What Do I Need to Know About Worker Classification?

June 13, 2016

Business owners, no matter the industry, need to know how important it is to classify their workers properly.

Should you classify them as employees or independent contractors? While in part this is a question of preferred business model, both federal and state laws require that workers be classified as employees unless certain tests for independent contractor status are met. Because of the significant consequences of misclassifying workers, the wrong classification decision based on the laws in your particular state could mean the difference between success and failure for your business. Make the wrong choice – even unintentionally – and tax agencies could have cause to collect a hefty amount in back employment taxes and penalties, in addition to potential lawsuits by the misclassified worker.

Why Are Yoga Studios Under Scrutiny?

Employee misclassification is a hot-button issue across the country, with class action misclassification cases making headlines, as with the recent $100 million settlement Uber reached with drivers in California and Massachusetts who had challenged their classification as independent contractors. Since yoga is a multi-billion dollar industry, the staffing practices of yoga studios are increasingly coming under scrutiny by state and federal tax agencies. Though the size of the yoga industry is impressive, many yoga studios are not “big business” – they are local, community-oriented, small businesses, like Quest Yoga Arts in Mount Kisco, New York. Quest Yoga Arts’ owner Laura Jensen knows what it is like to be in the states crosshairs on worker classification issues.  

A Tale of Two Yogis

In December 2014, Jensen found a Stop Work Order on her studio’s door from the Workers’ Compensation Board of the State of New York for what it deemed a failure to secure workers’ compensation coverage for her studio’s staff. Jensen contends that her teaching staff are independent contractors, not employees; and that, as such, she is not required to cover them under a workers’ compensation policy. Jensen later learned that a $70,000 penalty accompanied her Stop Work Order.

Jensen ultimately filed a “Notice of Redetermination” of her workers’ classification status in addition to other paperwork requested by the state, but to no avail. She now owes more than $150,000 in penalties, and she must also obtain disability benefits coverage in addition to workers’ compensation for her instructors. “I can't seem to find a lawyer in the area who deals with this, and the ones I have talked to say it's going to cost just as much to litigate as to try and settle with them,” says Jensen. While the cost of workers’ compensation insurance is not a significant expense, Jensen adds, she doesn’t believe instructors who only teach one or two classes a week should be considered employees. “I only have 15 teachers and I'm not a big studio – just a local, small business trying to make a living,” she says.

The potential for misclassification is heightened because state laws vary and, even under federal law, standards for determining independent contractors do not all track the IRS determination of whether a business must pay federal employment taxes. According to the New York Department of Labor website, “Whether the labor is paid using a W2 or 1099 Form for tax purposes does not matter in determining an employer/employee relationship for workers’ compensation purposes.” .

Studio owners disregard the obligations of having employees at their peril. Betsy Kase, owner of two Yoga Haven studios in Westchester County, New York, became entangled with the Workers’ Compensation Board when she learned five months into hiring her first employee that she needed coverage. While Jensen says the cost of a yearly policy covering everyone who teaches at her studio is only $750, she ended up owing $32,000 in fines for the five months of non-compliance, which her accountant was able to negotiate down to $3,200.

Kase believes the state could do a better job at clarifying its workers’ compensation law and publicizing who is required to have it. “How would you know when you had to buy workers’ comp insurance? There is no checklist that says you have to do this,” she says. Ultimately, however, the burden of compliance falls on the business owner, and lack of awareness of legal requirements will not excuse a business owner from penalties for noncompliance. In addition to workers’ compensation insurance coverage, most states require employers to contribute to an unemployment insurance fund for employees, and federal and state laws mandate that employers provide certain benefits to employees.

What Do I Need to Know Right Now?

While worker classification laws do vary from state to state, many states follow the lead of the IRS’s “20-factor” or “right to control” test. According to the IRS, “regulations provide that an employer-employee relationship generally exists if the person contracting for services has the right to control not only the result of the services, but also the means by which that result is accomplished.” The penalties for misclassifying a worker can be steep, including liability for unpaid federal and state employment taxes, as well as fines, interest and late fees, in addition to any insurances like workers’ compensation that need to be obtained so your studio is in compliance. Complicating the issue, however, the U.S. Department of Labor takes the position that, for some employment law statutes, the “right to control” is not determinative of employee or independent contractor status. In a July 2015 Administrator’s Interpretation, the Department of Labor set forth a multi-factor test of independent contractor status “to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor)”; the policy document cautioned “no one factor (particularly the control factor) is determinative of whether a worker is an employee.”

The federal government is not alone in setting a high bar of independent contractor status and intensifying enforcement efforts. In the past few years, states like California have ramped up audits among yoga studios to enforce worker classification compliance, with owners responding in various ways, from establishing “yoga co-ops” to proactively reclassifying all workers as employees. In Oregon, some owners have opted to sell their yoga studios because they regarded the cost of compliance as too high, while others have chosen to battle their cases in court.

What If I Disagree With Tax Officials About My Workers' Status?

If federal or state tax officials believe you have misclassified your workers – and you believe you haven’t – you can dispute the claims. On the federal level, you can file for relief provisions (see Publication 1976, Section 530 Employment Tax Relief Requirements and the Voluntary Classification Settlement Program). Relief provisions, including settlements, differ from state to state as well. If you are unsure of whether your workers meet the test for independent contractor status or how to proceed when contacted by state or federal authorities, consult with an employment lawyer, tax attorney or accountant who can help you navigate state and federal laws – and even avert troublesome scenarios from the start.

Where Can I Find Out More About the Rules in My State?

Yoga Alliance has created a Worker Classification Resource Center where members can find links to state agencies for more information. You can also watch archived workshops on the topic, and sign up for upcoming workshops so you are up-to-date on how worker classification impacts your business.

Worker Classification Resource Center

Locate your state below to find out the laws and regulations about employee classification.










District of Columbia:






















New Hampshire

New Jersey

New Mexico

New York

North Carolina

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Puerto Rico

Rhode Island

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Virgin Islands


West Virginia



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