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Befitting its name, Three King’s Golf is a three-man—well, two-man, one-woman—operation.
Knowing that the Kennesaw, Ga., facility couldn’t support additional full-time employees beyond himself and his wife and son, family patriarch Bob King started exploring options for offering golf instruction without having to create an in-house teaching position.
“The range is a marginal earner anyway unless you’re in an area with an influx of customers, but we’re not,” he says. “It takes care of the three of us, but it wouldn’t take care of five instructors on a full-time basis.” So King “hired” a local golf professional as an independent contractor. The arrangement was so successful that 13 years later, King continues to offer instruction through outside teaching professionals, all of whom set their own hours, lesson fees and teaching methods so as not to blur the fine line that separates them from employees.
Because independent contractors aren’t subject to many of the employment laws and tax rules that cover employees, they provide ranges with an avenue for offering expanded services without added financial and administrative burden. But incorrectly classifying a worker can have devastating economic consequences.
There’s a potential serious liability in misclassifying workers, even unintentionally, notes Rick Ross, a partner at Fredrikson & Bryon, P.A., a Minneapolis-based employment and labor law firm representing management. In particular, he says, incorrectly labeling an independent contractor who really is an employee can cost the business big time. Not only are violators responsible for federal back taxes, plus a penalty equal to 12 to 35 percent of the tax bill, but they also have to answer to state employment agencies that collect employment taxes and workers’ compensation insurance—the sum of which could put a small company out of business.
Give Up Control
The key factor that the Internal Revenue Service and other agencies will look at to determine independent contractor or employee status is the degree of control by the hiring company.
“For true independent contractor arrangements, the range has no control over the hours they teach, the number of lessons they give, the rates they charge, etc.,” says Tom Kendrick, a PGA career consultant in the Employment Services Department of the PGA of America. “If that professional were an employee, then any typical employee costs and related expenses would be incurred. In return, range owners would have more control over the professional’s availability for lessons, the fees charged and the type and number of lessons given.
“Each range’s business model may determine which option would be best, but a great question to ask is this: Would the range be comfortable having a professional who is self-employed and operating their own business, teaching golf, at their range with little or no input or control over that professional’s teaching business?”
Yes, says Alan Bales, manager of Player’s Golf Driving Range in Martin City, Mo., which is anchored by a Golf Discount store. The Midwest golfing season is short, he notes, and there’s not a lot of people taking lessons in January. “If we have a person who was an employee and he’s not teaching, what are we going to have him do [during the slow periods]? Sell golf clubs?”
Though some facilities can and do benefit from having teachers use their expertise to help sell clubs and merchandise in the pro shop, another camp attests to the business-building capacity of an instruction program untainted by sales.
Teaching professionals at golf driving ranges help boost traffic and create regular customers, says Geoff Bryant, president of the United States Golf Teachers Federation in Port Saint Lucie, Fla., which is celebrating its 15th anniversary. In the case of independent contractors, “the professional does the advertising and brings people to the facility” without the range having to expend marketing resources.
Additionally, instructors who only teach are subtle salespeople because of the relationships they build with customers, says John Richman, director of instruction at Player’s Golf. “Customers see me as a separate entity,” he says. “That’s the biggest bonus from the owner’s standpoint—customers trusting the instructor and the instructor ‘selling’ equipment and services.” If instructors, working as employees, also are responsible for making sales, then customers feel pressured, he says. As an independent contractor, “you’re not perceived that way.”
Know the Rules
But it’s how the IRS and other enforcement agencies will perceive the range-instructor relationship that should be considered first. The only way for range owners to avoid penalties is to learn how these agencies use different testing procedures to classify workers.
The IRS’s test includes a set of 20 factors that examine behavioral and financial control by the hiring company and the relationship of the parties (see “20 Questions”). Many state agencies use the same sort of “right of control” test but emphasize different factors related to their purview. Others, such as the Department of Labor, use an “economic reality” test that focuses on, for example, whether the instructor is economically dependent on the range; the extent to which the services in question are part of the company’s business; and the permanence and duration of the relationship.
“Unfortunately, determining whether a person is an independent contractor or not is not black and white; it’s mostly gray,” says Ross. In light of IRS Revenue Ruling 68-625, where it was determined that a golf professional who makes his own appointments and carries on activities without any direction from the golf center or club is an independent contractor, range owners should adopt a laissez-faire approach, he notes. For example, a fee-sharing arrangement can work against range owners because it gets them involved in the instructor’s business, Ross says. Scheduling lessons for the instructor is another questionable action, and making equipment and range balls available or booking lessons are all benefits an employee would receive.
“Arrangements will vary with the business model of the range and the goals and objectives of the range and the teaching professional,” says Kendrick. “Some ranges do not charge the professional any rental fee or collect any percentage of the lesson revenues. An essential factor to make this type of arrangement work is to have the lesson taker pay for the cost of balls used during lessons.”
At Three King’s Golf, the only direct compensation King receives is for the buckets of balls students hit. Several instructors include practice balls in their fee and then reimburse King for the bucket price, while others require students to purchase their lesson buckets separate from the cost of instruction. Students also pay the instructor directly unless they’re paying by credit card, in which case King will run it through his machine. “Generally we allow that transaction to take place between the professional and his customer,” he says.
Marketing also is left up to the instructors, who display their promotional materials and business cards in a designated area of the clubhouse so that customers can call them directly. King says not having a resident golf professional on site hasn’t dissuaded customers and that the cost-saving model has been a boon to his business, especially in the early years. “If you’re just getting started, you have to watch your cash flow pretty carefully, and this is a way to offer customers instruction without paying for an employee,” he says. And a common way at that. According to a survey conducted earlier this year by PGA, 81.4 percent of the organization’s professionals work as independent contractors at ranges nationwide, though Kendrick says the survey did not “test” the legality of those arrangements.
Put It in Writing
Most worker misclassifications are discovered accidentally. “In most cases I’ve been involved with, the individual gets discharged and they file for unemployment insurance, but if they’re an independent contractor, they don’t get it because the employer never paid for it,” says Ross. Often, an investigation ensues. Other actions that can trigger an investigation are workers’ compensation claims and IRS audits.
According to “Tax Savvy for Small Business: Year-Round Tax Strategies to Save you Money” by Frederick W. Daily, “The Wall Street Journal reported that in one six-year period, the IRS performed more than 11,000 audits of companies using independent contractors. The results: 483,000 reclassifications of independent contractors to employee status and $751 million in back taxes and penalties.”
In the event of an investigation, says Ross, the claim of an independent contractor arrangement can be strengthened by the presence of a contract. Though actions speak louder than words (a contract is meaningless if the instructor is treated like an employee), having a written agreement at least shows the IRS and other agencies the intentions of both parties.
First and foremost, the contract should state explicitly that the instructor is an independent contractor and is not entitled to any of the benefits provided to employees, says Ross. Experts also suggest range owners include language that covers
• Services the independent contractor will provide
• Accounting of expenses (true independent contractors are responsible for their own expenses)
• Provisions for training materials and teaching space (furnishing equipment, such as swing and video analyzers and range balls, leans toward an employee relationship)
• State and federal income taxes the independent contractor will pay
• Liability insurance secured by the independent contractor
• Process for terminating the agreement
Anybody working as an independent contractor is walking a fine line, says Richman of Player’s Golf.
But it’s ultimately the range owner who pays if that line is crossed.
“A good-size range with a good-size staff is better off engaging a professional as an employee so that they insulate themselves from any claims,” Ross says. Or, before categorizing someone as an independent contractor, “consult with an attorney, and specifically an attorney who knows labor and employment law, or even a tax attorney. It is a small expense to avoid what might be a very significant liability.”
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