Avoiding Sham Contracting In The Fitness Industry – Part 1
Whether a personal trainer is an employee or contractor is a balancing act that all gym owners and managers should keep in mind. Recent cases and media attention have put this distinction in the spotlight, and it is clear that burying your head in the sand is a dangerous approach to take.
Key thought starters:
- Whether a personal trainer is an employee or a contractor has significant legal implications.
- Personal trainers and gym owners can suffer financial consequences if they do not understand the difference between employment vs contractor relationships.
- If a gym member is injured while being supervised by a personal trainer, it is likely that the employee vs contractor distinction will be closely scrutinised.
- Just labelling a personal trainer as an ‘independent contractor’ is not enough. The question of employee or independent contractor comes down to relationship between the parties, and focuses on the substance of this relationship.
- Mischaracterising an employee as an independent contractor can have big consequences.
Sham contracting can carry large penalties for both the employers and the individuals involved in the sham contracting.
Why it matters:
Gym owners and personal trainers have very different legal obligations and legal rights depending on whether a personal trainer is an employee or an independent contractor.
Some of the ‘big ticket’ items include:
- Tax and superannuation – Employers are responsible for tax compliance on behalf of their employees. However, independent contractors are essentially working for themselves and are expected to manage their own tax compliance (such as paying income tax and GST). Independent contractors will need to make their own superannuation contributions. However, there are some general exceptions to this rule which may apply (for example, where a contractor is hired principally for their labour and is, therefore, an employee for superannuation guarantee purposes).
- Employee entitlements – Employees receive a number of entitlements which are protected by law, such as annual leave and personal leave (although these benefits are not provided to casual employees). Employees may also enjoy protection from unfair dismissal. Independent contractors do not automatically receive these benefits.
- Insurance and liability – From a liability standpoint, independent contractors are usually held liable for the legal risk involved with the services they provide. For this reason, personal trainers who are independent contractors are generally expected to arrange their own insurance. On the other hand, employers are generally liable for what their employees do in the course of their employment. For example, if a member sustained an injury because an employee personal trainer was negligent during a training session, it’s likely that member could sue the personal trainer’s employer.
- Training plans – Intellectual property created by an employee is traditionally considered to be the property of their employer, whereas intellectual property created by an independent contractor is usually deemed to be the property of the independent contractor. Intellectual property arguably could include all training plans and meal plans created by personal trainers for clients. However, a gym owner may contractually agree with their personal trainers that all intellectual property created by the trainer is the property of the gym.
In this 2-part series, Solicitors Scott McKenzie and Adam Colquhoun explain how business can avoid the pitfalls of whether their personal trainers are employees or independent contractors. This has been reproduced with the permission of Australasian Leisure Management as it was an article in Issue 126, 2018.
Authors:
Scott McKenzie is a Director with Velocity Legal and can be contacted at E: scott@velocitylegal.com.au
Adam Colquhoun is Principal at WestmoreJacobs and can be contacted at E: acolquhoun@westmorejacobs.com.au
The views in this feature do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Readers should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.
As seen in Australasian Leisure Management
Justin is the Managing Director of Active Management, which he began January 2004. He offers coaching to businesses worldwide in everything from start up and design to marketing and sales systems. Justin also facilitates four Australian and New Zealand ‘fitness industry roundtables’ events, which allows him to see a huge cross section of business models.
Great topic Scott and Adam,
To further complicate the issue I think there are two common ‘contractor’ situations. Please correct anything below.
1. Where the member pays the club for the membership, program or service (say SGT or PT) and the club pays the ‘contractor’ upon receiving an invoice. Normally this service is for this ‘contractor’ only (not an employee of the contractor) and at a set time. Additionally the ‘contractor’ is probably wearing some club logo. I’d assume this is actually an employment arrangement and the club is responsible for group tax, workers comp, super, PI and PL insurance. Plus the club paid the transactional direct debit or eftpos costs. Many ‘contractors’ are unaware of these expenses.
2. Where the member pays the ‘contractor’ directly and the ‘contractor’ pays a rent (weekly or per session) to the club. In this case they are not a ‘contractor’ but a ‘tenant’ or in some clubs, a ‘franchisee’. In this case, the ‘tenant’ is responsible for PI insurance, BAS/provisional tax, super, and optional sickness and accident insurance (as not covered by workers comp). But whether or not this ‘tenant’ wears the club brand, any PI claimant would probably claim against the club (landlord) and the trainer (tenant). Plus the ‘tenant’ meets their own transactional costs.
I assume that where a club has rent paying ‘contractors/tenants/franchisees’ who’s clients pay them directly (category 2 above), there is nothing stopping the club also entering into an employment relationship for the delivery of small or large group programs on a pay-per-session or pay-per-attendees basis.
Where might a club owner go to purchase a template ‘tenant agreement’ that covers most bases so that all parties clearly understand their rights and obligations. And attaching to this, should the club require all clients of ‘tenants’ (category 2) sign some type of acknowledgement that the access to the facility is provided by the club under the membership agreement but the service is supplied by an independent person (contractor/tenant/franchisee)? Template?
I hope that was clear!
Jamie – listen to the podcast I did with Scott McKenzie last year on contracting.
Scott has drawn up my contracting agreements and also done other work for me.