Dear Littler: What Misclassification Issues Are There in the Work(out) Place?

Dear Littler: It took longer than I expected, but I finally got my fitness studio up and running! Between negotiating the lease, buying equipment, marketing, and finding some quality trainers, my head is just swimming. I finally took a break last night, but I got a concerning text message from our night manager saying that one of our trainers was asking why the manager was an employee, but he wasn’t. Should I be worried? 

—Working Out the Kinks

Dear Working Out the Kinks, 

You did the right thing by checking in. Start-ups and small businesses in the fitness industry have plenty of things to worry about when they first get up and running, and issues like independent contractor classification can get overlooked. And who can blame you? The demand for fitness trainers and instructors is at an all-time high, with a job market projected to grow three times faster than the average for other occupations over the next ten years. But the guidance on how businesses should engage with these workers is limited and confusing. 

The Problem 

It is difficult to determine how to utilize independent contractors. On the one hand, it can make sense to retain the staff you utilize less often – maintenance workers and janitors, for example – as independent contractors when they only work for you a couple hours a week and perform services entirely unrelated to what your business offers. It also is quite common in the fitness industry to classify professionals like personal trainers, nutritional coaches, and strength trainers as independent contractors. Many of these professionals are self-employed with their own established reputation and businesses, who work with multiple gyms and studios, and offer one-on-one training outside of an established gym. They like the flexibility of building their business across the community, and businesses like yours provide a steady source of clients who are not only incentivized by their fitness goals, but also by their devotion to your services and the desire to get the most value out of their monthly membership fees. It may seem easier to just treat these workers like any other vendor and pay them a flat rate for the work performed.

And most gym owners see independent contracting as a way to avoid the administrative demands of payroll, wage and hour compliance, and taxation that come with having employees. There also are the competing interests of brand and business loyalty and the desire to manage the customer experience. Small studios frequently ask their instructors and trainers to wear branded merchandise or specify the equipment or methods they offer. In trying to provide your customers with the very best experience, you may be falling into the trap of misclassification and taking on significant financial risk of a misclassification lawsuit. 

The Shifting Standards

As the fitness industry continues to grow, so too do the number of lawsuits that arise from disputes over improperly classifying workers as contractors. One major factor contributing to this is the (understandable) confusion over the constantly shifting standards applied when determining independent contractor status. The U.S. Department of Labor has adopted several tests over the years, as have the Internal Revenue Service and the National Labor Relations Board. There also are state-specific tests including the “ABC test” used by 30+ states including California, Connecticut, New Jersey, and Massachusetts. The ABC test is very difficult to satisfy, as prong B requires that the work performed be outside the usual course of the hiring entity's business, a nearly impossible requirement to satisfy. An instructor teaching at a yoga studio is within the usual course of the studio’s business while a painter hired to paint inspirational murals in the studio is not.

There has been a clear uptick in cases in recent years. Most of these cases settle out of court to avoid the high cost of litigation. For example, a NY and CA class action brought by instructors against a fitness chain was settled confidentially out of court, while another settled a case for nearly $1.5 million. The largest settlement to date resulted in a $12 million payment to personal trainers (+$4M in attorneys’ fees) in a NY class action. Given the clear exposure in these cases, companies often choose to settle.

Some cases are fully litigated, however, and may result in adverse findings. In 2023, the District of Columbia’s Office of the Attorney General launched an enforcement action against a fitness center after learning about the pay structure it used for personal trainers. At the end of its investigation, the OAG came forward with a single, costly conclusion: the personal trainers were misclassified as independent contractors and should have been employees. The OAG awarded the plaintiffs a staggering $450,000 penalty along with the requirements that the company overhaul its pay structure, treat the trainers as non-exempt employees, and report back regularly to the OAG on compliance. The risk to small studios and clubs is particularly acute. Katie Santos, owner of Fitness HR® and HR consultant to boutique studios, says, "[m]any studios don't realize that laws are changing in favor of employees, and younger employees know how they should be classified.” In her experience, “these workers go directly to litigation if they feel they are improperly classified as contractors and the penalties for misclassification can be harsh and put a studio out of business.”

The Fix 

Whether you are dealing with a high-octane yoga instructor or a squad of personal trainers, the time you take to determine whether your workers should be classified as employees is time well spent. As much as I would love to tell you there is an easy and ironclad checklist you can follow to make sure every worker is classified properly, the takeaway here is that there is no “one size fits all” in the world of worker classification. From simple factors like dictating uniforms and equipment used, to more obtuse issues like the degree of control your workers have over their own profit/loss and whether they are allowed to compete with you, the analysis of independent contractor classification is complicated. This may seem like a daunting task, but once you have a sense of how to classify your workers, you will be able to get back out there and run your studio without needing to worry about late-night questions like these. Discussing such matters with employment counsel can help take that weight off your shoulders.