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California Attacks Yoga Studios Over Taxes!

I am writing to let you know of an important and disturbing development that is threatening the yoga community in California.

The Threat To Your Yoga Studio

The California Economic Development Department (the “EDD”) has been aggressively targeting yoga studios in California to determine whether they have properly classified yoga teachers and other workers as independent contractors rather than as employees. The EDD targets industries that are abusing the tax laws, audits and forces re-classification of workers from independent contractors to employees. The EDD may have set its sights on the yoga industry in California.

I know of eight studios that are being audited in the Bay Area alone. I know of several more which are under audit in Southern California. Although some audits are ongoing, substantial fines have been imposed against yoga studios. I do not know of any studios that have won their audits. If you hear of any audits in your area, please let me know.

The EDD has an agreement with the IRS where they share information about companies that have misclassified their workers. If a studio is audited by the EDD, it may be audited again by the IRS. I have seen this in other States.

If you are audited and lose, you will pay back taxes and penalties. You may be forced to change your business model to employer-employee and your cost of doing business will increase. Your relationship with your teachers will change. You must comply with a large body of employment and tax laws.

Penalties For Misclassification

If you misclassify your workers and lose your audit, you may be liable for state unemployment taxes, worker’s compensation insurance, unpaid payroll taxes, penalties and interest. The EDD can look back three years. If you are audited by the IRS and lose, you may be liable for federal tax withholding, FICA and Medicare payments, federal unemployment, penalties and interest. In 2012, California passed a new independent contractor law. It imposes harsh civil penalties. For each violation, you may face a penalty of between $5,000 and $15,000 in addition to back taxes and other penalties. These may increase if there is a “pattern or practice” of violations.

What Can Yoga Studios Do?

You have three choices:

1. Do nothing and hope you do not get audited.

This is an unwise strategy. Your chances of being audited have now increased. If a studio in your town has been audited and converts to employer-employee, it may report your studio to the EDD because it is at a competitive disadvantage. Audits have been triggered when workers have mistakenly filed for unemployment compensation. The EDD randomly audits businesses. If you do nothing and are audited, you may be following business practices that may cause you to lose your audit.

2. Build Your Case That Your Teachers Are Independent Contractors

Take a very conservative position on classifying your workers as independent contractors and build the strongest legal case to defend yourself. The basic steps are to research and understand the law, complete the IRS and California independent contractor worksheets to assess whether you have properly classified your workers, change your business practices, use professional independent contractor agreements and avoid red flags.

The law in this area is too complex to discuss in this letter but the key legal test is control. The more you control your teachers, the greater the chance they are employees. The less you control your teachers, the greater the chance they are independent contractors.

You should consult with your tax expert, accountant or employment lawyer to get professional guidance on whether you have properly classified your workers.

3. Convert to the Employer-Employee Model

Studios are beginning to convert to the employer-employee model as a way to cut-off the accrual of additional liability and to stop worrying about an audit. This is more common for larger studios or studio chains. Some smaller studios are beginning to convert. You should consult with your tax expert, accountant or employment lawyer to get professional guidance if you want to convert.

Avoid Red Flags

Make sure that you do not have any red flags. Some of these red flags are: (i) failing to get invoices from your teachers; (ii) not using professional independent contractor agreements or using “do it yourself” agreements (or none at all); (iii) supervising your teachers; (iii) requiring teachers to follow a studio manual which makes them do odd jobs around the studio and controls the way they teach; (iv) requiring teachers to open and close the studio and collect money from students; (v) paying benefits or business expenses of the teachers; and (vi) not requiring teachers to run independent businesses.

What Should Yoga Teachers Do About The Independent Contractor Problem?

Many yoga teachers think this is not their problem because the studios are liable for properly classifying their workers. However, yoga teachers have an important stake in this issue. If a studio is audited and loses, it may be driven out of business. This devastates the yoga community and you will lose your job. If the studio survives and converts to employer-employee, taxes will be deducted from your paycheck and you will lose your tax deductions for that studio.

Yoga teachers should bring these issues to the attention of the studio owners and encourage them to make intentional, informed decisions as to the business model they wish to follow. If you work at a studio and see the red flags, provide the studio with a copy of this article and encourage it to get professional help.

My Role In This Situation

My intention is to educate the California yoga community about the alarming actions of the EDD and the effect that an audit and potential tax liabilities may have on the viability of yoga studios. I hope to empower you to understand and comply with the tax laws to reduce your chances of tax liability. I want to see yoga studios build strong businesses so they can continue to provide the benefits of yoga.

I am not a member of the California State Bar, I do not specialize in employment law and this letter is not legal advice. I am not soliciting or accepting any legal representation of yoga studios in California on matters involving classification of yoga teachers.

Here is how I can help:

1. You can buy a copy of my book Light on Law For Independent Contractors. It has 200 pages of discussion and resources on both the federal and state law of independent contractors and employees. It has a chapter on California law. It has both the IRS and EDD worksheets to use for classifying workers. It has model independent contractor and employment agreements. Here is the link if you are interested:

http://garykissiah.com/tees/independentcontractors/

2. You can consult with me from a business point of view to discuss your situation and assess the best way forward. I will be happy to provide you with the EDD Information and Worksheet, the Tax Audit Guidelines, the EDD Worksheet and the IRS Guidelines.

3. You can contact me and I will be happy to refer you to a California lawyer who specializes in this area of the law.

I am very sorry to bring these unpleasant developments to you but I have seen the results of these audits and they are heartbreaking. We cannot continue under the conventional view that teachers are independent contractors because “everyone else does it that way.” Both the IRS and the States are auditing businesses nationally over this issue. They view using independent contractors as abusive and want the tax revenues. I view this is a result of the success of yoga. As money has flowed into yoga and the mainstream media has embraced yoga in everything from advertisements to movies, it has caught the attention of the tax collectors and they are following the money. They want our tax revenues.

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Trouble In Yoga School!

 

Yoga teacher training programs have been expanding at a rapid rate and they have become an important profit center for many yoga studios. However, as a result, I am now getting lots of calls about conflicts between students and the schools.

There have been disputes among students, teachers and studio owners, complaints to state regulatory agencies, harsh attacks in social media and blogs, and lawsuits. Students have accused schools and their teachers of engaging in unethical conduct. These conflicts have become inflamed because students have accused yoga schools of bias, discrimination and unfairness when the schools try to defend or to explain their actions.

These situations can be deeply distressing, time consuming, expensive and damaging to your business.

The fundamental causes of these problems are twofold. The first is that many students are very attached to becoming a yoga teacher. Sometimes this attachment is for the wrong reasons: yoga may be viewed as a life raft, a way out of a difficult life situation or as a way to build a meaningful new career. Some students think teaching yoga is an easy way to make great money and have lots of personal freedom. If a student who wants to be a teacher for these types of reasons does not graduate -regardless of the cause- the result is often a strong emotional reaction.  Frankly, some students are attracted to teaching yoga because yoga has healed their personal traumas. However, the deep work involved in training programs may bring these traumas to the forefront and  lead to emotional instability. If these students are denied graduation, the result can be explosive. The school is usually blamed for the situation.

The second cause is that many yoga schools are young businesses and do not have experience in putting procedures in place to prevent these problems from occurring in the first place. They do not have experience in managing the difficult issues that the intense experience of yoga teacher training tends to create. Professional agreements are not used or agreements are not used at all. Some schools are launching their first programs and learning as they go.

Three Common Scenarios That Breed Trouble

These conflicts evolve from three common scenarios: (i) the student cannot master the material, fails the program and does not graduate; (ii) the student voluntarily withdraws from the school; or (iii) the student is involuntarily withdrawn from the school.

Students Who Fail The Program

Unfortunately, there are some students who are not capable of mastering the material necessary to become a competent yoga teacher. Some students become paralyzed with fear at the thought of standing in front of a class and teaching. Other students may have a learning disability or are not able to master the substantive information necessary to graduate. They may not be able to grasp anatomy, basic Sanskrit, the asanas or yoga philosophy. They underestimate the rigor of the teacher training process.  Still others do not have the emotional and personal maturity or stability to teach yoga. I have seen very delicate situations when a student cannot graduate due to pregnancy or physical disability.

The school may be forced to conclude that the student did not fulfill the requirements of the program. The student is devastated and this can easily lead to a dispute.

Voluntary Withdrawal

Sometimes students may need to voluntarily withdraw from a program for a good reason. The reasons are varied: sometimes it is work or family related, health, financial or other similar reasons. Sometimes students realize that they cannot accept the basic system of yogic beliefs due to cultural or religious reasons and wish to withdraw. In other cases, a student may just arbitrarily quit the program.

Involuntary Withdrawal

Some students may become so disruptive that the school may is forced to remove the student from the program.

I have personally seen situations where a student was so aggressive and adversarial in class that she effectively shut down the entire class so that she could vent or express her feelings.  I know of other situations where students have emotionally “melted down” as a result of the deep work they were doing in the program. This has led to emotional outbursts, erratic and abnormal behavior, and conflicts with the other students and teachers.

In other situations students may find that they intellectually or emotionally reject the basic yogic belief system. Others may find that their cultural or religious beliefs conflict with yoga. These situations may lead to problems in class and result in the program terminating the student.

These situations are dangerous and often lead to disputes that are difficult to resolve.

Strategies to Prevent Trouble

What should yoga schools do to prevent such situations from occurring in the first place? How should schools react when they are faced with one of these situations? How can schools position themselves legally so that they will be in a strong position as they manage their way through these problems?

Only Admit Qualified Students

Yoga schools should carefully screen students before they admit them into their programs. This can be done by adopting meaningful admittance requirements. All schools should use a questionnaire that solicits information about the candidate’s practice and motivations for wanting to become a teacher. A personal statement can also provide insight into the motivations of the student.

It is a best practice for the school to personally interview every student who wishes to enter the program to make sure the student is emotionally mature and stable. Schools should ensure that the candidates have a dedicated and substantial yoga practice. If students are not serious practitioners of yoga, how can they hope to teach?

Some schools are very cautious about admitting students who are on medication for psychiatric issues because they have found that these students may not be stable enough to handle the rigors of the training program or to become a yoga teacher.

Some schools seem to think that the only requirement for acceptance is a credit card application. This practice can lead to admitting unqualified students and to problems managing students. The end result may be the graduation of unqualified teachers. This may damage the brand of your school.

It seems to me that your school’s brand will be stronger if graduates from your school are competent and inspired teachers. We should remember that yoga was originally transmitted directly from guru to student but only when the student was ready!

During the evaluation process, it is a good idea to understand whether the student wishes to teach or to deepen his or her practice. The student’s intentions should be clear and the options that are available to the student should be discussed. Some schools freely admit students into programs to deepen their personal practice and then allow those with the interest and the aptitude to continue in the program if they decide to teach.

Use State of the Art Agreements

It is critical that all yoga schools use a professional agreement for their teaching programs. This will accomplish several things:

(i) you can include the questionnaire and personal statement so that you can determine if the student is qualified to enter your program;

(ii) you can set the ground rules for student behavior in class;

(iii) you can make it clear that graduation is not automatic; i.e., students must pass all of the components of the program to the satisfaction of the school in order to graduate;

(iv) you can make it clear that the school has the absolute discretion to determine whether a student has met the requirements to graduate from the program;

(v) you can set forth your refund policy in three common situations: you expel a student, the student fails the curriculum or a student voluntarily withdraws;

(vi) you can set clear rules around students who wish to deepen their practice and those who want to teach;

(vii) you can require the student to follow an appeal process to your Ethics and Teaching Committee if the student has a grievance with the school;

(viii) you can limit your liability for personal injury and for liability for economic damages (such as tuition fees and loss of potential earnings from teaching yoga);

(ix) you can protect your intellectual property such as teacher training manuals and other materials and impose restrictions on the use of your materials;

(x) you can require that the student follow a Code of Ethics (and revocation of your teaching certification if that is your business model); and

(xi) you can include provisions that will discourage any student from filing a lawsuit or a regulatory complaint.

As a service to the yoga community, I am happy to provide you with a free copy of my template agreement for yoga teacher training programs. If you would like a copy, please email me at lilalabs@gmail.com.

Set Up A Teaching Committee

I recommend that all yoga schools establish a Teaching and Ethics Committee (the “Committee”). This Committee may be comprised of owners, senior teachers and respected members of your yoga community. I recommend three people. The Committee can be quite informal and the members do not need to do anything until a problem arises.

The purpose of the Committee is twofold: (i) to administer your teacher training program and to respond to complaints and problems with students; and (ii) to resolve any ethical problems that may arise in your yoga school or studio (and to administer your studio’s Code of Conduct if you have one).

The Committee establishes a clear mechanism for dealing with teacher training and ethical issues in a structured and objective way. These problems are often delicate and complicated and may have conflicts of interest due to personal relationships between students, teachers and owners.

Many yoga schools do not have a process in place and, when a problem does occur, the owners try to address the situation on a “one off” basis. It is a best practice to already have a Committee in place. A formal complaint and resolution process gives students comfort that their problem will be handled in a professional and objective way.

If you do not have a Committee and a student brings an ethical problem to your attention, it will weaken your legal position. Regardless of the decision that you make on the matter, the student may feel your decision was the result of favoritism, bias or discrimination. Moreover, if you know the persons who are involved, then it is even more difficult for you to make an objective decision due to a conflict of interest.

On the other hand, if your studio has a Committee and it has objectively evaluated the circumstances and made a fair decision, your decision is much more defensible legally and emotionally. It is much easier for a Committee to make a decision and then communicate that decision to the people who are involved, rather than being in the position of having to do that yourself.

I have seen cases where the head of a program determined that a student did not meet the requirements for graduation but the student disagreed and wanted to protest the decision to the studio. There was a conflict among the student, the head of the program and the owners of the studio. If you have a Committee in place, it can resolve the situation based upon an objective review of the facts. Otherwise, you may end up in paralysis between the school and the student and a dispute.

In my experience, students tend to respect the decision of a Committee more that that of a single person. Moreover, the decision of a Committee can be used to rebut any feeling of the student that the decision was based upon favoritism, bias or discrimination.

Time Out

Consider the case where a student has an emotional meltdown, finds that he or she is not ready to teach or is struggling to master the material. The school has decided that the student should continue in the program but the student just needs more time. I have had success in recommending that the student be given a “time out.” This means that the student leaves the program for six months or a year in order to resolve the problem and then comes back to the school for an evaluation. If the school decides that the student is ready to continue, the student is re-admitted.

This solution also works with very “sticky” problems with no clear resolution: sometimes the person moves away during “time out” and the problem resolves itself over time.

Refunds For Peace

In many situations, the student simply wants a refund of tuition. Sometimes they just want their money and other times the refund represents vindication that they were right. I typically recommend that the school provide the refund. In my experience, this can be a relatively cheap way to buy the peace. This may be the right thing to do if the student must withdraw due to health or career reasons or some other valid reason.

If there is a dispute, the student can launch assaults against the school and teachers on social media and there is little that can be done to stop this. The student may continue to harass the school, get a lawyer or file a claim in small claims court.

All of these situations will ultimately cause you more time and expense and anxiety than the refund is worth. Even though you know that you are right and the student is wrong, it may be more efficient to give the refund. Lingering disputes can be draining and some students who feel wronged may feed on the conflict.

If possible, it is a good idea to get a release from the student so the problem is finally put to bed.. The release can also include an agreement that neither the student or the school will make any public statements concerning the situation.

Don’t Try To Graduate The Problem Away

I have seen cases where schools have decided to graduate the problem student just to make the problem “go away.” Although I understand the thinking behind this, I do not feel that this approach is healthy for your school, the students who may encounter this teacher in the future or the greater yoga community. It is better to take the path of “right action” even if it is hard.

 

 

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Stop The Music! ASCAP Is Hitting Yoga Studios For Music Royalties

 

ASCAP is the American Society of Composers, Authors and Publishers. It is a membership association of more than 500,000 composers, songwriters, lyricists and music publishers of every kind of music. It represents hundreds of thousands of music creators worldwide.

ASCAP protects the rights of its members by licensing and distributing royalties for the non-dramatic public performances of their copyrighted works. It licenses  music to all who want to perform copyrighted music publicly.

An ASCAP license authorizes performances of  millions of copyrighted musical works in the ASCAP repertory and in the repertories of affiliated foreign performing rights organizations representing over 100 territories. ASCAP announced that it distributed over $851.2 million in royalties to its members in 2013, an increase of nearly $24 million over 2012.

ASCAP has discovered that yoga studios are a source of licensing revenues and are now targeting the community. ASCAP has been sending demand letters to yoga studios which require them to purchase a license for the performance of music within the studio.

Playing music in a yoga studio is considered a public performance of music which requires the permission of the owner of the music. The permission requires the payment of a licensing fee. Because studios are receiving an economic benefit from playing music to enhance the experience of the students, it strengthens the claim that the owners of the music are entitled to payment of a license fee.

The most recent ASCAP letter that I have seen requires the payment of royalties because a yoga studio is considered a “dance school” within the definition of the ASCAP license. A “dance school” is a school that teaches “jazz, classical, ballet, tap, modern ballet, acrobatic, gymnastic, square, folk, ethnic, baton, aerobics, yoga, zumba, pilates, hip-hop, fitness, exercise and workout classes.”  The fees are based upon tiers of students. These tiers are: not more than 75, not more than 150, not more than 300 and over 300 students.

Unfortunately, the license is only for a year, and you can expect ASCAP to hit you for another license in the second year. The fee is also adjusted annually based upon he Consumer Price Index.

As a practical matter, there is very little you can do. ASCAP has lawyers, money and are experts at extracting licensing fees. If you decide not to pay the fee, ASCAP will ramp up the pressure until you do and you may be at risk for an infringement action. The fine under the Copyright Act for a public performance violation can be as high as $150,000 per occurrence (i.e., per song played).

You may also be at risk for paying fees to the other two licensing agencies which are similar to ASCAP: BMI and SESAC. Yoga Alliance has advised the following:

“However, if you pay licensing fees to ASCAP, that won’t protect you from BMI and SESAC. A public performance without permission of even one musical work from within either company’s catalog triggers the obligation to pay royalties for use of their entire catalog. Furthermore, paying ASCAP may make it more likely that you will subsequently face demands from BMI and/or SESAC to pay them licensing fees as well. So the only way to eliminate all risk is to pay licensing fees to all three companies…”

In my workshops, my advice has been for studios to play as much music as they can that is covered by a blanket license. This is music from Pandora and Spotify, and other sources which have ASCAP blanket licenses. Then you have an argument that only a portion of your studio’s musical performances are infringing. Using live and original music may help your argument. This may give you an argument to lower your license fees.

You may also be able to use music that is in the public domain (old music that was composed before the early 1900s) or music that is made available royalty-free through a Creative Commons license. These options are not attractive because it will be difficult for you to find appropriate music that is outside of the scope of ASCAP and, even if you do, you may still get hit and be compelled to pay the ASCAP licensing fee. It is legally complicated to determine if music is in the public domain or if it is being used within a Creative Commons license.

Another approach is to take the position that the studio is not liable for the music played by its independent contractors (i.e., the teachers). By definition, the teachers are running independent businesses and are responsible for their own music. Many teachers bring their own devices and plug into the studio’s system. The studio is only responsible for music played by its employees. A studio may be able to use this argument to negotiate getting into the cheapest tier.

Obviously, this approach would not be popular with the teachers! Also, ASCAP may take the position that it will base its calculation of your license fees upon the number of students in the studio, irrespective of who is playing the music.

Last, I understand that Yoga Alliance is planning to contact ASCAP, BMI and SESAC to determine whether they can negotiate a special deal for yoga studios. I wish them the best of luck on this but chances of success are low.

 

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Should You Ask About Injuries Before Class?

I have been in many yoga classes where, at the beginning of class,  the teacher asks whether any students have an injury.  Sometimes the students describe their injuries openly in the class.  Other times the teachers visit with the students privately (usually in child posture) because some students may be reluctant to discuss their injuries in front of the class.

The teacher then begins the class.  However, rarely do I see the teacher paying special attention to the injured students. I think this is for several reasons. First, if the class is large, the teacher may not have the time to run the class and spend the time on the injured students. Second, the teacher may not have the expertise to give personal guidance to students who may have a broad range of injuries and conditions. And third, some teachers may find it difficult to remember which students are injured and what their injuries are while they are teaching their class.

Should Teachers Ask About Injuries Before Class?

How does the legal system treat a teacher who has actual knowledge of a student’s injury, does not give the student personal care during class and the student suffers an injury?  Is the teacher in a better position or a weaker position because they have knowledge of the student’s injury as a result of asking at the beginning of a class?

From a legal point of view, a teacher who asks about pre-existing injuries and has actual knowledge about an injured student is in a weaker legal position than a teacher who does not ask and has no actual knowledge about injuries.

If a teacher has actual knowledge that a student is injured, the law imposes a duty of reasonable care on the teacher to monitor the student and ensure that he or she does not aggravate the injury. If the teacher does not fulfill this duty, then the teacher may be found liable for the damages if a student is injured.

Teachers must fulfill their duty of care even though it may be very difficult to monitor several injured students in a large and dynamic yoga class.

If I Have Actual Knowledge of a Student’s Injuries, What Should I Do?

You must pay special attention to your injured students and suggest modifications to prevent them from aggravating their injuries. In special cases, you may need to suggest that the student attend a different class. For example, this could include pregnant students or beginning students who are injured but who want to take an advanced class. If you are teaching yoga in a hot studio, then you should be even more cautious in taking care of your injured students if it is not appropriate for their situation.

In my many discussions with teachers about this situation most want to know about their student’s condition so that they can offer compassionate support in class. But the question remains: do you have the competence to care for injured students and can you fulfill your duty of care for those students in the context of a large and dynamic yoga class?

If the answer to these questions is “no”, then you should not be asking students at the beginning of class if they have any injuries.

If I Don’t Ask About Injuries, How Should I Teach?

But what should you do if you decide not to ask about injuries in class? I recommend that you make a general announcement at the beginning of class that students should modify their poses to “keep themselves safe” or to “honor their bodies” or similar language. You should emphasize that those students with injuries should exercise special caution to care for themselves.  In addition, you should offer several different modifications to the class for your poses. This is important because many students do not know how to modify their poses and simply telling them to modify will not offer them very much meaningful guidance.

What If a Student Volunteers Medical Information?

What should you do if a student volunteers information about a medical condition? Since you have actual knowledge of the condition, your duty to take reasonable care of that student has been triggered and you should do all you can to give that student special attention to protect he or she from injury. It may seem somewhat unfair if you did not ask for this information but it is the right thing to do both from a legal and a yogic point of view.

We should contrast this with those teachers who offer classes that are intended to teach students who have injuries or serious medical conditions. For example, I know a teacher that offers classes for students who have cancer. I know another who has classes just for runners. In those cases the teachers have special training and are competent to take care of the students. Also, if everyone in the class has the same medical situation, it is much easier for the teacher to offer a class that is appropriate for all of the students.

Medical Information on Release Forms

A related question is whether you should solicit medical information in a form of release or a new student questionnaire. In my experience, this is fairly common practice with yoga  studios.

However, I do not think it is a good idea to gather medical history from your students because this practice raises many practical and legal questions.

Are you prepared to keep the student’s information strictly confidential and implement a security process? Are you prepared to require your students to update their condition if it changes? What about your existing students who provided you with information about their medical condition but it subsequently changes?  Do your teachers actually review the information about all of the students who are in their class before the start of class and use the information? Are your teachers trained and able to give individual attention to each student’s medical needs within a class setting?

From a legal point of view, the problem is much the same as soliciting information about injuries at the beginning of a class. If you have actual knowledge of a student’s medical condition that you obtained from a questionnaire, then you have a duty to use reasonable care to protect the student from further harm.

However, as you can see, there are lots of practical problems with protecting sensitive medical information, keeping it current, and giving it to your teachers so that they can properly use it.