It's long. And detailed. And you should read it if you're an independent contractor (the blog, the sample contract, AND the 140-page document from Department of Labor)
Last September I was doing research for my own business development and I somehow stumbled on the Department of Labor Wage and Hours' 140-page document on independent contractor status - just two days after they opened it for public comment. I felt compelled to glance it over, and it was quickly apparent how important this was. The proposed rule included the Department of Labor's review of the history of how independent contractor status has been determined, the issues that have come up, their concerns, and where they were leaning in terms of making a final rule on what criteria to use in determining "independent contractor" status. In short - no more loopholes.
Important stuff. So I dove in. And here is what you get out of it.
I walk you through how to use the criteria and provide lists of questions to ask during your evaluation. Keep in mind these particular questions were developed for a Massage Therapist, but they can be easily adjusted for whichever field of work you're in.
Second: Connection to Strategy
When I finish showing how to use the criteria to determine your worker status, I walk you through a bit of my process, including evaluating financials to determine if the fee and pay structure are in everyone's best interest and how I developed a new pay structure for contract massage therapists. This is an example of just how important strategic planning is and why it is an ongoing effort. Small business owners and freelancers need to learn what kinds of questions you should be asking so that you are protected and your workers are protected. If I hadn't known what kinds of doors this Department of Labor document would open, my client may have postponed this vital review of income and expenses - and potentially have lost a lot of money.
Last: Sample of Expanded & Detailed Massage Therapist Contract
My stumbling on this in September was fortuitous because my client had recently mentioned it was time to review contracts and get new ones set up. Because of this process, his personalized but standard contract is now a highly detailed agreement that contains everything it can to protect each of their best interests AND keep the worker status as they all want it. And, this all culminates in a document you can possibly poach language from. Huzzah!
No More Loopholes
Different courts have used variations on the definition of “Independent Contractor” status versus “Employee” status and they use related but different criteria, or “economic realities,” to determine how someone should be classified.
The U.S. Department of Labor Wage and Hour Division will have the final word. They reviewed the various uses and discussed points that were unclear or duplicative. In September 2020, they posted their notes for public comment. At this stage, it is highly likely that there will not be significant changes from the ideas they presented. The deadline for comment was October 26, 2020. Still no update on their site regarding the ruling as of 12/13/20.
The Dept. of Labor’s primary concern is that it is common for workers to be misclassified as Independent Contractors when they are, in fact, employees. Misclassified employees can be - nay... they WILL BE denied access to legal benefits and protections, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. The Dept. of Labor actually does take the rights of workers seriously these days. Check out their site here to learn about misclassification and grab some resources.
The U.S. Dept. of Labor's Criteria for Determining Employment Status
The Dept. of Labor has narrowed it down to two core questions. But, in reality, there are 4-5 questions with the first two being heavily weighted. And for each of their questions, you will need to ask yourself, even more, to determine how you should answer.
- If the answers are YES to both question #1 & question #2, then the employment status is Independent Contractor.
- If the answers are NO to both question #1 & question #2, then the employment status is Employee.
- If the answers are split, with one answer YES and one answer NO, then the answers to the other questions are weighed in.
1) Does the worker exercise substantial control over key aspects of the work?
- Does the Worker set their own schedule?
- Can the Worker accept or decline a booking?
- Does the Worker decide what to wear? (The business can set protocols for issues of safety, etc.)
- Can the Worker customize the treatment they offer depending on the client?
- Is the Worker required to interact with the client in a specific way?
2) Does the Worker have the opportunity for profit or the risk of loss based on their initiative, skill, business acumen, and investment?
2a. Does the Worker’s skill impact their ability to make money or not?
- How many years of training does the Worker have?
- Do they have special training or certification?
- Do they get repeat customers?
- Have they had any customer complaints?
- Have customers submitted reviews about the worker?
2b. Does the Worker’s initiative impact their ability to make money?
- Do they help recruit customers to the Business, in general? For themselves?
- How many customers have gotten services at Business due to the efforts of the Worker
- Do they market their services and/or promote their work with the Business? How? Do they inform followers on Social Media that they provide services at Business? On their business website? Do they have cards?
- What role do they have in customer relations?
- Do they help schedule and/or confirm their appointments?
- Do they update their own schedule?
- Do they send reminders to the client?
- Do they follow up with the client after the treatment?
- Do they prepare and process paperwork for their clients and keep client files up to-date?
2c Does the Worker show business acumen?
- Do they understand the reasons for treatment fees? What about the payment structure?
- Do they know what the profit margin is for the Business?
- Do they know what their costs would be (time, money, energy), if they were to provide services by themselves without support from the Business?
- Have they contributed their opinion in a thoughtful manner?
- Have they given input on how to cut costs or increase revenue?
- Have they given input into a marketing strategy?
- Have they made referrals?
- Have they helped form partnerships?
- Do they provide quality customer service? How is this measured?
- Have they shown managerial skills, such as mentoring less experienced workers, assisting with the implementation of an online booking system, helping create a new treatment package based on customer requests or they're noticing a common need among their clients?
2d. Does the Worker invest in the facilities and equipment?
- Do they pay part or all of the direct supply costs, such as lotion and laundry soap? How is that amount determined?
- Do they prepare and break down the space for their treatments?
- Do they manage their own bookings or does the business provide a reception?
- If the Business provides reception, does the Worker contribute to the expenses at reception? How are these expenses determined?
- Do they pay some type of rent to the business, whether flat rate or percentage?
- Has there been a cost breakdown done? Has it been shared with the Worker?
- Does the Worker’s payment cover supplies? Rent? Utilities? Janitorial? Marketing? Support staff? Bank fees? Other?
- Does the Worker understand the benefits and challenges with paying towards those expenses and working with a Business to provide their services?
- Is the pay the Worker receives commensurate with their contributions of time, effort, and costs?
- If they pay, does their payment cover actual costs?
- Is their profit margin commensurate with the Business’ profit margin?
- Do they follow the Business’ COVID protocols?
- Do they help the Business develop said protocols?
- Do they help the Business stay current with state directives?
- Do they help the Business research sanitation methods?
- Do they actively help in sanitation?
Were answers to both questions evident and clear to be YES?
If the answer to both questions is definitely YES, then you can continue with preparing an agreement founded on that understanding. It is my recommendation that you be as detailed as possible in the agreement, highlighting the specific things that make them Independent Contractors.
Were answers to both questions evident and clear to be NO?
As stated in the National Law Review, “if the individual is unable to affect his or her earnings through initiative or investment or is only able to do so by working more hours or more efficiently, then the factor would weigh toward employee classification."
There are several routes to take.
- The Business can hire the Worker as an employee, with benefits, payroll taxes, and all that is required under the law.
- The Business and the Worker can work together to adjust the work arrangement so that, when asking the questions again, the answers would be definitively YES.
- The Business and the Worker no longer work together.
It is extremely important that the Worker be 100% comfortable about arrangements that are made. The Business should, in no way, force the situation. These laws are for WORKERS’ rights. If the agreement does not feel suitable, do not agree to it. If the conditions of the agreement are fine, make sure that the status matches so that the Worker gets the pay and benefits you deserve under the law.
Did you answer YES to one question and NO to another? Or, was it not absolutely clear?
If there is any gray area, either adjust the work arrangements so there is no question or answer the following questions.
Again, if the answers are very clearly YES, then you can claim Independent Contractor status. If the answers are very clearly NO, then revisit the arrangement, become an employee, or walk away.
- Does the contract have a date when it expires?
- Is the Worker required by the Business to work specific hours/days?
- Can the Worker change their schedule as needed?
- Does the Worker have access to the schedule, directly?
Note: A business can require that Independent Contractors provide their schedule in advance to aid in scheduling, minimize back-and-forth, etc.
4) Is the service rendered by the Worker an integral part of the business?
Note: The Dept. of Labor did say that they view this question as a gray area. It lacks clarity on the intention or use of the word integral. Does integral mean important OR does integral mean integrated?
Is a Revision to the Agreement Necessary?
This is not a bad thing. It’s good to review and revise and make sure that both the Business and the Worker are getting out of the arrangement what they need to.
The easiest and quickest way to adjust the agreement is through question #2. Discuss how the Worker can be more involved, show initiative, give feedback and suggestions, and cover the costs of them doing business.
Examining other “Investment” Options
As you work through the process, come up with multiple options. List the pros and cons for each, so you have some real material to consider. For example, two options could be:
Option 1: The Worker pays to use space at the business.
It could be a flat rate each month, or for every hour used. But the Worker provides their own oils and linens, recruits their own clients, processes payments, etc.
- Pros: A flat rate is something you can easily plan for
- Drawbacks: There is no team, no collaboration for personal and mutual benefit. And it is more time-consuming, more difficult, and more expensive to do all of that work on your own.
If it is the right percentage, this could easily work.
- Pros: The Worker and Business can figure out an approximation of expenses and make sure the percentage is the right amount to cover expenses
- Drawback: If the treatment fees vary, then so does the payment, which is difficult to plan for.
You are done with the process when the Business owner and the Worker both feel good about the arrangement - and the Department of Labor would feel good too if they saw it.
Fair Pay Rates for Independent Contractor Massage Therapists
The Hunt for Data
When this process started, my client was using a personalized but standard 2-page contract. After I was finished dissecting the proposed rule, I had to then dissect our own numbers to see what my client was charging clients and what the contract therapists were taking home. Some adjustments needed to be made.
I set myself to researching the national average for percentage pay rate for contract massage therapists. That should be simple, right? But it was like a data desert. And it wasn’t merely that my search skills were off that day. I tried three different times, weeks apart.
I kept coming to one thread in a massage therapist forum. It was started many years ago but it was added to, year after year, by people contributing numbers from their area. I also found vague data on either AMTA or ABMP (I can’t remember.) I asked several local massage therapist friends about their experiences over the years. I was told super-secret-totally-unverified-but-sounds-like-it-could-be-true information about a popular local business’ pay rates for their highly experienced therapists. I even enlisted help with researching this, but they came up with similar things as I did. The data was absolutely insufficient, but it was all I had. So, with that, I compiled the following info.
Local & National Pay Rates for Contract Massage Therapists
These numbers are based on one-hour treatments that cost around $100.
- Therapists that do not contribute to overhead or supplies are paid at or close to 40% or $40 per hour ($0.67 per minute of treatment).
- Therapists who pay for supplies and/or contribute to overhead make 45-65%. Their take home is $40-$50 per hour ($0.67 - $0.83 per minute)
- A popular local establishment was supposedly paying 30% on the equivalent of a $145 one-hour massage, which is $43.50 per hour ($0.72 per minute)
Proposed Arrangement Between Business & Independent Contractor Massage Therapist
In the end, I suggested to my client something similar to this::
- The Business pays the Worker a set rate per minute, with higher rates based on the number of years of experience. For example:
- 1-3 years of experience = $0.67 per minute of treatment
- 4-8 years of experience = $0.72 per minute of treatment
- 8-10 years of experience = $.075 per minute of treatment
- 10+ years of experience = $0.83 per minute of treatment
- The Worker pays a fee to the Business. The fee is taken from the client's payment for the massage and is handled by the bookkeeper, who:
- allocates a portion of the fee as a payment to the Business
- allocates a portion of the fee to a special savings account created by the Business, the funds being reserved for annual bonuses and/or professional development for the Worker
The culmination of all of this was a new draft of a Business & Independent Contractor Therapist Agreement/Contract. It is based on and incorporates the language used by the U.S. Department of Labor, and makes explicit the points that show this is, indeed, the correct worker status.
What’s listed in this draft is a suggestion. When you create yours, leave no gray area. Fine-tune the arrangement as much as necessary so there is no question about the employment status.
And, please, don't just take my word on it. This is to help with the process and preparation. PLEASE have an attorney review the contract before anyone signs anything.
I hope you found this post useful. If so, please share it. There are a lot of people out there who classify (or are misclassified) as independent contractors - from consultants to plumbers to event planners and the list can go on - and they may benefit from seeing this information.
As soon as I hear the Department of Labor's final decision, I'll share it here.
If you think you could use some help evaluating price sheets and pay rates or writing up some form letters and contracts, I can help. Contact me - the first exploratory chat is FREE!