not have to meet minimum wage standards because we were “commission” and she did not make us do laundry. But we were required to buy uniforms and sit in the back room our entire shift. When she finally did start hiring IC’s for on-call positions, she treated them more like employees – requiring them to buy a uniform, be available for entire shifts, etc. Very convoluted and I felt the business practices were shady so I left. I would love to go to the schools and really discuss this with the new grads because unfortunately I have seen this happen more and more. IC’s being treated as employees and employees being treated as IC’s.

Reply
Vivian Madison Mahoney says February 28, 2014

Wow what an article and how timely Irene! Thanks for sharing all of this info including your personal end of it. I just completed about an hour and half of Independent Contractor Vs Employee Rules for CE Credits at my 2 day “Stuff That Works” seminar I presented in Orlando Sun and Mon. I too learned the hard way but thank God it was not with my company contractor massage therapists where the State and IRS could reclassify ALL of them and make me pay SS, Medicare, State Unemployment Tax, Workers’ Comp, refile State and Federal Quarterly’s, pay penalties and interest for as far back as THREE YEARS!! Thank God it was only on one CNA caring for my disabled daughter. Paperwork alone will make you wish you were dead sometimes!! Now my LMT friend in Colorado is going through the same thing and we surely hope she comes through this with flying colors as the case moves through hearing after hearing. She and I and maybe you will join us Irene?, will be doing webinars on Independent Contractor vs Employee Rules in a couple of months or so.
I get calls and emails from LMTs and Chiropractors offices all the time asking about hiring rules and regulations. I am so, so thankful you placed this article on your WONDERFUL NEW WEBSITE Irene!!!
Viv

Reply
    Vivian Madison Mahoney says February 28, 2014

    PS I forgot to mention that I solved ALL my employee and independent contractor worries as I placed all of them, including myself with an Employee Leasing Company. I hired and let go who I needed and wanted but no longer had ANY paper work, we were all covered by work comp, unemployment benefits if needed, had the ability to choose insurance coverage, 401K etc. All of this for a small administration fee that was SO worth it!! What a joy to not have those headaches. I had plenty of extra time to promote my business, had insurance coverage that PAID for Massage when provided and billed by a Massage Therapist and everyone loved getting those checks delivered on Friday with no worries of quarterly estimated taxes and responsibilities.

    Reply
      Irene Diamond says February 28, 2014

      Viv,
      I did the same thing for a while- passed my front desk/manager over to an employee placement agency who handled everything including work comp, payroll, end of year filing, etc.

      A huge relief, but cost my 28% on top of the hourly wage. Did that for 10 years and just this year brought it in house and we are just using a payroll service on our employees.

      Reply
sue says February 28, 2014

For my IC’s I do have an appearance document, outlining that clothing should be clean, slacks/skirts no shorter than the knees, short sleeved shirts – clothing that you’d feel comfortable to “wear to your grandma’s church” No visible body piercings,no scents/perfumes due to allergies. Also I request they arrive 20 min before their first client. I supply sheets, offer to supply lotion, if they choose to bring their own, no oil as it gets into the blankets. They make their own schedule, and only come in if they have a client. They choose how long they want between sessions. But I am wondering if the appearance document is not OK for IC’s? Have had a few therapist come to work wearing ripped shorts (like the kids wear) and perfume. Thanks

Reply
    Vivian Madison Mahoney says February 28, 2014

    Just wondering if you have these stipulations spelled out in your independent contractor agreement, agreed to and signed by your workers’ before they begin work?

    Reply
    Irene Diamond says February 28, 2014

    Sue,
    Hate to tell ya, but that appearance doc is probably not going be in your favor if you get audited.

    In a true IC relationship you wouldn’t care how your cleaning crew, accountant, lawyer, book-keeper, house painter dresses, would you?

    I feel for you, and know how important it is to have them dress ‘properly’ but you really can’t dictate it.

    Reply
Joyce says February 26, 2014

I still can’t figure out if I am classified correctly. I work for a chiro. He schedules the appts then asks if I’m available, if not he gives them to someone else. He keeps asking me to give him a schedule of when I’m available but that varies greatly with me so I keep saying it’s not possible. I thought as an IC that I would schedule the appts when it’s good for me which isn’t happening. So confused.

Reply
    Irene Diamond says February 26, 2014

    It looks like you are an IC, and the doc is doing the correct thing by parsing out the work. As an IC there is no guarantee of work. Each job (session) if correctly structured, is actually a new contract.

    The problem comes when therapists want a guarantee of work/income, which only happens in an employee relationship.

    You say, “I thought as an IC that I would schedule the appts when it’s good for me…” You can tell him your schedule and it would be great if he chooses to book clients for sessions within your preferred window. But keep in mind it is his biz, so he will do what fits his pts and his office best. If that mean he’s giving the work to another therapist then he most probably will.

    Hope that clarifies for you.

    Reply
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