Fitness Industry Update: Why Independent Contractors May Not “Nama-stay” That Way

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Recently passed and proposed employment laws relating to the classification of employees may significantly impact the fitness industry. Now more than ever in California, New York, and New Jersey, an employer’s misclassification of a fitness professional as an independent contractor (as opposed to employee) carries potential legal and financial consequences, such as unpaid wages and benefits, fines, penalties, and in extreme cases, being shut down.

As Proskauer’s Labor & Employment attorneys Danielle Moss, Phil Lebel and Jacob Tucker explain below, employee misclassification is even more complicated in the fitness industry, in which it is not uncommon for individuals to provide services to multiple businesses simultaneously.


Background

Towards the end of 2019, you may have noticed a glut of articles predicting the end of the “gig” economy. Headlines yelled: “California Just Dropped a Bomb on the Gig Economy – What’s Next?” and “All Eyes Are on California as Uber and Lyft Fight Labor Leaders to Determine the Future of the Gig Economy.” This alarm stemmed from California’s passage of Assembly Bill 5 – “AB5” for short – and its anticipated effect on companies that will now have greater difficulty classifying workers as independent contractors.

Although the primary focus of the law was to address concerns regarding the classification of ride-hailing app drivers, AB 5 and subsequent proposals in New York and New Jersey have far broader implications – including to employers in the fitness industry. Included below is a quick primer on the laws and some of the reasons why boutique fitness employers should consider undertaking a “wellness check” of their workforce classifications:


California’s “AB5”

Passed by the California Assembly in September 2019 and effective January 1, 2020, AB5 codified and expanded the reach of a three-part test for deciding whether a worker is an employee or an independent contractor under California wage and hour laws. Known as “the ABC Test” – assuming one of AB5’s exemptions doesn’t apply (in which case a different test would apply) – employers must satisfy each of the following requirements to properly classify someone as an independent contractor in California:

     A = the worker must be free from the control and direction of the company in connection with their performance of the work, both under the contract (as applicable) and in practice;
     B = the worker must perform work that is outside the usual course of the company’s business (in other words, there aren’t employees at the company who are performing the same or substantially similar tasks, or the services being performed by the worker aren’t part and parcel of the company’s business model); and
     C = the worker must customarily be engaged in an independently established trade, occupation, or business that is the same nature as the type of work performed for the company.

Unfortunately the idea that this test is as easy as “A, B, C” is misleading because it is a very fact-specific inquiry that must be conducted on an individualized basis, and is not a quick or easy checklist. Let’s walk through each component of the test that employers must carefully consider in evaluating each person they retain to perform any services, regardless of their job title or category:


Control and direction.
There are many things that an employer should look at in determining this factor, including but not limited to whether they control where the individual’s work is performed and when they are scheduled to work. Generally speaking, if an individual cannot come and go as they please and must report to a set location at a pre-scheduled time determined by the company, those factors suggest that they are not “free” from the control and direction of the company, weighing in favor of that person being an employee. Further, to the extent that the company provides detailed instructions about how the work is to be accomplished – leaving little discretion to the individual about the means of accomplishing the end result – this suggests employee classification is more appropriate.


Outside the usual course.
Taking a nightclub as an example: the essence of the business is to provide a party-like, music-filled atmosphere. The club DJ’s work – preparing and executing the playlist for partygoers’ enjoyment – may therefore not be considered “outside the usual course” of the business. On the other hand, if, for example, a boutique fitness owner were to hire a painter to create a special mural in their studio on a onetime basis for a set fee – that painting activity would most likely be considered “outside the usual course” of the fitness studio’s business and thus, weigh in favor of the painter being properly classified as a contractor. This requirement is often considered the most difficult for companies to meet.


Customarily engaged.
This requirement appears to limit independent contractors to those individuals who perform the same type of work outside of their relationship with the employer for other third parties or entities. For example, a licensed massage professional may routinely treat clients outside of, and in addition to, massages at an employer’s business. If this professional is not customarily engaged in independent work for others outside of the employer’s business, the professional will not be able to meet the “C” requirement and cannot be considered an independent contractor.

Obviously, these are just a few basic examples to attempt to provide texture to this new and untested law – but each case will depend on the unique facts and circumstances presented. Already, Uber, Postmates, and other companies and/or industry organizations have challenged AB5 in court and so whether (and to what extent) it will remain enforceable remains to be seen.  To date, at least one California federal judge has weighed in and denied Uber and Postmates’ request to block AB5.


Proposals in New York and New Jersey

Not to be outdone, other states have followed California’s lead. For example, while courts in New Jersey have been using the ABC Test for a while, New Jersey Governor Phil Murphy just signed five new misclassification bills into law on January 21, 2020. The proposed bills significantly increase punishments for misclassifying independent contractors in the state. Among these penalties are higher fines and the possibility of the government shutting down offending businesses – which are certainly matters of concern for any New Jersey based fitness boutique.

Meanwhile, New York Governor Andrew Cuomo recently compared the gig economy to sweat shops and publicly vowed to push for stronger employee misclassification regulations by May 1, 2020. Therefore, fitness boutiques in the Big Apple should keep their eyes peeled for these developments in the coming months.


What This All Means for the Fitness Industry

You may be thinking to yourself: “I don’t own a ride-share company or delivery service, so why should I care?” Even though those are the businesses currently grabbing the headlines, AB5 and similar laws in other states have the potential to seriously impact the way boutique fitness companies currently operate. Here’s why:


To Be or Not to Be an Independent Contractor – That is the Question, Regardless of Industry.
The legal risks associated with an employer’s misclassification of an independent contractor (whether it be drivers or greeters at a Pilates or Yoga studio) are staggering given the fact that employees are covered by a swath of federal and state laws and regulations that simply do not cover independent contractors. A boutique fitness owner’s threshold determination of whether to hire someone as an employee or to engage an independent contractor can be the difference between their adherence to overtime and minimum wage laws, withholding state and federal employment taxes, and having to offer certain benefits like retirement plans and health insurance versus not – and later being called to account for that failure over a span of several years (depending on the state they operate in). These are just a few examples of the types of claims that can be brought against a fitness boutique owner for alleged misclassification, and that’s not counting attorney’s fees, damages, penalties and other associated costs that may be assessed on top of these figures.


Even If You Aren’t Focusing On It Yet, Everyone Else Is.
The Internal Revenue Service has specifically scrutinized how fitness studios classify their workers to ensure compliance with tax laws and regulations, and at least one lawsuit has been filed in California against a spin studio alleging misclassification of fitness contractors under AB5. Achieving your 10,000 steps-a-day goal by walking to a courthouse or government agency may not be what you had in mind – and so you may prefer taking a closer look at your staff to ensure compliance with these laws now.


Boutique Fitness Companies Have Unique Issues.
While fast food restaurants may deem kiosk machines sufficient to place orders for food, you may not feel that a machine can provide your customers or members with the personal touch they’ve come to appreciate when they walk into your gym or studio. Only you can decide for your business whether you value having direction or control over your staff such that you are willing to potentially forego their independent contractor status; or whether you’re happy to permit contractors to work for you at their discretion contemporaneously with other fitness businesses without fear of theft of trade secrets or confidential material. Whatever you decide, if you haven’t already, it is time to start asking yourself these tough questions – especially whether your worker is performing work outside of your gym or studio’s usual course of business – in order to ensure that your goals, and the services provided by your workers, align with the laws.

Running a boutique fitness company is difficult enough without having to contend with a misclassification lawsuit or government investigation. Fortunately, so that you can continue to focus on the leg (or upper or lower body) work, we have extensive experience providing our clients with guidance and advice relating to these issues.

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Contributed by our Partner

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