The Legal Differences Between a Fitness Contractor and an Employee

Building a strong team is vital to the success of any fitness or wellness business.

Employment of fitness trainers and instructors is steadily on the rise, expected to grow 19% each year until 2031. In addition, over half of them are self-employed.

This moment in history provides the most ambiguous landscape for fitness and wellness professionals when it comes to classifying an independent contractor or an employee.

It’s a crucial topic for fitness and wellness business owners to discuss and understand because of the significant ramifications of misclassifying a worker.

This aspect of employment falls into employment or contractor law. It essentially has to do with how we classify those who work for us. There are certain rules and laws that apply when you hire an independent contractor compared to the rules and laws when employing a new employee.

Independent contractors vs. employees: What do you need to know?

With this in mind, when hiring your dream team, should you hire them as independent contractors or employees? This is one of the most common and important agreements you’ll make in your business.

Now, the biggest risk that business owners face is misclassification when they call their team members “contractors” but really treat them like employees. This happens because small business owners know it is cheaper and easier to have contractors.

This is a problem because the CRA, IRS, or relevant tax authority has a vested interest in ensuring that if you have employees, you’re paying the related state taxes. The laws which explicitly protect employees don’t impact or protect independent contractors.

Misclassifying your workers can lead you to face significant penalties and fines as well as back taxes for all the years of misclassification, plus interest. Sadly, I have seen this drive more than one of my clients bankrupt.

What’s the difference between an independent contractor and an employee?

There’s a lot to consider, especially when it comes to operational and legal implications. For instance, how much and when do you pay them? What about taxes, benefits, and liability and insurance coverage? How about labor laws and rules regarding termination?

It’s important to think of contractors and employees separately. So, let’s find out the differences between them.

Control over services

When you have independent contractors, you have to realize that you have less control over how the services are provided. You have to think of a contractor as someone who operates their own business, and you are simply outsourcing part of your own business to them.

Both the IRS in the United States and the CRA in Canada have something called a, “Control Test,” which determines whether someone is an independent contractor based on the degree of control of the services being provided.

How does this play out in our industry?

The area where I see fitness and wellness professionals struggling with this is when they have someone who works for them, and they want to oversee and fine-detail the way that the work is being done.

Effectively, they’re controlling the services, they’re making the person wear the clothing of a studio, they’re giving them business cards, they’re presenting them as a representative of that particular business, but they want to call them a contractor. The biggest issue is that they will tell the person exactly how the services must be provided.

Say you’re hiring a yoga teacher or a personal trainer for your business. You’re not allowed to tell them how to do their job. You’re not allowed to have control over the way the services are provided. When you hire them, you’re outsourcing part of your business to them, and they are doing it.

Taxes

In the context of taxes this is where the business owner sees the benefit in hiring independent contractors vs. employees.

A contractor is seen as a business expense, and thus all tax responsibility falls on to the contractor. They would be responsible for paying all federal and state/provincial taxes.

As an employee, all the burden would fall on the business owner, the employee would have all the taxes withheld by their employer and the business owner would be responsible to pay all federal and state/provincial taxes while also contributing to the employee’s social security and Medicare.

Benefits & business expenses

Independent contractors are generally responsible for their own benefits, such as health insurance, retirement plans, and paid time off. Additionally, contractors typically bear the expenses related to their business operations, including equipment, supplies, and transportation costs.

Employees, on the other hand, may receive benefits from their employer, which can include health insurance, retirement plans, paid vacation and sick leave, and other perks. Employers may also cover certain business expenses, such as work-related equipment and supplies.

Liability & insurance coverage

Independent contractors are typically considered separate entities from their clients, which means they are personally liable for any damages or legal issues that may arise from their work. Contractors are often required to carry their own liability insurance to protect themselves and their clients from potential claims.

What about an employee? Well, they generally have limited personal liability related to their work. If an employee causes harm or is involved in a legal dispute while performing their job’s duties, the employer is usually responsible. Employers typically carry liability insurance to cover such situations.

Labour laws & termination

Independent contractors have more flexibility and autonomy in how they conduct their work.

That means they’re not subject to most labor laws that protect employees, such as minimum wage, overtime pay, and protection against unfair termination. Contracts with clients usually define the terms and conditions of the working relationship, including termination clauses.

Employees are entitled to certain protections under labor laws. These include minimum wage requirements, overtime pay, and protection against unfair treatment or termination. Employment contracts or labor laws typically govern the terms of employment and the conditions under which an employee can be terminated.

Independent contractors or employees? How do you know who to hire?

One thing that’s very important to mention in the discussion of the difference between an independent contractor and an employee has to do with jurisdiction. We recommend that before making any classification of independent contractor or employee, first consult with a lawyer to understand whether, in your jurisdiction, the people working for you are allowed to, in fact, be independent contractors or employees.

When it comes to an employee, the benefit is that you can control the way the services are provided. You can control the scheduling, and you can control all the different elements of the way the services are performed. You can tell them where to be, when to be, where to sit, how to sit, and what to do.

Again, there’s minimal risk to health and wellness business owners or issues around employees because government and tax authorities, in some ways, prefer for you to have employees. With employees, they know that you’re paying state or provincial taxes as well as the peace of mind that workers are being protected.

Hiring new staff? Ensure your business is protected from legal risks.

So, in summary, the big issue with independent contractors and employees has to do with classification, specifically with small business owners and the health and wellness industries trying to have only contractors but treating them like employees.

Mixing this classification is a major red flag and a major risk. There is the possibility of being audited by your relevant tax authority and having to pay back taxes plus interest plus fees.

The best way to make sure you are correctly classifying your workers is to look at the relationship, consult with a lawyer who understands the industry, and ensure you’re set up for success.

Ready to take the stress out of the law and discover legal best practices from a law firm that truly understands the fitness and wellness industry? Our whole team at Conscious Counsel is here for you, excited to support and help.