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Commercial Lease Requiring Insurance Benefits

Are you staff members employees or independent contractors? Did you know that your commercial lease may force this decision for you? Here’s how the issue of employee vs contractor and commercial leases can collide.

Insurance Requirement

Every commercial lease we’ve reviewed requires the tenant to maintain building insurance. There is nothing wrong with that. We fully support that and expect it. Insurance companies like AGuard are happy to extend building policies and add the building owner as an additional insured. However, some take it a step further. We’ve seen commercial leases that require the tenant to maintain worker’s compensation insurance for staff members. Aside from increasing the gym owner’s cost, this can be a real problem.

Insurance is a Benefit

If you are ever audited by the IRS, it will apply a three part test to determine whether your independent contractors are actually employees. The test is designed to determine the amount of control you exhibit over your staff. The more you control your staff, the more they are employees. One part of the test also looks at whether you provide benefits. These benefits may be vacation, sick leave, 401k contributions. Additionally, benefits may also come in the form of insurance coverage. Are you seeing the problem yet?

The Cost of an Employee

If you lease requires you to maintain a worker’s compensation policy for your staff, then you cannot designate them as contractors. That’s the problem. Your commercial lease has just removed your ability to determine the tax status of your staff. Now, not only do you have to pay more for the benefits, but you also have to pay more in taxes. The average employee will cost a gym owner 10-15% more than an independent contract according to Incite Tax. Over time, that’s a pretty significant increase in cost.

So, what does your lease say?

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