Coaches: Employees or Independent Contractors?
In the competitive world of sports and fitness, titles matter. Perhaps none more than those of employee and independent contractor. Whether you are managing a gym or overseeing a youth sports league, it is important to understand the difference between the two designations. While classifying a coach as an independent contractor has many advantages, the costs of misclassification can be high.
Benefits of Classifying Coaches as Independent Contractors
Classifying a coach as an independent contractor instead of an employee offers a number of benefits.
The cost savings for your organization can be significant. With an independent contractor, your organization is not responsible for payroll taxes, unemployment compensation, or workers' compensation. In addition, you don’t have to provide independent contractors with employee benefits, such as health insurance and paid time off.
An independent contractor arrangement also offers your business increased flexibility and reduced legal obligations. For example, you may need a coach for just a short period of time, such as for a specific program or a particular season. Let’s say that you operate a tennis facility and you bring on a coach to run a youth program in the summer. If that coach is an employee, when the program is over and you need to either reduce their hours or let them go, they may be entitled to unemployment compensation. With an independent contractor, you can bring the coach on as needed without having to worry about unemployment compensation or other costs and legal requirements associated with reducing an employee’s hours or laying them off.
When is a Coach an Independent Contractor
As with many other legal questions, the answer to whether a coach can be classified as an independent contractor is not straightforward as there is no single standard for making that determination. Instead, there are multiple standards and the applicable one depends on the purpose of the classification. For example:
For federal tax purposes, the Internal Revenue Service (IRS) uses the right-to-control test. A worker is considered an independent contractor if the company has the right to control or direct only the result of the work and not what will be done and how it will be done.
For purposes of the Fair Labor Standards Act (FLSA), the Department of Labor (DOL) uses the economic realities test. A worker is considered an employee if the worker is economically dependent on the employer for work.
Every situation is unique. Regardless of which standard applies, an individualized assessment of relevant factors is required to determine whether a coach is an independent contractor. Examples of relevant factors include:
Degree of Instruction - When you provide a coach with detailed instructions on how to work, such as specific drills they need to run during practice, that indicates that they are an employee. Whereas, less detailed instructions indicate less control over the coach and that they are more likely an independent contractor.
Method of Payment - If you pay the coach on a hourly basis, that usually indicates that they are an employee. Independent contractors are usually paid on a project basis, such as paying the coach on a per session or season basis.
Permanency of the Relationship - When your arrangement with the coach has a fixed ending date or involves regularly occurring fixed periods of work, that supports the coach being an independent contractor. If there is no fixed ending date, the coach is likely an employee.
Risks of Misclassifying Coaches as Independent Contractors
Deciding whether a coach is an independent contractor or an employee is more than just a choice of words. Misclassification can result in significant legal and financial consequences, including fines and tax obligations.
For example, in 2004, the IRS assessed the Fairfield United Soccer Association with $334,441 in back taxes and fines for misclassifying coaches and referees as independent contractors. Ultimately, the IRS and the association reached a settlement agreement, whereby the association agreed to pay $11,600 in back taxes and treat certain coaches as employees going forward.
Minimizing the Risk of Misclassification
Fortunately, there are proactive steps that organizations can take to reduce the risk of misclassification. These include:
Evaluating all current and future classifications to determine whether they comply with federal and state law.
Drafting a detailed independent contractor agreement that sets forth the terms of the relationship.
The decision to classify a coach as an independent contractor cannot be a choice of convenience dictated by financial and logistical benefits. Rather, it is a determination that requires a careful and individualized assessment in order to minimize the risk of misclassification and the potential liability it entails. Taking proactive steps now can save your organization from significant legal and financial consequences in the future.
Levene Legal can help you take these steps. We can evaluate your current classifications as well as draft and review independent contractor agreements.
