During the Soccer Show, all the league presidents attended a day long meeting to discuss various topics, but mainly the Academy proposal that had been sent out. Since that was the most talked about topic, I’ll cover that last (too many notes to go through!) The other presentation was over lunch dealing with the Employee/Independent Contractor issue. The media coverage about the Fairfield case has a lot of soccer associations wondering if they could be next and if they are not handling their referees properly.
Just to refresh, here’s what the IRS has to say on the subject:
Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work done by an independent contractor, and not the means and methods of accomplishing the result.
Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control what will be done and how it will be done.
Clear as mud right?
First, let me stress that I am not a lawyer (IANAL). Nothing I write here should be construed as legal advice of any kind. In addition, while the speaker who gave the presentation IS a lawyer and much of the reference material cites various case decisions, nothing he said or wrote should be construed as legal advice either. When in doubt – consult a tax attorney. This post goes beyond just a regurgitation of what was said during the presentation as there are so many things involved. So it’s not the shortest post in the world, however I encourage you to read the entire thing, though you may not rest easy once you do.
With all that out of the way…
One thing to remember is there is much more at stake then just tax withholding. Someone working for your organization as an employee means you have to deal not only with IRS withholding, but FICA (Social Security Taxes), Worker’s Compensation, and Unemployment Taxes. In North Carolina, this means you’ll need to pay up to 24% additional in taxes above and beyond what you pay your employees in salary. With independent contractors, these taxes are not paid by the organization, instead they are supposed to be paid by the contractor themselves or if they work for an agency, through the agency. So the designation of your referees as employees instead of independent contractors can represent a significant hit to your budget in addition to the more complex paperwork.
The basis for the presentation were two documents. One was a memorandum sent to the NCYSA Associations in May 2002 while the other was a legal brief highlighting various case law. You can view the memo here,
however I’m still working to get permission to link to the brief from the author. The second handout was a brief based heavily on an excellent Special Report from the National Association of Sports Officials. It should be noted some of this information may be out of date as the special report was released in 1999. The bulk of what I’ve written here is based on the information in these two documents. One thing that both documents make very clear is that there is no federal standard or even consistency across states in terms of law. So most conclusions are drawn from case law related to sports officials and the judgments in those cases don’t always point to the same conclusion. Fun!
This is one area often overlooked when dealing with referees. Most associations are concerned about the tax implications. However, if a referee is considered an employee of your organization, you have worker’s compensation issues to deal with. In North Carolina, N.C. Gen Statute Â§97-19 has concerned many associations since it provides that:
any "principal contractor, intermediate contractor or subordinate contractor" who subcontracts work to another party must obtain a certificate of workers’ compensation insurance from that party or risk liability to the subcontracting party (if an individual) and its, his or her employees.
Many associations felt this made them liable for workers compensation claims if they didn’t get a certificate of insurance for each contractor. However, based on the case law cited in the memo, the NCYSA feels member associations are considered ‘owners’ who contract with referees (i.e. independent contractors), which means they don’t fall into the category of a "principal or intermediate" contractor. The memo included a very useful section of procedures associations should follow to ensure their referees fall into the independent contractor designation:
- Referee assigners should not ‘engage’ referees to officiate matches. Referees should be engaged by member associations. Assigners may carry out their separate independent contractor responsibilities to coordinate scheduling, organize assignments to comport with certification requirements, etc.
- Referees should be paid their independent contractor fees by the member association (recreation) or by the participating home travel team (as a pass-through of a registration fee/team fee that would otherwise be charged, collected, and distributed by the member association of the home team)
- Member associations should not withhold or deduct any sums for any purpose from amounts due to referees.
Now most associations already do part 2 and 3. Referees are paid in cash at the fields for travel matches by each team and recreation referees are generally paid by the recreation association for rec matches they work. Here’s what I don’t understand. My understanding is many associations rely on the assigner to schedule referees for travel matches. They don’t approach individual referees directly. This often fits many people’s idea of an independent contractor (I had the agency, i.e. referee assignor, send someone over) but the recommendations say something different.
While we’re talking about workers compensation, there is an interesting case that deals directly with workers compensation. In Snider v. Clermont Cent. Soccer Ass’n, (No. CA98-07-056, 1999, Ohio Ct. App.), a referee sued a soccer association for negligence when he was hurt on a wet field. The Court ruled that since the referee was an independent contractor and was in complete control of the match, he voluntary assumed the risk by continuing the match. This is an important concept that is cited in many legal cases surrounding referees is that the rules we play by give them immense power to control a match. What they say goes, including canceling matches, etc. This is a key test for an independent contractor – that they are not beholden to an ’employer’ in terms of what they do on the pitch. Once they are on it, they assume total control.
The bottom line related to Workers Compensation is there is no law (legislative or legal) in North Carolina dealing with the issue of sports officials and their status as independent contractors or employees. Other states have case law that is often cited by N.C. associations. Also, other states including Alaska, California, Florida, Georgia, Idaho, Missouri, Montana, Oregon, and Virginia have laws specifically making amateur sports officials independent contractors. Nine others have published judicial opinions saying they are independent contractors. Other states may have enacted legislation in the past few years. An interesting point raised in the brief is that all of the legislative and case law regarding amateur sports officials as independent contractors is only for the purpose of workers’ compensation! None have dealt with the question of taxation/unemployment insurance (as of this brief’s writing).
Independent Contractor vs Employee
All of this is intertwined. The status of a referee directly affects which regulations are in effect (workers comp, FUTA, withholding, etc). The memo mentioned above includes a handy list of factors that most cases have used to determine if someone is an independent contractor. The person employed is considered an independent contractor if:
- They are engaged in an independent business, calling, or occupation.
- They have the independent use of a special skill, knowledge, or training in the execution of their work.
- They are doing the specified piece of work at a fixed price or for a lump sum or upon a quantitative basis.
- They are not subject to discharge because they adopt one method of doing the work rather than another.
- They are not in the regular employ of the other contracting party.
- They are free to use such assistants as they may think proper.
- They have full control over such assistants.
- They select their own time.
They key to this is FIFA’s stipulation, which almost all soccer associations follow, that when a referee steps onto the pitch, their word is law. It is sited in most of the cases mentioned in relation to amateur sports referee employment status. The ARs ‘report’ to them, they call the game as they see fit according to the training they have received. The local soccer association cannot stop a match and say "you’re doing this wrong". If you look at how you handle your referees, you should satisfy all the above factors, but I know some associations may do things, like purchase flags, etc for referees, that can steer them closer to ’employee’ status.
The brief notes that with all the laws and decisions dealing with workers’ compensation, there is little to no guidance when it comes to unemployment insurance and taxes. The Department of Labor has pressured states to not pass legislation making amateur sports officials independent contractors because they believe it would conflict with the Federal Unemployment Tax Act (FUTA). Their view is that referees work for the schools or non-profit leagues and don’t meet any of the FUTA exemptions. Because the states receive a subsidy from the federal government for a ‘certified’ unemployment program, it is risky for states to go against the Dept. of Labor and put that subsidy at risk. However the courts have ruled that sports officials for amateur associations do meet the common law independent contractor exemption and thus are exempt from FUTA.
The bottom line of all this is while most state soccer associations will say referees are independent contractors and the little case law there is supports this, the lack of federal law and guidelines saying this means everyone is at risk.
In 2003 and 2004, Senator Ted Stevens of Alaska held hearings on the FUTA issue and amendments to the Amateur Sports Act were discussed to deal with this once and for all, however no proposed legislation emerged from these hearings.
One thing that puzzles me is the common suggestion that a soccer association not interfere with a referee’s ability to call matches based on the Laws of the Game. The problem with that is almost ALL youth soccer associations modify the Laws of the Game. Just the fact that you play small-sided means you’re playing by a modified version of the FIFA Laws of the Game and thus are controlling how a referee handles a match. The presenter was shocked our association had ‘modified rules’ but most of the presidents I talked to admitted they did to – few soccer leagues play by 100% pure USYS recommendations and even then, the USYS recommendations are still modified versions of FIFA’s Laws of the Game.
The Fairfield Case
If the uncertainty outlined above didn’t make you scratch your head about the status of referees, recent actions by the IRS represent an additional wrinkle. The presenter at our meeting was unfamiliar with the case, especially since it was in the Revenue Ruling stage and had not gone to court. In June of 2006, a parent clued a local paper into what had happened with the Fairfield United Soccer Association. The IRS had audited them and hit them with significant penalties saying their paid coaches and referees were employees.
The Internal Revenue Service has cited the Fairfield United Soccer Association (FUSA) for $334,441 in back taxes and penalty fees for 2003 and 2004, according to IRS documents.
The nonprofit organization, which is made up of about 45 teams, has employed as many as 60 coaches and other staff but has not paid the required employment and other taxes, along with not meeting other IRS requirements, according to a letter and other documents sent to FUSA and signed by IRS Revenue Agent Samuel Stein. Both the treasurer and the president of the soccer organization at the time the complaint was made last year are certified public accountants who should have been familiar with IRS regulations, and two board members at that time were attorneys, the documents also state.
As a result of its investigation, the IRS determined the nature of the relationship between coaches, referees and the league was that of an employee and employer, and penalized the Fairfield United Soccer Association for not filing W-2 and 1099 forms for those who earned $600 or more from 2003 to 2004, as well as other employment-related forms.
"The Government finds that the coaches working for FUSA are employees … the government finds that FUSA had $172,285.60 in unreported wages for the year 2003 and $205,932.14 for year 2004," the investigation report states. The report includes similar conclusions about referees working for FUSA.
Paid coaches can be tricky to begin with, but the way the IRS flat out said referees were employees is scary. Fairfield handled it’s referees like most soccer associations: paid in cash at the match and scheduled by an independent assigner:
In the "Taxpayer’s Position" section of Stein’s report, association representatives say that "no one at FUSA thought of issuing the 1099 [forms]s." The organization did not keep records for payments to referees, the report says, because it did not pay referees directly. "… the payments were made to parent-coaches and managers to reimburse them for payments which they made to the referees," the report says.
The referees, who were mostly high-school age, FUSA said in the report, usually received less than $600 per year for refereeing. Complete records were not kept because parent-coach/managers were put in touch with referees by a referee assignor, or coach/managers contacted referees directly, and in some cases referees would switch games with other referees.
"Referees have to be independent," [FUSA President Jay Skelton] said. "It’s like the New York Mets having their own umpires. If I’m an umpire for the Mets, how can I be impartial? They have to be independent contractors."
However, the IRS said that because the referees are hired, scheduled, trained and paid by FUSA, as are coaches, they are soccer association employees and subject to the same regulations.
This is scary stuff. The IRS came out and basically said no matter how you handle the referees, they’re employees. Fairfield’s method of scheduling referees is in line with how many soccer associations do it – via assignors or for recreation, directly with the association. Fairfield has appealed the decision and while a decision was expected by the end of 2006, I was not able to find any recent mention of it online. Soccer association treasurers should follow this case closely. If the IRS does not reverse it’s decision, I expect this will go to court. The danger there is if Fairfield loses, not only do they face certain bankruptcy, the implications across youth soccer could be huge.
Here is what US Soccer has to say on the subject.
Determination of employment status is made on a case by case basis. The Internal Revenue Service has issued regulations establishing multiple factors to consider in making the determination. However, no single factor is determinative. Further, states determine employment status under their own laws to resolve workers’ compensation, unemployment compensation, or tort liability issues. Although states typically follow the IRS factors in making this determination, each state’s analysis can be different. It may be necessary to consult legal counsel regarding your specific state’s laws on these topics.
They provide a table of factors to consider, but shy away from taking a stand. They do have a set of suggestions to maintain independent contractor status for referees.
The US Youth Soccer Association also mentions the topic in their national Financial Policy Manual (Bottom of Page 8). Like US Soccer, they simply note that associations need to consult an attorney. The pertinent sections read:
E. Social Security
Employees of USYSA, state and local associations are subject to withholding for social security taxes in the same manner as employees of profit businesses. The employer must make certain someone (administrator, office manager, treasurer or some other officer) is responsible for insuring the proper calculation of withholding and timely deposit of the tax funds. Frequently a question arises about independent contractors. Each state and local association should consult with its attorney or accountant regarding its specific situation. The issue most often arises with regard to coaches and referees. Some of the criteria for deciding whether the individual is subject to withholding are:
- Is there a regular schedule of work and payments?
- Does the "contractor" have the ability to say "no" to work without repercussions?
- Are payments, each quarter, above the minimum required for withholding?
The consequences for failing to withhold taxes when required can be embarrassing and costly to a local or state program. Do not leave this item to guesswork or the opinion of a friend "who’s never had a problem".
F. Employment Security Tax
The state unemployment laws and employment security tax regulations vary from state to state. In some states non-profit organizations are exempt from the tax. In others, the organization may choose different methods of paying tax or paying reimbursement to the state for claims filed by former employees. A state or local association which employs anyone should check with the state agency. Even though Â§501(c)(3) organizations are exempt from federal unemployment taxes, do not assume you are likewise exempt from the state tax. Even though no tax may be due, the association may be required to file a quarterly or annual return.
The Florida Soccer Association has a very nice webpage put together that highlights many of the questions related to referee designation and has some suggestions for maintaining a referee’s independent contractor status.
- State Referee Committees should be responsible for assigning referees instead of state and local associations and leagues (i.e., the entity running the competition should be different from the entity assigning the referees)
- Organization bylaws and policies should reflect that referees are independent contractors
- State Referee Committees should remain the entity that trains, certifies and evaluates referees
- Contracts should not be used; any assignment acceptance form should reflect that the referee is an independent contractor
- Referees should be hired to work on a game by game basis rather than for a season or other longer period of time, and should be permitted to work for multiple soccer groups
- State and local associations and leagues should refrain from giving referees instructions regarding how to call a game; referees should retain the right to control games without interference using the Laws of the Game.
- State and local associations and leagues should not supply equipment or uniforms to referees
- Referees should be able to turn down assignments freely
- Referees should be covered by their own liability insurance through registration with USSF and should not be covered by state and local associations and leagues
Even they note that the lack of firm law means that all you can do is try and that determinations are still made on a case by case basis.
Oregon seems to have passed a law specifically designating soccer referees as independent contractors, though it was not immediately clear what parts of the puzzle (workers compensation, FUTA, etc) it applied to. They are one of the nine states mentioned above related to workers compensation, so this may just be that law.
Washington State Youth Soccer seems to stipulate that soccer referees ARE employees. However this seems to be related to youth referees (younger than 18) and the state’s Industrial Insurance program.
Of course this wouldn’t be complete without linking to the often verbose documentation that the IRS has and I’m sure I only expose the tip of the iceberg here.
- Non-Profit Orgs: Independent Contractors vs. Employees
- Businesses: Independent Contractors vs. Employees
- IRS Training Manual – Independent Contractor of Employee?
- Pub 15-A Employer’s Supplemental Tax Guide (See "Who Are Employee’s")
Short answer? There aren’t any. I’m not a tax law expert so I wouldn’t make them if I could. It is clear that the bulk of soccer associations treat their referees as independent contractors. National and State soccer associations either steer clear of recommendations, or at least in the case of the NCYSA, take the position that referees handled in accordance to the little case law available are independent contractors. The IRS, by way of it’s Fairfield audit, believes otherwise. This leaves soccer associations dangling a bit. It’s unfortunate for Fairfield, but the best thing that could happen is for their audit to go to court and a definitive decision be handed down, by a federal court indicating referees are independent contractors.