Michael and Allissa discuss the downsides of the IC arrangement and rant a little.
Sponsored by The Jojoba Company.
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Michael Reynolds Hey, everyone. Welcome to the Massage Business Blueprint podcast, where we discuss the business side of massage therapy. I’m Michael Reynolds. Allissa Haines And I am Allissa Haines.
MR And we’re your hosts. What’s going on, Allissa? What’s up?
AH Nothing. I am knee-deep in vacation from my office. I have a handful of days off. I have had one or two off already and there’s been — I’m totally going to post a picture of this. There’s been — I’ll just blur the kid’s face out because I don’t like to post picture of the kid’s faces, but —
MR Sure, fair enough.
AH We have this giant narwhal innertube thing that floats around in the pool. And the boy child was just floating around on it yesterday, and I was just like this kid is my spirit animal. It’s not appropriate to say that, I think, it’s a cultural appropriation thing. But I just look at him and I wanna live like — he is living his best life right now in the summer, hopping in the pool whenever he wants, and floating around on his belly on a giant narwhal.
MR A narwhal. That’s the best part of it.
AH Which, by the way, if I haven’t said this — I don’t know if you know this — I did not know that narwhals were real things.
MR Oh, yeah.
AH I thought that they were like unicorns. I didn’t think that they were a real animal.
AH Until like two years ago. [laughs]
MR They’re totally real. Every week a new animal is the theme at Eli’s daycare and one week it was narwhal.
AH So it wasn’t until two years ago I learned that it was an actual thing and not like a Harry Potter creation.
MR Just a water-born unicorn. [laughs]
AH This is exactly — I just had never — okay. So that’s a little bit about me. Smart in some ways; dumb in others.
MR There you go.
AH And I learned this because my niece is a marine biologist, and she was like Yeah, they’re real, Allissa. I’m like No way. Ha!
MR Fun fact for the day. I’m sure we’ve educated at least a handful of our listeners who also probably did not think narwhals were real.
AH I’ll post a picture in the show notes. And, Michael, how are you?
MR I’m great. It is very hot here; it’s mid-90 degrees. But, hey, whatever. It skipped spring here in Indianapolis. It went from winter to summer in 5 minutes. So we’re just in for a hot summer. Other than that, it’s great.
AH Too bad you don’t have a pool like I do.
MR I know. But I’m thinking we’re going to join the Y because they have an outdoor pool so that’s on our radar.
AH Excellent. All right. You ready to get into the terror of today’s topic?
MR Oh, man. [laughs] If we’re not losing listeners yet, this is going to do it. Because I think we’re ranting about independent contractors today aren’t we?
AH It’s not a rant. It’s a really well-reasoned conversation.
MR I’m sorry. We’re conducting a well-reasoned conversation today about independent contractors.
AH That will totally be wrapped up with Michael’s rant because this gets under his skin.
MR I know. I can’t help it. I know. I will try to behave today.
AH All right. So it’s no secret that we are not fans of the independent contractor model. And there’s a handful of reasons for this. And then there’s some newer legal-oriented reasons for this as well. But I want to touch on the non-legal stuff first and why, in general, these kinds of independent contractor so-called agreements stress me out a little bit.
They’re super unclear. And this is a beef I have with most massage businesses that employ or contract other therapists to work on site with the owner or just under the owner. It’s super, super unclear. It’s done in a million different ways. It’s done badly in most of them. And the logistics and the systems and the processes are never well documented, explained, communicated, or executed. And I mean this in so many ways. And I see this all the time online, and even in emails people send like What’s a good percentage split for blah-blah-blah? There’s so much context here. And there’s so much gray area with confused expectations. I’m going to run though a list of ways this gets confused.
Equipment. Okay, so the massage room that you’re going to use as a contractor, let’s say, has a table, has a rolling stool. Are you allowed to use the hot towel cabinet, are you using the linens, are you using the owner’s lubricants or are you bringing your own in? Those are the real tangible things that we tend to think of and that usually get communicated pretty well. Who’s responsible for — are you using your own linens or are you using the office’s? If you’re using the office’s, who is responsible for putting them into the washer or dropping them off at the laundromat? Who’s paying for that laundering, and is that coming out of your percentage or is there going to be a fee on top of that? And ditto this extensive gray-area stuff for all the services involved in running this kind of business. Who’s answering the phone? Whose phone number is someone calling to schedule an appointment? If someone calls your phone number first, but the first couple of times they came for a massage they called the main office’s phone number, then are you stealing their client, or is it still your client? Frankly, I know legally, if you’re an independent contractor, it’s your client. But the owner and management of the establishment may not fee that way because there’s so much gray area.
Ditto that for website. Are you going to have your own website, or are you going to be listed on theirs? If you’re listed on theirs, do you have any control over your service descriptions? Do you have any control over what your bio says? Do you have any control over what happens if they mention you on social media and you do or don’t like the way that they mention you, or they describe the service that you provide wrong, or they make a happy ending joke? Sometimes that happens with different salon owners who are not massage therapists; they don’t understand what is and isn’t funny to us.
Scheduling, phone answering, online scheduling limitations, recordkeeping. If you’re an independent contractor and you are seeing clients at a location and you leave, can you copy and take your client records with you? Does the owner agree with how you feel about that because, technically, if you’re an independent contractor, you are running your own business, and your agreement with that salon, let’s say, is a business to business agreement. It’s not an employment agreement. So do you guys agree on this?
What about a dress code? If you’re a contractor, the owner and manager can’t make you wear their t-shirt or make you wear their polo shirt. They might think that they can. You might have entered an IC relationship not realizing what their expectations were of you and then gotten knee-deep into it. Or just started to learn more and become a more seasoned massage therapist with having met other massage therapists at continuing education events that say Uh, yeah. I don’t think you’re really a contractor. They’re treating you like an employee.
And this is the primary root of why I hate independent contracting and why I have yet to see anyone doing it really, really well. And that’s my primary — that’s where my primary hatred of this type of arrangement comes from. It’s rarely done with beautiful communication, proper documentation, really get great contract that really respects the owner of the business and the independent contractor. I feel like it’s just this half-butted way of being like “I wanna own my own business,” but not really being ready or willing to do the work to launch your own business. I think it becomes a real mediocre, permanent stepping stone when it wasn’t intended to be that for a lot of people.
So before I bump into the other options for working and having a career in this field and then also I point some of the people toward some of the legal-ish stuff going on that makes me hate it even more, Michael, let’s do your rant.
MR Oh. Right now?
AH Yeah. You ready? Yeah, you want to?
MR I was going to wait until the end. [laughs]
AH You don’t have to.
MR Okay. So I will try to behave, again, like I said before. I guess I want to start my rant with a question. Why do you think most people — I shouldn’t say most because I don’t really know the numbers, but why do you think a lot of massage therapists go the independent contractor route when they’re hiring or when they’re bringing on team members? Why do you think they choose that?
AH I think they choose that because they think having employees is going to be way harder than just having contractors.
MR That’s what I thought. That seems to be the consensus. Most people, when I ask them why they chose to bring on independent contractors as team members, they just think Oh, well, hiring employees is a lot more work. And that always puzzles me because when I dig and ask why is it more work, no one can give me a straight answer. Honestly, I believe it’s because it’s really not that much more work at all. In fact, I think it’s a lot easier in some ways.
AH There’s a number two reason here too.
MR Oh, yeah. Go for it.
AH And that is, actually, I sympathize with owners of larger businesses who do this because it’s really hard to find massage therapists who understand that an IC agreement may not benefit them most. And I think massage therapists as a whole tend to be rebellious and don’t want to be employees, don’t want anybody telling them what to do, don’t understand why an employer would keep 70-80% of the massage fee. I think massage therapists, in general, who go to work for other people in one way or another, do not wholly comprehend what it takes to run a business financial-wise, and all they see is that the massage business owner gets a hundred bucks for the massage they performed, any they only get 30 bucks and a tip. That seems ridiculous because they don’t comprehend — unless they’ve had the experience of being an IC that they’re going to do worse or equal as an IC. I think that that’s an education issue on the part of massage therapists in the field.
AH I don’t think schools — I don’t want to blame everything on schools. They’re working hard. But I don’t think that there’s a really great — I don’t think that we’re teaching massage — I think that there’s predatory schools that’re like You can make a hundred dollars an hour when you get out of massage school and that’s crap. And I also have a really big beef with pretty much every massage business resource out there that talks about gross profit, earning a certain amount of money, and then doesn’t acknowledge that expenses will bring that down. And then they’ll be like Okay, maybe you make $100,000 a year doing massage or services, and you only take home 75,000. And in people’s head’s they’re like I take home 75,000. But then they’re not like no, no, no, you take home 50 after taxes. Or — and those are big numbers. The reality of this would be like — I think a more realistic number would be You’re going to make $50,000 performing massage. Great. You’re going to spend 15,000 on expenses. That’s a lot. So let’s say 10,000 on expenses. So you’re going to take home $40,000. Except that you’re not because you’re going to pay tax on that, and you’re going to take home $30,000. We don’t do a really good job of making it clear to people what they really will take home after taxes either as a business owner or even as a contractor. I think if there was a realistic setup for that, people would see that sometimes they can actually make more money as an employee with a lot less thinking about your business once you walk out of the massage office.
So I think that partly it’s because employers are unreasonably afraid of what being an employer is and partly because the workforce itself is undereducated about what it means. That was was longer than I intended to go off on that.
MR Well, I already sense two new episodes coming out of this, and one is obviously talking about the realistic picture of income. I think we may have talked about this before. The second episode I’ll talk about in a minute. But you’re right. I think a lot of people are– for me it seems like the number one thing is they just think it’s high maintenance to hire employees. It’s really not. The bottom line is it’s not. In fact, I think it’s actually easier. I have multiple businesses with W2 team members, regular employees, and it’s really not that difficult. Again, the other episode I want to mention that we can probably spin this off into is basically all the ins and outs of how to hire people as employees. But we’ll get into that later.
It’s really not that big a deal. You get a payroll system. You figure out how you want to hire people. And that’s basically it. You need a good payroll system, and that pretty much takes care of most of it. A lot of people don’t realize you can actually hire team members, and you can give them all the flexibility you want. You can actually give them freedom, flexibility, buy-in to the business, ownership perspective into the operations of the business if you want to. You can give them all the same benefits of behaving like an independent contractor, but you can pay them like an employee and be perfectly legal, and you can have a lot more benefits to add on to that as well. Like if you want to add a 401(k) plan eventually or if you want to add health benefits, you can do all those things much more easily.
And to me, it just feels more like the right thing to do. If you’re going to have a team and you’re going to treat them like part of your business and you’re going to integrate them into your brand, doesn’t it feel like the right thing to do to have them as employees of your business working in your business and make it very clean? That’s just my perspective on it.
AH I don’t disagree. Michael, who’s our halftime sponsor?
MR Oh, well, actually we have a different halftime sponsor today because it’s kind of us.
AH I know.
MR So we have an event coming up that we’re going to be attending and showcasing at and that is the World Massage Festival at worldmassagefestival.com. And we are partnering with ABMP for the World Massage Festival. We’re building all sorts of fun things. We’re going to be at the ABMP booth there doing consultations and meeting people. So that’s going to be a lot of fun. It is August 6th-9th, 2018. And I totally took over the halftime spot even though you were probably ready, so that’s my schtick. What else do you want to add?
AH That’s okay. Michael did the professional version of it. This is what we’re doing. We’re going to hang out at the ABMP booth for a couple of days. We are going to do one-to-one business consults with attendees at the conference — or the festival, pardon me. We are going to have this great question jar, essentially, where people can drop their business and marketing questions into the jar all through the first couple of days of the festival, and then Michael and I are going to record a couple podcasts on the spot there answering all these rapid-fire questions that people leave for us.
We are going to probably eat lots of sushi and sit by the pool. I went to the festival once before in Vegas, and I don’t gamble, I really don’t even drink, but I loved it. It was just super fun; it’s super chill. If you’re going, know that you’re going to need to come play at the ABMP booth and see us. We’re super excited.
We write the column, the Blueprint for Success column, for ABMP Massage and Bodywork magazine, and we had that great retirement featured a couple months ago, and I just love the work that we do with ABMP. We got a couple projects coming up with them as well that I’m not sure if we’re allowed to talk about yet, but we’re doing some cool stuff with them, so I’m really, really excited that we’re going to be at this event, we get to hang out with ABMP, we get to hang out with a whole bunch of new people because Michael and I have not done any live events together as Massage Business Blueprint have we?
MR I don’t think so.
AH So it’ll be really fun. Michael wants to have t-shirts made. I’m like whatever. But we’re doing it.
MR [laughs] They’re going to look awesome. I can’t wait. I’m excited. It should be fun.
AH All right. Let’s jump back in. There’s two bits I want to get to here. One, what are your other options? Your options are, like we talked about, to have employees where you can control the schedule, the service delivery, the reputation, the dress code, what people do with their time between massage appointments if you pay them hourly or you have a combination hourly and commission situation.
Your other option is also just to have renters, which I’ve talked about a lot here because that’s what I do at my office. I simply rent space to other practitioners. And there’s a lot to this because you have to rent to people who you trust to make smart decisions and not make your office look terrible reputation-wise or physically. And we’re going to have another episode coming up about how to be a great officemate. So we’ll cover that more there. Those are your other options. You can rent or you can do employees.
If you’re still considering doing independent contractors, you want to listen to what I have coming up next and also get some really great advice from business attorneys in your state and also your tax advisor so that you can get things set up properly regardless of how you go with it. The reason I’m specifying that you really want to get stuff done in your state — or get advice in your state is because states also get to interpret IRS codes. IRS code, Internal Revenue Service, is federal, is federal tax code. But states use that code and then have some of their own, and they interpret it at state-level courts. That’s how things get applied on a state level in many cases.
So there’s always been this standard of independent contractor versus employee, and there’ve always been three prongs to this approach to measure the degree of control and independence. And they’re the behavioral: does the company have control or the right to control what the worker does or how they do their job? So an employer can make you do their signature massage sequence. If you’re just a contractor, they cannot tell you how to massage. And then financial: are the business aspects of the worker’s job controlled by the payer? So if you have an employer, then they can decide how much to charge the customer for the massage. If you’re a contractor, you’re supposed to have control over your own pricing and how you’re paid as part of your contract, and there’s a real clear agreement about tools and supplies and equipment and stuff like that. And then there’s the type of relationship: are there written contracts or employee benefits like pension plan, vacation pay? And then there’s weird little thing that’s been expanded: will the relationship continue and is the work performed a key aspect of the business? And this is a little note that’s been overlooked in the federal code for a long time, and states are starting to interpret this little bit that says “is the work performed a key aspect of the business?”
Massachusetts recently interpreted — it wasn’t recently, it was a couple of years ago — interpreted a case that had to do with cab companies hiring contractors. They interpreted this whole employer versus contractor thing. And one of the notes that they expanded on was this same “is the work performed a key aspect of the business”. And they interpreted it to say if a contractor is providing a service that is a main service of the business, or if there are other people in the business providing that service, they can’t be a contractor; they’re an employee. So what that says is — and I’ll use this as an example. Let’s say I’ve got five massage therapists working for me and they’re all independent contractors. That’s incorrect because there’s massage — I’m running a massage business; they are all providing massage; massage is, in fact, the key aspect of my business; it is the key service we offer; and there is more than one person doing that. If I was to hire someone to come in and do acupuncture and pay them as a contractor and it was occasional, they could legally be a contractor. But because massage is the key aspect of my business, the people providing massage in my business cannot be contractors, they need to be employees. This has been interpreted this way because state-level courts and state-level revenue — what’s your state level — your department of revenue — in Massachusetts that’s what’s it’s called — are recognizing that business owners have been misusing this independent contractor category, and they’re starting to — contractors are bringing court cases against these employers, and this is how the courts are deciding.
I have had a lot of people argue with me about it, which is totally cool. Argue away. I’m not a lawyer; you need to talk to a lawyer in your state. I’ve had people say that Well, if you have five massage therapists, but each of them offers a different type of massage, that’s a variety of services, so you’re fine if they’re contractors. I don’t know that an IRA auditor, state or federal, is going to agree with that or comprehend the different types of modalities that massage therapists provide and give you a pass on that. I do know that if they disagree with you, you’re going to owe a whole busload of back taxes and penalties and employment benefits to these people who you have miscategorized for years. This is happening in more and more states. I’ll put the links to how this happened in Massachusetts a couple years ago. I am not going to create an exhaustive list because I don’t really want to and also because I want you to contact someone in your state, if you feel like this might be a decision that’s right for you, to get really good advice. Document the crap out of it and then understand that you might be rolling the dice in the event of an audit because even in places where we think the federal tax code is really clear, it can be interpreted in many different ways. You can ask five tax attorneys a question, they’ll answer it five different ways. But the only think that really matters is the opinion of your auditor, and you want to keep that in mind. So if a service is performed outside the normal course of your business, you’re fine. You can hire a painter as a contractor to come in and paint your office or whatever. But you can’t have multiple practitioners doing the same service and legally have them categorized as contractors. And that is the end. Because I don’t want to get too legal-y. But I wanted you all to know this is happening because it’s different from the conversation we would have had on this even five or ten years ago, but it’s happening. States are starting to interpret this and apply this, and you could even call your state’s attorney general’s office to see if they have any legislation on this or any court decisions on this or your state’s department of employment as well. That’s all I have to say about that.
MR Yeah, and I think — I keep going back to why not do it. I know that it does cost a little bit more, and a lot of people say Well, it costs more to have employees. Well, yeah, it’s going to cost a little bit more. There’s some tax stuff, there’s a payroll system to pay for. But it’s not that much, and I just like that it’s the right thing to do. And there are other benefits that come with that and a lot of it I’ve already kind of mentioned, the brand integration, the cohesive team aspect of it, being legal, all those are great things. I don’t know — we might want to get them to be a sponsor because I love them so much. I’m not sure if they will be, but I’m going to just go ahead and do a shout out to my favorite payroll system, which is Gusto. I’ve been using Gusto lately, and it is dreamy. If anybody is worried about a payroll system or having to manage payroll, it’s really very, very easy if you use a good system. I use Gusto for this personally. It’s gusto.com, and it handles all the state tax reporting for you, it does all the backend weird financial tax stuff you have to worry about, all that is take care of for you. If you want to plug in a 401(k) plan or plug in health benefits later you can do that. It gives you all the I9 documentation reporting stuff to go through. It’s all very, very easy, and it makes it a dream to manage employees from an administrative standpoint. So there are — it’s very inexpensive. It’s not that much per month either.
AH The reality is you may already have systems in place that can incorporate payroll very easily anyway. If you’re already using QuickBooks, if you already have a bookkeeper, it’s probably nominal to add a payroll situation into that. And it’s probably not that hard to learn how to do it yourself once you have those systems in place and keep it really, really affordable. Yay for Gusto. Also know there’s other options.
MR Yeah, I’m just a big fan of not beating your head against a wall doing stuff yourself when you should be outsourcing it for a fraction of the labor it would cost.
MR But you’re right. You could do it yourself. QuickBooks does have payroll; I’m not a fan of QuickBooks payroll. It’s not quite as good as Gusto in my opinion, but it’s there. Yeah, it’s not that hard. I know a lot of people argue with you about this and argue with us about this, and you’re right. That’s okay to have debate, but it just doesn’t seem to make a whole lot of sense to me. It’s not that difficult and it’s the right thing to do to have employees or just renters. You have a good renter situation that works well for you, right?
AH 90% of the time.
MR [laughs] Mostly, yeah.
AH And it also — having renters and charging a flat rent means that they need to have skin in the game. They need to be putting out a certain flat amount for rent every month, so they know they have to hustle and fill their schedule so they can cover that, cover any of their other expenses, and bring home what they need to. Whereas when you have contractors, if they don’t care about making much money, that room is going to be empty, and they’re controlling their schedule. So if they don’t want to work, they don’t have to work, and then you don’t make money off of them. They don’t have skin in the game. The reality is that so many massage therapists are hobbyists. They don’t count on this for their full-time income. When that’s the case, when someone has another income coming into their home then that schedule is not their priority.
I say this all with great empathy. I understand how hard it is to find good employees, to find good renters. But I think that when you hire contractors instead, you’re just — I’m going to use a word — you’re just screwing yourself. If you end up with contractors because you can’t find good employees or good renters, then maybe you just need to scale back and work on your own. That might be the thing. Because I think when you invite contractors in, you’re creating a lot of gray area. That said, you might be really, really great at it with really, really great contracts and really great communication expectations and great legal advice so you know for realizes you’re doing it right, and then rock on. But I’ve yet to see a really great case of that.
MR Yeah, it’s usually this weird limbo area that’s kind of wishy-washy.
AH People call it a hybrid, but it’s really just crappy.
MR Well, I love talking about this, as you can tell, and I know you do too. So I would say for our listeners, if you have questions about this or you want to have legitimate, open-minded conversation about this and would like more information, definitely contact us. We would love to help you out with more specific guidance if you have some other questions or want to just talk it over. Hopefully it’s helpful. Good stuff. Anything else you would add, Allissa, or are we good?
AH I’m done, man. I’m done.
MR All right. Awesome. Well, we will wrap it up there. Again, I sense a couple other episodes coming out of this, which is really good stuff, so we’ll start planning for that. Again, just to come back to our halftime spot again, we’d love to see you at the World Massage Festival in Vegas. If you’re thinking about going, if you’re on the fence, definitely sign up and come play with us there. If you’re already going to be there, absolutely come hook up with us and we would love to meet you there and hang out and be a part of our podcast too. Come join us as we record and we’ll hang out with you there. We can’t wait to see many of you at the event.
With that, we’ll wrap up there. Thanks for joining us today. We appreciate you being a listener. Our website, as always, is massagebusinessblueprint.com. If you have a topic or question or if there’s anything you want to give us feedback on, the email address to do that is firstname.lastname@example.org. We appreciate you being a listener and part of our community. Until next time, have a great day. We’ll see you then.