- Can Golf Pros be Paid as Independent Contractors for Lessons and Paid as Employees for Work in the Pro Shop?
- July 2, 2003 | Author: Richard A. Ross
- Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
Many clubs employ golf professionals to give lessons to club members and also work in the pro shop. A potential problem facing clubs is how these pros should be compensated. The work performed in the pro shop is the type of work normally performed by employees, while frequently the lessons the pros give could be characterized as work performed by an independent contractor. Unfortunately, the law is somewhat complicated and clubs that do not properly compensate the pros may expose themselves to potential liability.
The law that applies to this situation involves primarily tax law. The Internal Revenue Code and the tax regulations essentially require that all services provided by an individual to an entity must be compensated in the same manner. The determining factor as to how the individual is paid, is the type of services that are performed in a pay period and by measuring the number of hours the individual spent providing each service. If one half or more of the work performed in the pay period is "employment," in the pro shop, then the individual must be paid as an employee for all of the services performed in that pay period (i.e. withholding taxes, etc.)If the majority of services provided in a pay period are lessons which in fact are services of an independent contractor, the pro will be paid as an independent contractor (i.e. no withholdings).
While the calculation of hours spent working in the pro shop as compared to providing lessons may be easy to calculate (although administratively a burden), another important factor in the process is to determine whether the pro is actually working as an independent contractor when giving lessons. The Internal Revenue Service has promulgated rules and guidelines to determine whether a person is an independent contractor or employee. The IRS primarily looks to the traditional "right of control" test to make that determination. Under this test, the question is whether the club has the right to control and direct the individual who performs the services. This control includes the results to be accomplished as well as the detail and means by which the result is accomplished.
The IRS issued two Revenue Rulings 35 years ago, detailing two situations involving golf professionals' status. In Revenue Ruling 68-625, the IRS determined that the pro in that case was an independent contractor. The pro maintained the right to sell golf lessons and equipment at the club. He made his own appointments, fixed his own prices and acted as a merchant of equipment. The club had no right to control the manner in which he provided his services. Conversely, in Revenue Ruling 68-626, the IRS concluded that pro was an employee of the club. In this second case, the club determined when he was to be available for lessons, fixed his lesson fee and the club had the right to inspect the books of the pro shop.
The determination as to whether a pro is providing services as an employee or independent contractor is fact specific and will be determined on a case-by-case basis. Once a determination has been made as to whether the pro is providing services, in part, as an independent contractor, then the club must make the calculation of percent of services preformed in each pay period. Generally speaking, the club should pay all of the pros on the same basis, as the IRS will look to how each pro is compensated in determining their status. While it is possible to have pros designated differently, it can create problems with the IRS, as well as potential disharmony among the pros.
If the IRS audits the club and determines that it incorrectly designated pros as independent contractors, the club will be liable for failure to withhold taxes, including social security contributions and penalties. Depending on the number of individuals, the compensation involved and the period of time over which the designations were incorrect, a club could face substantial financial liability.
Not only can liability result from an IRS audit, individuals may also pursue employment-related claims against a club. In a very recent court case in Federal District Court in Maryland, an assistant tennis pro sued his club, claiming that he was improperly paid as an independent contractor. In Paukstis v. Kenwood Golf & Country Club, Inc., D. MD., No. DKC 2002-0818, January 23, 2003, the judge permitted Mr. Paukstis to pursue overtime claims under the Fair Labor Standards Act ("FLSA"), as well as a claim of negligent supervision. Mr. Paukstis was giving tennis lessons and working in the tennis shop. He was paid as an independent contractor and frequently worked more than 40 hours per week. He is claiming that he was actually an employee and should have been paid overtime for the hours worked in excess of 40 hours per week. If he prevails under his FLSA claim, he will be entitled to the unpaid overtime for two years (and possibly three years), which amount could be doubled by the Judge. He will also have his attorney's fees paid by the club if he is successful. In addition, if he prevails on his negligent supervision claim, he could also be awarded unlimited compensatory damages for pain and suffering, as well as unlimited punitive damages.
As you can see, how a club designates the status of its golf pros is significant and can potentially expose the club to significant financial exposure under both tax and employment laws. Club management should consult with their employment and tax attorneys to insure they properly designate the pros and limit their liability.