Hello Studio Owners,

I am curious to know if you set up your studios with instructors as employees or independent contractors?

I would especially be interested to hear from anyone who has made the transition from one set-up to the other...

In relation to this, what are your policies for instructors requesting time off?

I appreciate hearing from other business owners in the Pilates community!

By legal definition, an independent contractor
works other places, sets their own hours,has their own equipment, and never works more than 20 hours in one place.

With an employee, you pay their taxes, which helps most air-head Pilates teachers who dont, and the business gets a deduction. When I had a large staff, we also offered health insurance, which was a reason not to quit.

Businesses with independent contractors get audited more. My mom, who is an accountant, always tells me it's not worth going to jail for someone.

Very common in Los Angeles is teachers subleasing, they pay you a rent and handle their own appts, money, cancellations, etc.
That's a good set-up. Some studios just give them clients, rather than the studio keeping the clients and paying the teachers.

There are many creative models; out of the 90's came the P.T. model, very clinical, waiting room, dont start until the instructor starts, etc. Few, very few studios, run it like Joe and Clara ran theirs.

I am a studio owner but also an employee of my corporation, works out well as with one other employee we qualify for health insurance at a good deal, the business pays my taxes, takes the deduction, yet I get most of it back.

Your best bet is to talk to an accountant
and work it out on paper, have the teachers sign a non-compete or policy statement, signing you need two weeks notice for time off. HArd when you have actors/teachers who cancel for auditions the next day!

Equiniox has a 20 page agreement with its teachers, including meetings, dress code, etc.

The bigger you get, the more problems you have unless you have a talent for that macromanaging.
Siri Dharma Galliano

I work for a studio who treats us like an employee, but calles us "independent contractors". Would be interesting to see a legal definition of independent contractor in the fitness realm. We don't set our own appts., we give her a set number of hours and days we work and she books our clients. We also use the fully equipped studio and don't bring anything with us. I feel like we're employees, not contractors. If we need time off, we need to inform her 2 weeks in advance. She doesn't withold taxes and 1099's us intead. We're paid a flat hourly rate for private sessions, with incremental increases per person in semi-privates and classes. She's been doing this for 10 or more years, and must have legal or financial advisors that tell her it's ok. Almost all of us work in other places during the week and I don't think anyone puts in more than 20 hours a week. Any opinions? I'm wondering if this type of arrangement is really legit, or if she should be witholding taxes and covering us under worker's comp. as an employee.

Hi Luann
I own a studio and the instructors who work here "rent" time from me. I charge them a set fee per hour and they do their own advertizing, book their own clients and charge what they want. I have owned the studio since 2003 and it's worked well. I do not 1099 as I claim ther income as rental. I also have a chiropractor, a massage therapist and a Gyrotonic instructor with her own expansion machine, who have the same arrangement. They sign a contract and must have their own insurance. My studio is 1662 sq. feet and I have 5 reformer/tower combo systems, a caddilac, chairs, barrels and so forth so they do not need anything, I also have bands, balls weight, etc. It works out well for us. I even refer clients when I am too busy as I would rather have the instructors busy and get the rental from them than have the potential client go to another studio.

Luann, Independent contractor's may vary from state to state so I would ask your accountant or check on line. Based on your post, here in PA you would be considered an employee.

I am a studio owner and my accountant is very specific on this law. Your studio owner needs to be careful.

Hello all,
We can certainly speak to this issue as we went through both a Worker's Comp. audit as well as an EDD audit to determine if our Independent Contractors were indeed independent contractors. In a court of law, we were found to be in compliance.

There are very specific guidelines you must adhere to. We are compiling a package to offer to everyone with what we have learned from this process and will offer it on the United Pilates Collective Website for download.

If you would like more information, please contact tracey@ehspilates.com

I went through the legal definitions and where I think my studio owner is cleared from calling us employees is in the performance of our job. She doesn't dictate how we do our job or how we achieve our end results - but in all other aspects (scheduling, attitude, equipment, notification of absences, etc.) we are acting like employees. I've decided not to bring it up to her - it's her business and it's working for me, although I would like to not have to worry about my own taxes. Will be interested to see what Nancy Myers comes up with on the Collective!

I have employed both Independant Contractors and Employees at my studio and have spent a lot of time researching this topic.
It turns out, each state is different in it's definition of an independant contractor vs. employee. You would have to check with the Department of Labor in your state.
In the state of CT, the main difference is that an independant contractor must 1) Prove they are working at other studios 2) Make their own hours 3) Carry their own Insurance and Workers Comp. policy 4) Submit an invoice to the employer for the hours worked 5) Recieve a 1099 at the EOY and understand that they are responsible for their tax payments and deductions 6) They are not eligible for company health benefits 7) The employer is not required to contribute to their self-employed pension if they have been working at the studio for 2 or more years.
Having an employee required so much paperwork and additional expenses, that it was just not worth it for me. Instead, I was able to pay an IC a higher rate and they were able to take more deductions, it was a lot less work for me, and in the end everyone was happier!

The IRS has very specific guidelines for independent contractors. They can be found here http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

One of the bigger problems I see are studios that pick and choose what they want to out of an employee relationship and an IC relationship.

An example - A studio calls the instructors independent contractors, but sets the price they can charge, collects the payments from the clients, the instructors turn in a time sheet and receive a check from the studio. They are working on the studio's equipment, they are limited in where else and when else they are allowed to work and required to teach a specific method or style of pilates. The instructors carry their own liability insurance and the clients are a mix of those the instructors have developed and people that call the studio. I have seen studios such as this get audited and be told that their instructors are misclassified and need to be employees.

In version 2 - The studio is fully equipped, the instructor pay a set hourly rent for the hours used, they bring in outside clients. The clients pay the instructor, the instructor pays the owner. There are no restrictions on where else the instructor is teaching or what they are teaching and they carry their own liability insurance. This has been upheld as an IC situation. In this situation the IC can issue a 1099 to the studio to prove rent payments if they want or if they have any concerns about the studio not claiming that income (such as paying often in cash etc).

Situation 3 - You are brought in to teach a couple of classes, your students are provided to you, your space is provided to you, but you are allowed to teach any style that is appropriate for that class. You carry your own insurance. This can go both ways. If it's an ongoing situation with no end date the IRS tends to look at it more as an employee situation. If you sign a contract for a semester or x number of classes at x price it can be handled as more of an IC because you are being hired for a defined contract with a limited and stated scope of action and time.

As others have said, check with your state, but also with the IRS. The IRS also has a quiestionnaire you can fill out and get a determination, in writing, on your situation at no cost.

If you are an IC, you need to check with your state sales tax authority and find out if you are required to collect sales tax on your invoices for service and if so you need to set up the paperwork for that and make sure you collect and file. Also depending on your state you will be required to carry your own workman's comp insurance and possibly unemployment insurance. These requirements are state set so the secretary of state for your location is the best place to start finding answers.

If you are an IC you might also look into setting yourself up as an S corp, corp, or LLC for both tax and liability protection. Since everyone's situation is unique consulting with a CPA and business lawyer are good places to start.

Lastly, I found the comment about most air headed pilates instructors not paying their taxes offensive in both that you would refer to instructors working for you as air heads and the general view that pilates instructors have no business sense.

I was teaching in a studio where I was paid as an independent contractor but treated like an employee. As I did MY research into how I was being paid I started to realize that I was being taken advantage of. The studio owner was not aware of the fact that she was taking advantage of the situation, she just didn't know better. I'm sure this is the case with many studio owners.

After getting fired for bringing this up and asking for more money I have since opened my own studio. I'm not employing anyone at the moment, but if and when I do, I'm going to use the model that Luann is using. If you want less paperwork and more time freedom as a studio owner, then this is the way to go. Yes...you will have less control over your studio, but you could make a living on just rentals if you wanted to. This will give you the chance to train as much as you want and you will have less issues to worry about.

If your dream is to have a studio that is a reflection of you, where everyone teaches the way you do then you will definitely want to pay your instructors as employees. This way you can control when and how they teach and all of your clients get the same thing when they come in.

No matter how you decide to pay your employees, make sure you don't get greedy. We work in an industry where professionals are routinely taken advantage of and for some reason it's accepted as the norm. Happy instructors make a happy studio, so pay your instructors what they're worth. If you do, they will more than pay you back.

Brittany, Many studios are owner /operated and the owner is probably putting in many hours teaching, as well as running the business.

I don't think that owners are greedy per se, but owning a studio is very expensive and they have to consider the bottom line . ie; rent, utlities, payroll, taxes, insurance, advertising,cleaning, etc and at the end of
the day we all need to make money.

I've owned my studio for 7 yrs and as I previously mentioned I rent my space to other instructors, which saves the headache of paperwork and payroll expenses and so forth, but just like anything there are plus's and minus's like if the instructor/tenant leaves, your income will be effected, if an instructor/employee leaves, at least you still have the clients.
I do have my instructors sign a non compete and a contract as to term of lease, but believe me the legal costs far outweigh anything you will recoup from a suit.

Sorry Brittany, but I'm not the one with the studio or have anyone working for me,to quote you - "I'm going to use the model that Luann is using." I think you meant to reference someone else's approach. I'm the one who is wondering if she's really an employee, not an IC and I truly believe that I fit the definition of employee. If I bring it up to my studio owner, though, I know she will get defensive and say something like "if it's not working for you then you should work somewhere else". I have no worries about my taxes, I declare everything I'm paid by anyone. I also carry my own liability insurance and voluntarily purchase disability insurance from the state of CA, so I believe I'm covering all my bases. I would like more money and have approached her in the past for increases, but she says I'm at the "cap" of what she pays instructors, whether it's true or not. My goal is to build my home business to the point that I don't have to work for anyone else. Maybe in time...

Sorry Luann, I must have been looking at the wrong name. I was trying to say that I will choose to rent my space out to instructors as opposed to paying them as employees or independent contractors. Right now it's only me working out of my studio and I like it that way, but more importantly my clients like it that way. It only takes me 25 clients/week to make a 6 figure salary, so I would not be able to sleep at night if I had instructors working for me and I was only paying them 40% of what the clients were paying.

I also was not accusing anyone here of being greedy, just make sure that if you are paying your instructors as independent contractors they should be paid 50%-70% of what the client pays. I personally would choose closer to the 60-65% range. If you are paying them as employees you can get away with less because you are paying a percentage of their taxes, etc. Either way make sure you pay your employees what YOU would WANT to get paid, not what you would EXPECT to get paid, or more importantly what you were being paid 9 years ago before you owned your own studio.

Also another thing to keep in mind if you are paying your instructors as independent contractors. It is not your decision what you are paying them. They are business owners themselves whether they know it or not. They pay the same business taxes you do. Technically they are the ones that decide their rate. Many instructors aren't aware of this. Be careful, you don't want to find yourself in court.

Let's not kid ourselves. As far as expenses go, Pilates Studios are one of the easiest and least expensive businesses to own. We are extremely lucky to work in an industry that an instructor can decide to open a studio on May 1st and be up and running on June 1st. It's not hard, so be honest with yourself and your instructors. Yes you are giving them a place to work and equipment to work on, but they are giving you money for doing NOTHING! Of course there are other things besides instructing that you have to do, but you should not make more than they do for the session that they are teaching. Without them, it would just be you slaving away 80 hours/week, miserable wondering why you decided to do this in the first place.

LA,

I dig the way you do business. I just read your post again I think you're doing it the best way, but that's just my opinion.

Britanny I appreciate your comment about the way I do business, but I want to add that I don't know where you live, but in my neck of the woods, it cost me a fortune to open my studio, 40 grand just for the basic pilates equipment! ( not including all the extra's like office furniture, computer, softwear and so forth))
And to run the studio is really expensive,my rent is $2500.00 per month(1664 sq st,) and that does not include CAM"S (COMMON AREA MAINT) which is another $627.00,per month, plus utilities, phone, cleaning staff,advertising, cleaning and paper products for the equipment, taxes,insurance,the list goes on. It also took much longet than 1 month to get up and running.
But in any event, I wish you good luck with your studio, no matter what your business model

Workers' Compensation is determined by the state. This is a state issue and not a federal issue. You should contact the department of labor in your state to determine if you are in compliance with the law in regards to workers' compensation.

I have worked in the insurance industry for over 15 years. I have seen studios shut down and fined (up to $10,000 a day) until they could prove they were in compliance. This is not a subject to be taken lightly. It is better to check and make sure before the state comes knocking on your door.

Very interesting new article in NYTimes about the fact that the Fed and the states are going to be auditing for this exact thing (IC vs Employee) very heavily. http://www.nytimes.com/2010/02/18/business/18workers.html?scp=3&sq=Steven%20Greenhouse&st=cse
They are desperately searching for tax revenues...Be very very careful. Also interesting that it says most ICs under-report income by as much as 30%.