Employees vs. Contractors in your Microgym

I’ve been getting this question fairly frequently of late:  Nicki, I know you recommend having employees, but isn’t it expensive?  Shouldn’t I just keep my trainers as contractors?

If you have trainers that train at multiple locations (other gyms besides yours) and who come to you as accomplished professionals (you are not providing ANY training nor are you telling them in any way HOW to do their job, and they bring their own equipment/tools to do their job, then maybe you legitimately have independent contractors.  However, this is not the case in most microgyms.

Here’s the deal: the government is on a tear trying to find places to pick up lost revenue.  One of the places they are targeting is the small business that has contractors who in fact should be classified as employees.  If they find your contractors are indeed employees you are liable for back payroll taxes on all the earnings this person has made under your roof.  We’re talking big dollars here.  Big enough dollars that could put you out of business.  It doesn’t matter if they pay “rent” or even if they’ve signed an “independent contractor agreement”.  None of that matters if you are audited and are found to have misclassified your folks as contractors.  Apparently top targets of this type of audit are fitness studios and hair salons.

In the end you really need to make some basic decisions about what you want out of your business.  Do you want a microgym that just makes ends meet (covers all operating expenses) and allows you a place to train? Cool.  Do you have a few friends that are trainers and you all want to run your own independent operations out of the facility, co-op style? Ok, fine.  It’s totally up to you.  In this case I would recommend each person have an equal stake in the overhead and liability (everyone’s name is on the line so that one person is not stuck holding the bag at some point)…although having partners of any kind is usually a horrible idea, so you’d be better off doing the whole operation solo….but that’s the topic of an altogether different post.

If however, you want to build a business that has VALUE and is considered an ASSET (ie not only provides you a place to do what you love, but also generates income, provides a return on your investment (monetary and sweat equity), and is saleable) then you will need to have systems and you will need to have employees to carry out those systems. You will want some uniformity within the client experience.  Obviously all trainers and coaches have different personalities and coaching styles, which is great!  But you will want some integration of basic principles, some continuity in curriculum for the brand new client (prerequisite mobility and movement mastery prior to entering group classes), etc. You will want your folks classified as employees.

Here are some of the most common objections to hiring employees:

I don’t want to bring all my folks on as employees, I don’t trust all of them.

Red flag. Why do you even have them as IC’s if you don’t trust them?  If you don’t trust someone they should not be operating in a professional capacity (representing your business) in the first place. Period.  Bring on the folks that are your top performers and who you view to be valuable to your business.

Hire promising folks on a probationary status and set performance parameters that must be met within a certain time frame.  If they don’t meet them they don’t progress past probationary status. End of line. (Bonus points for you if you know the sci fi reference I just made J)

How much does it cost?

Yes it costs money to have employees.  You must pay payroll taxes and workers compensation.  This is why you must be careful when structuring your pay schedule.  If you have your best paid folks bringing in 70% of their private training you are covering costs (typically around 2.5-3% in workers comp, 17% in payroll taxes) and not really making much money from these sessions.  Especially when you also consider the 2-3% in merchant processing fees if clients are paying via CC. Depending on your group class margins you can afford to have your best folks making top dollar.  Especially if they are pro-active and hustle to bring folks in the door.

How can I pay them such that they make good money and they are employees? I can’t afford to pay benefits.

Most microgyms and small fitness studios do not have the margins to pay employee benefits.  But it also depends on what you are paying your folks. The facility I know of that does offer benefits only pays out 40% of private training earnings (thus there is ample margin to pay benefits)…if you pay your folks a larger % of their training then there may not be any margin for benefits. There are big tradeoffs however as your staff likely gets to create their own schedule and has a relatively fun/relaxed/flexible work environment.

I don’t know how to do all the payroll paperwork!

Outsource it!  It is highly likely you are not an expert at running payroll and calculating and paying all the necessary payroll taxes.  Hire a professional to do this.  You do not need another responsibility or another task on your plate.  There are great payroll companies that make it easy for you to do what you’re best at without the headache.  Your payroll rep will call you every two weeks, you report the gross earnings of each of your staff members and they are paid via direct deposit.  You don’t have to physically be there to sign checks. You can be on vacation and your team will still get paid! Paychex and ADP are two examples of payroll companies that do this. If you are using a business management software like MindBody Online you can run a staff payroll report in a snap and have the numbers ready for your payroll representative.  Easy.

Something else to consider:

A facility I’ve been working with is currently making the move from contractors to employees.  One of the contracted trainers was a fairly flakey individual who disappeared off the scene amidst this transition. Well, one of this individual’s clients showed up wanting his money back for the $800 training package he purchased.  The client gave the money to the trainer.  The trainer split the scene.  The business is still liable to refund the client’s money.  The clients of a business have no idea how you are structured.  And they will always come to the storefront with any complaints, etc.  If you own the storefront any contractor liabilities are your liabilities. Ultimately you are responsible and it’s your job to make the customer happy (if you care to build a good reputation that is).

As you can see, how you structure your business is vitally important, including who you bring on in a professional capacity and the manner in which you build your team.

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3 Responses to Employees vs. Contractors in your Microgym

  1. Nicki, really good post. Great insight for us working to build out of being a one-man/woman show. I know a lot of people are protective of their systems for how they structure the payment of their employees, but can you offer any specific guidance and systems in a future post, or can you recommend where to track down this info. I know there are many different ways to structure paying trainers that are employees, but I’d like your take and favorite methods.

    Thanks,
    Edward

  2. Adam Kayce says:

    Excellent article (and timely!). These are all thoughts running through my mind these days, as I approach opening my own place.

    This blog really is an amazing resource – thanks for all you do here!

  3. Dave says:

    Amen sister, you even got the legal stuff spot on. Great advice.

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