To IC or not to IC. That is the Question.

I’ve seen a lot of articles about Kevin Ogar’s horrific injury floating around the web. For those of you that don’t know, an elite CrossFit athlete, Kevin Ogar, was competing at the OC Throwdown last week. He was attempting a heavy snatch, couldn’t complete the movement, bailed, and dropped the bar. Bailing on a lift is common in CrossFit, especially when the lift is heavy. However, when the bar dropped, it bounced against the stacked weight plates behind him, hit him in the back, and injured his spine. It is unknown whether Kevin will regain use of his legs, although reports have indicated permanent paralysis.

Without going into the amount of backlash CrossFit is likely to receive (and already receiving) regarding the dangers of the sport, I’d like to first point out that Kevin has received immediate, immense support from the CrossFit community. Kevin, like many elite CrossFit athletes, was uninsured. He suffered a devastating spinal injury, so surgery was naturally required. Almost immediately following reports of his injury, a fund was established to help pay for his surgeries, and over $100,000 has been raised already. This is a large part of what I love so much about CrossFit: the community. We support one another, we cheer each other on, and we lean on each other when things get tough.
After learning about Kevin’s tragic injury, it got me thinking about employer classification of their workers. I know it seems like that connection came completely out of left field, but hear me out. Had Kevin been a full-time employee for a business, there’s a good chance he would’ve been offered some kind of healthcare option under the new Affordable Care Act guidelines. However, Kevin was an independent contractor and part time employee. Thus, like many Americans, he was uninsured. Now, I’m not saying Kevin was improperly classified as an independent contractor. But, it definitely got me thinking about how employers decide to classify their workers as independent contractors or employees. Many business owners simply choose to classify their workers as independent contractors due to the benefits associated with doing so. However, mis-classification of an employee as an independent contractor can cause a legal nightmare for an employer.
Benefits to Employers and the Regulatory Authorities in Charge:
Many of you do not know why classifying a worker as an independent contractor is such an attractive option to employers. First off, there are a number of taxes employers can avoid paying to the government if their workers are classified as independent contractors (or “ICs” to keep it simple). Employing an IC means an employer is not responsible for paying payroll taxes, the minimum wage or overtime, complying with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers’ compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security. Naturally, this looks really good to a business owner who is trying their best to keep overhead low, thus maximizing as much cheddar in the business coffers at the end of the day.

Figuring out whether a worker is an IC or employee (or “EE”) is not as easy as looking to a code section or regulation for answers. There is really no one-size-fits-all approach in determining whether a worker should be classified as an IC or EE. In California, there are several state agencies involved with determining independent contractor status. The Employment Development Department (EDD) is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE) focuses on compliance with wage, hour, and workers compensation insurance laws. Other agencies such as the Franchise Tax Board (FTB), Division of Workers’ Compensation (DWC), and the Contractors State Licensing Board (CSLB), also have regulations or requirements concerning independent contractors. Because there are so many entities involved, a worker could be considered an IC by one regulating agency, and an EE by another. It is therefore important to understand how most courts in California approach classifying workers.
Economic Realities Test:
In dealing with any matter where classification of a worker is at issue, the DLSE will first begin by presuming the worker is an employee per Labor Code Section 3357. This presumption is rebuttable, meaning an examination of the facts is necessary for an ultimate determination as to whether a worker is an EE or IC. The California Supreme Court established the “economic realities” test in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. Of the factors evaluated by the Court, the most significant in applying the economic realities test is the degree of employer control over the work performed and the manner in which it is performed. Very simply put, the more control an employer has over the work itself and how work is done, the more likely the worker will be considered an employee. There are a host of other factors a court will examine when applying the economic realities test, depending on the issues involved. But I will save you all the headache of making you read them here.
You’re probably thinking, “As long as I don’t control work details, I should be fine.” And you MIGHT be right. However, in the case of Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288, the Court found that an employer-employee relationship existed, even where there is an absence of control over work details, if (1) the principal retains pervasive control over the operation as a whole, (2) the worker’s duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary.
The application of this test and evaluation of these factors are not easy, and I strongly suggest seeking legal counsel before classifying your workers as ICs willy-nilly. A good attorney can help evaluate your business and determine whether it’s acceptable to treat your workers as ICs, or if they should be classified as EEs. They can also help you draft independent contractor and employment agreements, which can be very helpful to an employer.
Just remember — because employers are able to avoid many state and federal tax payments as a result of classifying workers as ICs, the IRS and state government construe IC classification narrowly. What does that mean for you if you’ve improperly classified your EEs as ICs? Well, let’s just say the government always gets its piece, and you could be looking at some pretty hefty penalties imposed by both your state and the IRS. Let’s not forget you could also be looking at potential lawsuits brought by disgruntled workers.

Box Out the Noise

I seem to see new CrossFit gyms, or “boxes,” popping up left and right. For those unfamiliar with the CrossFit box’s “ideal” business locale, most  owners look to take up residence in commercial spaces, typically located in industrial parks. One reason these types of spaces draw box owners, is the fact a landlord may be more lenient with respect to noise in an area designed for industrial activity. All you CrossFitters out there know that we’re constantly dropping weights, and there can be a lot of noise and reverberations as a result (no, your grunting really isn’t that loud). While landlord leniency may — in theory — be generally true, it does not necessarily shield box owners from receiving noise and vibration complaints from neighboring businesses.

 

Typically, these issues don’t start out as issues for new box owners. But as membership size and attendance increase, owners can start to rub their neighbors the wrong way (especially if you and your members start chewing into the available parking — a topic for another day). So, what is a box owner to do when hit with neighbor complaints?

1. Look to the Lease:

There are many differences between commercial leases and residential leases. In California, many landlords choose to use “CAR” (California Association of Realtors) forms as either a template for the commercial lease, or the entire lease. However, commercial leases can be — and often are — custom documents drafted by the landlord’s representative. More often than not, these documents can be lengthy and include a variety of provisions relating to the lease terms itself and acceptable and unacceptable uses of the property. So, if you’re talking about opening a CrossFit box (or any fitness facility, for that matter), you want to be sure the lease contemplates your intended use — i.e. you want the lease to acknowledge that you’re using the property for what you discussed with the landlord. Even better, would be a provision acknowledging that loud noises are part and parcel to the operation of a CrossFit box. If the lease does not state how you plan on using the facility, there’s a higher chance you’ll be up s**t creek if and/or when complaints come down the pike from neighbors.

2. My Lease is Already Locked and Loaded:

If you’ve already signed a lease and your lease states you’re using the location as a CrossFit box, and noise is part of the deal (I won’t go into what happens if your lease doesn’t have these things), then generally speaking, a landlord can’t just kick you out (without going through a particular legal process, called an “unlawful detainer” action). Assuming you’re not violating any other provisions in the lease, the best way to resolve noise complaints is to discuss the situation with your landlord. If the landlord knew you’d be using his/her space as a CrossFit facility, knew that you and your members would be dropping weights, and knew that it would be generally loud during your hours of operation, then you can (and should) request the landlord remediate the situation. One such way box owners can remediate noise issues is to request beefed-up soundproofing in the facility. Often, a landlord will pay for some (or maybe all) of these costs, so you should discuss this with your landlord before doing it yourself.

3. Thinking “Outside the Box” for Your Location:

One situation I’m noticing more, are boxes that operate outside of industrial spaces. Urban areas that are densely populated do not often have a plethora of industrial parks to choose from. Box owners are often forced to get creative, which can lead to major issues. One such CrossFit box, CrossFit NYC, opened on Columbus Avenue on the Upper West Side of New York, on the basement level of a 31 story condominium building. The 12,000 sq ft establishment had sold over 350 memberships prior to opening its doors, planned on offering 800-1,000 memberships, and boasted over 500 classes per week. Unfortunately for that box, they did not get the proper permits from the city’s Board of Standards and Appeals (BSA) to run the box. At the time they opened, their application had been submitted — but not approved. The box opened without the permit, and a multitude of noise complaints ensued. An attorney was brought into the mix (dun, dun, DUN!), and 150 out of 167 residents signed and notarized an opposition to the permit pending before the BSA. The Board voted unanimously to rescind the box’s permit.

In that box’s case, it looks like a case of putting the plate before the barbell (see what I did there?). You always want to be sure your permits are squared away before operating your business, but this is just one example of noise complaints gone terribly awry.

At the end of the day, I always recommend box owners and those intending to open a box, consult with legal counsel to ensure their commercial leases are in order. It’s always easier to negotiate a lease before it’s signed.