Unemployment Insurance Tax Program Appeals Board Decisions – 2017 1st QUARTER OF CALENDAR YEAR 2017 Arizona Department of Appeals Board Economic Security Appeals Board No. T-1437905-001-B _____________________________________________________________________________________ XX STATE OF ARIZONA E S A TAX UNIT ℅ XX ℅ MELISSA HENRY XX ASST ATTORNEY GENERAL CFP/CLA XX 1275 W WASHINGTON ST XX PHOENIX, AZ 85007-2926 Employer Department _____________________________________________________________________________________ IMPORTANT --- THIS IS THE APPEALS BOARD’S DECISION The Department of Economic Security provides language assistance free of charge. For assistance in your preferred language, please call our Office of Appeals (602) 771-9036. IMPORTANTE --- ESTA ES LA DECISIÓN DEL APPEALS BOARD The Department of Economic Security suministra ayuda de los idiomas gratis. Para recibir ayuda en su idioma preferido, por favor comunicarse con la oficina de apelaciones (602) 771-9036. RIGHT TO APPEAL TO THE ARIZONA TAX COURT Under Arizona Revised Statutes, § 41- 1993, the last date to file an Application for Appeal is *** March 2, 2017 ***. DECISION REVERSED THE EMPLOYER, through counsel, petitioned for a hearing from the Department’s reconsidered decision issued on January 13, 2014, which held in part as follows: … we find the services performed by individuals as personal trainers constitute employment and the remuneration paid for such services constitutes wages. Accordingly, this Reconsidered Determination affirms the Determination of Unemployment Insurance Liability and the Determination of Liability for Employment or Wages, both issued on November 15, 2013, and will become final unless a written petition for hearing is filed … The request for review or appeal having been timely filed, the Appeals Board has jurisdiction in this matter pursuant to A.R.S. § 23-724(B). With notice to the parties, the Appeals Board conducted telephone hearings that were convened before ROBERT T. NALL , an Administrative Law Judge in Phoenix, Arizona, on April 27, 2016 and on June 8, 2016. All parties were given the opportunity to present evidence on these issues: 1. Whether the Reconsidered Determination properly affirmed the November 15, 2013 DETERMINATION OF UNEMPLOYMENT INSURANCE LIABILITY and the DETERMINATION OF LIABILITY FOR EMPLOYMENT OR WAGES. 2. Whether the services performed by individuals as "personal trainers" constitute "employment” and are not exempt or excluded by law from Arizona Unemployment Insurance (UI) coverage. 3. Whether all remuneration paid to individuals as "personal trainers" constitutes "wages", as defined in A.R.S. § 23-622. 4. Whether any of the individuals performing services as "personal trainers" performed work or services that is exempt or is excluded from Arizona UI coverage under A.R.S. §§ 23-613.01, 23-615, or 23-617, or under a decision of the federal government to not treat that individual, class of individuals, or similarly situated class of individuals as an employee or employees for Federal Unemployment Tax purposes. 5. Whether any of the individuals performing services as "personal trainers" factually and legitimately were independent contractors, during the time period shown by the Notice of Assessment Reports for the quarters ending: December 31, 2010 through June 30, 2013. At the hearing, the Employer’s counsel appeared, and four witnesses testified for the Employer. The Department was represented by counsel, and one witness testified for the Department. Board Exhibits 1 through 24 were admitted into evidence. Both parties have submitted post-hearing arguments or briefs. We have carefully reviewed the record. Appeals Board No. T-1437905-001-B - Page 2 THE APPEALS BOARD FINDS the following facts pertinent to the issues here under consideration: 1. The Employer is a limited liability company that, since 2003, provides personal training to clientele of several Arizona corporations which operate fitness center locations or gyms in Arizona. The facility operations and sales of memberships are separated from the provision of personal training services by the corporate structure. Several “fitness directors” and receptionists were employed, and were issued W-2 wage reports through a third party payroll service (Tr. pp. 112, 124, 133; Bd. Exhs. 8, 9, 25). 2. At any given time, at least 50 personal trainers are engaged by contractual relationships with the Employer. All personal trainers are paid the same rate of $24 per session with a gym member, which typically last one hour. Some gym members arrange for half- hour sessions, for which personal trainers are contracted to be paid $12 per session. Additionally, personal trainers can receive a 4% commission when an assigned client renews a gym membership contract and pays for a package of additional personal training sessions. 3. All personal trainers performed services under an “Independent Contractor Agreement” with the Employer, which specified pay by half-hour segments upon completion of work. An indemnity and hold harmless provision required every “Contractor” to provide workers compensation insurance for themselves. The firm agreed to provide space for use by the “Contractor”, and to provide personal training to clients. No terms were assignable, and termination upon seven days of notice was permitted for any reason (Bd. Exh. 6). 4. All personal trainers must be certified by one or more of various third-party industry program s, which require a standard of study hours involving courses leading to examinations and certificates. Some programs require periodic recertification, for which the Employer did not reimburse the trainers. 5. All personal trainers maintain their own liability insurance at their own expense, with minimum coverages as required by their contract with the Employer. The Employer did not reimburse this expenditure (T. pp. 130-133). 6. Personal trainers are assigned to gym members by a “fitness director” in an effort to match fitness goals of individual gym members with competencies of the personal trainers, and to accommodate scheduling (Tr. pp. 125-127). Members and personal trainers arrange their own meeting times, and personal Appeals Board No. T-1437905-001-B - Page 3 trainers note the attendance on goal sheets maintained in notebooks provided by the Employer for payroll purposes. Trainers turn in session usage reports are biweekly to the Employer as a condition of payroll calculations. Further, personal trainers are required to use these records to track how many of the paid-for sessions have been used by each gym member to date, and how many unused sessions remain in the purchased package of sessions. 7. Personal trainers serve each gym member at that member’s pleasure. Missing appointments or other reasons for member complaints could result in the fitness director or other manager assigning a different personal trainer to meet with that member, if requested. No other penalty is provided by contract. 8. The Employer provides all facilities, tools, and equipment for physical training. P ersonal trainers may arrange to use outdoor areas for activities such as running or climbing or shoving heavy objects, such as tires. Personal trainers also may bring their own additional equipment for gym members to use. 9. Certain areas of each gym facility and an adjoining ice skating rink are off-limits for personal training at certain times, by order of management, in order to facilitate group activities and for general safety. Although the employer is operating at several locations and any could be utilized, personal training services typically were offered at the same, original facility where the personal trainer was contracted. Some personal trainers were assigned to a smaller “Platinum Club” within a larger gym facility. 10. Independent contractor status is commonplace in the industry. These personal trainers are not closely monitored by the Employer. Their pay is not based upon whether the gym member client met their goals. (Tr. p. 95). 11. The employer provides a single logo shirt to each personal trainer. Other clothing must be of similar color, in order to visually differentiate from a distance between personal trainers and gym members. Further items are at the wearer’s expense. Wearing any clothing that advertises industry competitors is prohibited. 12. “CP”, a witness who contracted with the Employer as a personal trainer, subsequently was hired as a fitness director. At that point, he became an employee entitled to benefits, and he commenced the duties of selecting and assigning personal trainers to perform services paid for by gym members. He later became a District Manager and a Vice President. As a fitness Appeals Board No. T-1437905-001-B - Page 4 director, he never participated in personal training of a member because he considered that to interfere would be unprofessional. 13. Similarly, “BP” started as a personal trainer and he signed an “Independent Contractor Agreement”, but he was hired into a fitness director position at which his tasks included selling services packages to gym members and then matching the gym member to another personal trainer. He retained five clients at one club as a personal trainer, while working as a director with employee benefits at a different club. 14. On occasion, employees have notified a personal trainer of a particular physical disability, injury, or need observed that affected a gym member. The personal trainer was expected to utilize competent judgment to avoid aggravating that situation. 15. A personal trainer cannot extend credit to any gym member for training services. Prices and payment arrangements for all training services are established by the Employer. All personal trainers were paid by their half -hour time blocks, solely for services rendered as shown by the logs that each maintained. 16. Non-members are not permitted to enter or to use the gym facilities, and cannot receive personal training services on gym premises. Similarly, non-contracted personal trainers cannot train anyone within the gym facilities (Tr. pp. 91-93). 17. Personal trainers are not permitted to utilize any assistants or substitutes for provision of services at gym facilities. Fitness directors play no role in determining exercise regimens (Tr. p-. 126-128). 18. Although working for a competing facility was discouraged as a conflict of interest, s ome personal trainers advertised to the public, and some also worked elsewhere. No contractual provision precluded outside jobs (Tr. pp. 103, 105). 19. Personal trainers did not need permission to take vacations or other time off, but risked client discontent if unreliable. 20. During a period of facility renovation, trainers were required to attend a mandatory meeting was conducted to discuss special arrangements around the construction areas. 21. Some workers served under a Professional Employment Organization (PEO), which was paid directly for their services. Other personal trainers had their own firms or LLCs (Tr. p. 128). Appeals Board No. T-1437905-001-B - Page 5 22. The Employer’s web site does not disclose an independent contractor relationship, but refers to “our trainers” and to “Professional Fitness staff” (Bd. Exh. 7). The Employer contends that all of its “personal trainers” were independent contractors, and were not employees, as of December 31, 2010 and thereafter. The issues remaining in dispute concern the proper classification of the “personal trainers” and whether all forms of remuneration paid to these individuals constituted wages. Arizona Revised Statutes § 23-613.01 provides in part as follows: A. "Employee" means any individual who performs services for an employing unit and who is subject to the direction, rule or control of the employing unit as to both the method of performing or executing the services and the result to be effected or accomplished, except employee does not include: 1. An individual who performs services as an independent contractor, business person, agent or consultant, or in a capacity characteristic of an independent profession, trade, skill or occupation. * * * 3. An individual or class of individuals that the federal government has decided not to and does not treat as an employee or employees for federal unemployment tax purposes. [Emphasis added]. * * * Arizona Revised Statutes § 23-614 provides in part as follows: Employing unit; temporary services employer; professional employer organization; definitions A. "Employing unit" means an individual or type of organization, including a partnership, association, trust, estate, joint-stock company, insurance company or corporation, whether domestic or foreign, or the receiver, trustee in bankruptcy, trustee or successor of any of the foregoing, or the legal representative of a deceased person, which has, or subsequent to January 1, 1936 had, one or more individuals performing services for it within this state. … * * * Appeals Board No. T-1437905-001-B - Page 6 C. Each individual employed to perform or to assist in performing the work of any person in the service of an employing unit is engaged by the employing unit for all the purposes of this chapter, whether the individual was hired or paid directly by the employing unit or by such person, provided the employing unit had actual or constructive knowledge of the work. * * * Arizona Revised Statutes § 23-615 defines "employment" as follows: "Employment" means any service of whatever nature performed by an employee for the person employing him, including service in interstate commerce, and includes: 1. An individual's entire service performed within or both within and without this state if: (a) The service is localized in this state. … * * * 4. Service performed by any officer of a corporation. * * * Arizona Revised Statutes § 23-622(A) provides as follows: A. "Wages" means all remuneration for services from whatever source, including commissions, bonuses and fringe benefits and the cash value of all remuneration in any medium other than cash. The reasonable cash value of remuneration in any medium other than cash shall be estimated and determined in accordance with rules prescribed by the department. Arizona Revised Statutes § 23-725(A) provides as follows: Employer coverage; termination; election of coverage A. Except as provided in subsections D and E of this section, an employing unit that is or becomes an employer subject to the provisions of this chapter within any calendar year shall be deemed an employer during the whole of the calendar year. Arizona Administrative Code, Section R6-3-1723, provides in part: Appeals Board No. T-1437905-001-B - Page 7 A. "Employee" means any individual who performs services for an employing unit, and who is subject to the direction, rule or control of the employing unit as to both the method of performing or executing the services and the result to be effected or accomplished. Whether an individual is an employee under this definition shall be determined by the preponderance of the evidence. 1. "Control" as used in A.R.S. § 23-613.01, includes the right to control as well as control in fact. 2. "Method" is defined as the way, procedure or process for doing something; the means used in attaining a result as distinguished from the result itself. B. "Employee" as defined in subsection (A) does not include: 1. An individual who performs services for an employing unit in a capacity as an independent contractor, independent business person, independent agent, or independent consultant, or in a capacity characteristic of an independent profession, trade, skill or occupation. The existence of independence shall be determined by the preponderance of the evidence. 2. An individual subject to the direction, rule, control or subject to the right of direction, rule or control of an employing unit "... solely because of a provision of law regulating the organization, trade or business of the employing unit". This paragraph is applicable in all cases in which the individual performing services is subject to the control of the employing unit only to the extent specifically required by a provision of law governing the organization, trade or business of the employing unit. * * * D. In determining whether an individual who performs services is an employee under the general definition of subsection (A), all material evidence pertaining to the relationship between the individual and the employing unit must be Appeals Board No. T-1437905-001-B - Page 8