Are You Really An IC or Employee?

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

(Published 2011/02/25)

I know the unfortunate situations are 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?