When is a Tenant an Employee: Leases and Independent Contractor vs. Employee Status
Companies frequently lease out space in their building they don’t need to provide a return on otherwise vacant space. Leases have also been used to attempt make workers who would otherwise be employees into subtenants not subject to employment laws. This article briefly discusses when a tenant under a lease can be considered an employee, and the provisions of the form lease attached to this article. The form has not been the subject of a Department of Labor audit, so it should only be taken as a guide for creating your own forms and documents.
The other presenters at this seminar have discussed in more detail the factors that courts and administrative agencies consider is determining whether a worker is an employee, but to briefly review, the basic test is the so-called “ABC Test” (set forth in Conn. Gen. Stat. 31-222(a)(1)): is the workers free from control in the performance of the services; are the services performed outside the usual course of business or outside all the places of business of the enterprise; and is the individual customarily engaged in an independently established trade.
Where a business leases space to another business in return for a flat-fee rental, such as psychologists who lease a spare office out on a part-time or full-time basis who conducts her own practice from the space, there is little risk that the tenant will be considered an employee. As the tenant becomes involved in the business of the landlord, however, the risk of the tenant becoming an employee rises. Below are some of the factors involved in determining whether a tenant would be considered to be an employee.
Control. If the tenant is subject to the control of the landlord in the performance of the services, the lease will not prevent the tenant from being considered an employee. This is the lesson of the wage and hour cases involving exotic dancers in adult night clubs. In many of these clubs, the dancers paid a fee that was ostensibly for leasing an unspecified portion of the dance stage for the dancer’s shift. The dancers were commonly subject, however, to supervision of their dances, had to follow rules in the activities they carried out, and charge only the fees set by the clubs. Reich v. Circle C Invs., 998 F.2d 324 (5th Cir. Tex. 1993). See for example, Hart v. Rick’s Cabaret Int’l, Inc., 2013 U.S. Dist. LEXIS 129130, 18 (S.D.N.Y. Sept. 10, 2013), granting summary judgment to the dancers when the club had regulations prohibiting chewing gum, using cell phones, required schedules, detailed check in and out procedures, and extensive regulations on dress and manner of dancing. If the landlord can control the way the tenant performs their business, then the tenant is likely to be considered an employee.
Pricing. To avoid employee status, the tenant must have a realistic opportunity for profit or loss. If the tenant does not have extensive material costs (such as a psychotherapist), it would be difficult to argue that there is a realistic opportunity for profit or loss if prices charged by the tenant to its customers are set by the landlord. Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1049 (5th Cir. Tex. 1987) (fact that contractors could make more commission by selling more product not enough, in the light of the degree of control exercised over their work, was not enough to make them independent contractors).
Insurance. Requiring the tenant to obtain liability insurance naming the landlord as an additional insured will help avoid employee status. Robb v. United States, 80 F.3d 884, 894 (4th Cir. Va. 1996). The landlord should also require the tenant to obtain workers’ compensation coverage or obtain a statutory waiver of workers’ compensation coverage. If not, the landlord’s workers compensation insurer may classify the tenant as an employee and charge workers’ compensation premiums. Nat’l Fire Ins. Co. v. Beaulieu Co., 140 Conn. App. 571 (Conn. App. Ct. 2013)
Scheduling. The tenant must control when he or she works. If the landlord is not happy with amount or times the tenant comes into work, the landlord can terminate the lease at the end of its term. As established in the dancing cases cited above, however, requiring certain shifts and imposes fines or other punishments risks employee status.
Term of Lease: Set Term or Terminable at Will. The ability of the landlord to terminate the lease at any time for any reason undercuts that lease nature of the transaction. Real v. Driscoll Strawberry Associates, Inc., 603 F.2d 748, 755 (9th Cir. Cal. 1979).
Independent Business. If the tenant has its own business entity, particularly if the entity provides services to others, it is likely that the tenant will not be considered an employee. While the cases have not discussed the issue in these terms, looking at the case law as a whole, to the extent the tenant is contributing to developing the good will of the landlord’s business as opposed to his or her own, the more likely the tenant will be treated as an employee.
ROOM RENTAL AGREEMENT
The Effective Date of this Agreement:
This Agreement is by and between the “Company,” defined as the following:
AND __________________________ (“Provider”), a business with its principal office at ____________________________.
Purpose of this Agreement:
Provider wishes to rent a room at the Company’s location.
Provider may contract with the Company for the Company to provide additional services to Provider.
The Company has agreed to rent its facilities to the Provider on the conditions set forth herein.
- Services & Pricing
- Provider shall indemnify and hold the Company harmless from any all liabilities resulting from the following: any action or inaction of Provider; Provider performing services beyond the scope of the Provider’s professional practice and certifications and/or licenses of Provider; or liabilities resulting from Provider failing to maintain all licenses and certifications required to provide the services.
- Provider acknowledges that Provider shall set the fee for the services performed under this Agreement.
- Rental and Services
- Room Rental
- Provider shall pay the Company a rental fee for use of a room at the Company’s location.
- Provider shall only perform services at the Company that are within the scope of Provider’s own business, certification and or license(s)
- Following Provider’s use of the room, Provider will return the room to its original condition. If provider does not do so, the Company may charge a cleaning fee per incident.
- Billing Services
- Provider may elect to have the Company handle collection of all or some of the fees on Provider’s behalf, for which service the Company will charge a fee.
- Provider will be charged for any declined credit card charges or dishonored checks.
- Supplies and Linens.
- Provider may provide his/her own supplies
- Provider may use the Company’s supplies for a fee
- Provider will complete a Room Rental Form, the form of which attached to this Agreement, for each client Provider serves at the Company’s facilities.
- If the provider sells any product(s) the company provides to the client, the Company will pay a commission of 10% of the price for all products sold at the Company’s facilities. No fees will be paid for sale of any other products or services.
- Within fifteen days after each calendar month in which the Provider rents a room, the Company will furnish Provider with a statement of room charges, charges for services elected and funds collected on behalf of Provider for such calendar month. Any monies due to/ or from the Provider will be settled upon receipt of the statement.
- Room Rental
- Scheduling. Provider must inform company prior to each new month their schedule for room availability. If provider wishes they can utilize the services of the company to schedule appointments for their clients.
- HIPAA Compliance. Provider acknowledges that Provider is familiar with its obligation pursuant to the Health Insurance Portability and Accountability Act (“HIPAA”) to protect the confidentiality of the individual health information its clients that it provides services to at the Company’s facility, and that Provider will indemnify and hold the Company harmless from any violation of HIPAA committed by Provider. Provider shall otherwise comply with all federal, state and local laws and ordinances.
- Rental Contract Compliance. Nothing in this Agreement shall in any way be construed to constitute Provider as an agent, employee or representative of the Company. Provider agrees to furnish (or reimburse the Company for) all tools and materials necessary to accomplish this contract, and shall incur all expenses associated with performance, except as expressly provided in this Agreement. Provider agrees to and acknowledges the obligation to maintain proper records and pay all applicable taxes including but not limited to all self-employment, federal, state and local taxes imposed on Provider’s business and indemnify the Company and hold it harmless to the extent of any obligation imposed on Company.
To establish your status as an independent Provider, please attach the following to this agreement:
- Your business card ____
- Brochures for your own business _____
- Workers’ Compensation Insurance Certificate _____ (IF REQUIRED)
- Liability Insurance Certificate _____
- List other locations at which you do business: ____________________________________
- Provider agrees to produce insurance certificates to the Company.
- Provider agrees to maintain professional malpractice insurance policy in amounts no less than $1 million per person and $3 million per incident.
- Term. This Contract shall be for a term from the date hereof to the first day of the month after execution of this contract, and shall renew for successive calendar months unless terminated by either party by written notice prior to the start of the calendar month, provided that either party may terminate this contract immediately upon breach of the contract by the other party.
- This Agreement contains the entire Agreement between the parties and supersedes all prior oral and written Agreements, understandings, commitments, and practices between the parties. No amendments to this Agreement may be made except by a writing signed by both parties. Neither this Agreement nor any right hereunder may be assigned by any party hereto, except that the Company may assign this Agreement to an affiliate or successor.
Understood, Agreed & Approved
Executed by the parties as of the Effective Date first written above.