Common Presumptions that Damage
Massage Business Agreements
Massage therapists/practitioners can be loath to agreements. They love the idea of working together, but often despise working out money terms in a long-term working agreement. The unwillingness or inability to work through the financial terms of a contract can cost thousands of dollars to the clinic owner over time if outgoing expenses are greater than incoming revenue, and great hassle and expense to the contracting practitioner having to relocate. With such a wonderful symbiotic opportunity, why do so many clinic owner/ contracting practitioner agreements go sour? I think the foundational presumptions are to blame. Let’s examine five common presumptions:
Presumption # 1 - “I’m paying too much rent”
Practitioners ask me what stories I hear about practitioners associating in oppressive, draconian clinics that charge them far too much rent. Truth is, I’m approached far more often my clinic owners who bemoan the fact they are paying far more to work from their business than their associates are. It seems many clinic owners may inadequately assess the value of their business to an associate – through lack of financial understanding or the belief that “if I charge them more they’ll pack up and leave!” The result: the clinic owner undercharges and doesn’t cover operating expenses.
What are the costs of running a business? Lease, office improvements, office furniture, computer and printer, equipment such as massage table, linen, lubricants, signage and marketing materials, office and cleaning staff, and professional development. Add on fees for professional association dues and regulatory body registration, and membership in local business associations. There’s property tax (if building owned), income tax and of course tax on all supplies and services you purchase to run a business. Because it’s not common knowledge, most contracting practitioners don’t know the true costs of running a business.
When I ask clinic owners how they determined their financial terms, the response often is “the number felt right”. Intuition, although essential in providing bodywork, is not a substitute for doing the math.
Last year it cost me $2500/month to run my business with two part-time associates. Larger clinics are much more, hiring administrative staff, maintenance staff, lawyers and bookkeepers/accountants. Those are costs borne before the clinic owner takes anything home to live off!
There are intangibles like location and reputation that are highly undervalued. Clinic owners may cry “If I charge what I should charge for rent, my contracting practitioners will leave!” However, if a massage practitioner opened up next door to the established clinic, they wouldn’t have the same day-to-day cash flow as the established practice experiences because they haven’t developed location and reputation yet. What value are you putting on location and reputation in your financial terms?
In the book Better Business Agreements, I outline a Utilization model where a clinic owner can fairly assess the cost of bringing in a contracting practitioner and assure they cover operating costs and a profit margin. I also outline how practitioners can determine if a potential workplace is right for them, or if it’s better financially going it alone.
The financial terms should allow the clinic owner to cover all operating expenses and a reasonable profit for accepting the risk of operating a business. The contracting practitioner should only agree to terms that cover their business expenses and enough to take home for personal expenses.
Presumption # 2 - “the clinic owner shouldn’t profit from my practice”
Perhaps due to the altruistic nature of our work, we’ve created a belief that a contracting practitioner should be able to work from a clinic at-cost (or more often below-cost). However, this kind of relationship is unhealthy and eventually engenders resentment and high associate turnover because the clinic owner feels unappreciated, and the associate undervalues the opportunity of associate-ship in the business. Imagine if your brother-in-law moved into your home, commandeered your food and extra bedroom, and paid you a rent far below what it cost you to have him live there. How long would you tolerate that?
The business MUST make a profit. The owner puts out vast resources and takes tremendous risk for creating a business. The business becomes an asset, which as the owner decreases their workload over time will provide another source of income for them. The business builds capital for expansion, allocates savings towards retirement and other goals like professional development. Otherwise, why would someone go into business, taking the risk of liability and losing resources, if they wouldn’t be paid for it? “If you take on risk, you should be paid for it.” If you can’t make a profit and you’re not willing to correct the situation, I suggest you close up shop and work at the local spa or contract from another practitioner. It’s just not worth the risk or the accumulated debt down the line.
Presumption # 3 – “Straight percentage agreements are best”
For short-term locum / limited relationship situations, straight percentage agreements can work well. For long-term relationships built on rapport, trust and respect, they are problematic.
The rent paid by the contracting practitioner is variable – this means it may cover operating expenses in some month’s but not others, and during the first year of start-up the clinic owner often has to carry the contractor’s costs with the idea that it’s an investment in the future relationship…but the relationship must last to see that return on investment.
If operating expenses per treatment room are $1000, and the contracting practitioner pays on average $800/month, whose pocket does the short-fall come out of? Some practitioners argue they should only pay for expenses incurred when they work. However, unless the owner can lease out space/equipment while the practitioner is away (a human resource nightmare), then expenses continue. Consider this analogy – if you called the bank holding your mortgage and told them you won’t be using your house while on vacation, would they knock off two weeks of mortgage payments?
I would argue percentage-only agreements are not good for contracting practitioners either. When starting out giving away only a portion seems reasonable, but when the practitioner gets a steady stream of business, the rent can seem onerous and disproportionate…especially with no cap. Straight percentage agreements over the long term encourage turnover and an “us versus them” mentality. For long-term relationships, you need increased accountability and increased opportunity for financial reward on both sides.
Presumption #4 – “Contracting practitioners have little leverage in agreements”
So far I’ve spoken to the real suffering clinic owners bear in agreements, but In fact a practitioner can have tremendous leverage in agreements. To do this they must bring value to the table. If you’re a practitioner, build your business skills - attracting and retaining business (communication/marketing, sales, customer service, public relations) and technical skills (clinical/spa specialization) where you can charge higher fee per skills, serve new markets and broaden the customer base of the clinic. When your contract comes up for negotiation, negotiate for profit sharing or better rent. The clinic owner would be foolish not to be reasonable with you – it’s costly to lose a good associate.
Presumption #5 – “Contractor status is less hassle than having/being an employee”
Many clinic owners are unfamiliar and therefore fearful of pension plan and employment insurance deductions. Practitioners fear they’ll lose business tax deductions on supplies & equipment, or won’t make as much money as an employee. These fears are often unfounded and obscure real benefits with an employee/employer relationship.
Clinic owners can mandate training and skill-building, boosting the value practitioners bring to the clinic. Owners can better control resources used, schedule work hours, and avoid conflict of dual advertising ie: practitioners being self-serving with promotion rather than benefitting the business as a whole. Good employees can receive performance bonuses, take part in profit sharing, and qualify for workplace benefits plans. If the massage industry adopted this model we might see far less turnover and longer-term relationships between owners and contracting practitioners.
Presumption #6 – “It’s a contractor relationship because I’ve classified it as such.”
This presumption really hurts! In Canada our taxation body, the Canada Revenue Agency (CRA) provides a document outlining how to determine if someone can, for tax purposes, be considered an employee or a contractor/self-employed. This document is entitled Employee or Self-Employed? (Form RC4110) and can be found at the CRA website http://www.cra-arc.gc.ca/tax/business/topics/payroll/clarify/menu-e.html. (Massage Magazine readers should research the appropriate United States legislation for your reference.)
Many massage therapists I’ve spoken with maintain that their agreement is a client/self-employed contract, where the clinic, (the client), contracts services from the therapist (the contractor.). There are mutual benefits to this arrangement in that the contractor can deduct expenses incurred while providing therapy, thus lowering their taxable income. The “client” needn’t bother with withholding taxes on the contractor for federal and provincial tax, Canada Pension Plan (CPP), and Employment Insurance (EI); nor providing workplace benefit packages or WSIB coverage.
However, if we carefully examine the CRA document, we may find that the typical massage therapy agreement appears more like an employee/employer relationship. I believe this is a real “Achilles heel” in the profession, with both clinic owners and associating therapists vulnerable to an unfavourable ruling by Canada Revenue Agency should they be audited.
The implications from this document suggest the self-employed therapist…
§ Can work for whom and when she/he chooses
§ Is responsible for all tools and equipment
§ Can hire assistants or replacements for providing the work (therapy)
§ Incurs operating expenses through their own workspace
§ Hires and trains assistants
§ Has her/his own established business presence
§ Actively markets her/himself
§ Is paid a flat fee for the work
§ Can negotiate prices for the work and can provide work for multiple payers (clinics)
§ Offers no continuous relationship, loyalty, security, or subordination to the clinic owner
§ Incurs financial risk, as well as opportunity for financial profit
This may be very different from many current clinic owner and contracting practitioner (associate) agreements where:
§ The clinic manager retains control of the business and is responsible for the collection of monies, marketing, clinic maintenance, and the hiring of associates.
§ Equipment and tools (linen, lubricants, files, etc.) are provided by the clinic owner
§ The clinic owner assumes the risk of damage to the business, including the appropriate insurances
§ The associate typically cannot sublet the space or equipment, and cannot hire or train assistants
§ The associate assumes the clinic’s business presence, not standing out as a “business within a business”
§ The associate may network, but the clinic often does the marketing via signage, brochures and business cards, advertisements, etc.
§ The associate “rents” the space, equipment and tools, but may not be responsible for maintenance and replacement
§ Can work for multiple clinics, but restrictions are imposed in referring business to the opposing clinic
§ Does maintain a continuous relationship over time
§ Can increase income by providing more treatment, but the fees and terms are often set by the clinic manager.
The CRA makes very clear the consequences of improperly defining an employer/employee relationship as a client/contractor relationship.
“An employer who fails to deduct the required CPP contributions and EI premiums must pay both the employer’s share and the employee’s share of any contributions and premiums owing, plus a penalty.”[1]
If you determine that you prefer an employer/employee contract, you will need to open a payroll account to remit your deductions. You can find that information at the Canada Revenue Agency website at http://www.cra-arc.gc.ca/tax/business/topics/payroll/howpayrollworks/steps/account/menu-e.html
I encourage you to review your appropriate legislation and consult your lawyer and accountant to ensure you’re in compliance with the tax laws.
As I’ve argued, presumptions can be real agreement killers, leaving a wake of broken relationships and financial distress. I encourage you to leave your presumptions at the door and engage the process in a clear, now-awakened consciousness. Good agreements last a long, long time!
Don Dillon, RMT is the author of Better Business Agreements and the self-study workbook Charting Skills for Massage Therapists. Over 60 of his articles have been published in industry publications including Massage Therapy Canada, Massage Therapy Today, AMTA Journal, AMTWP Connections, and various massage school and professional association newsletters. Don’s website, www.MTCoach.com, provides a variety of resources for massage therapists.
Don has presented to members of the Massage Therapist Association of Alberta (MTAA), the Association of Massage Therapists and Wholistic Practitioners (AMTWP), the Massage Therapist Association of Saskatchewan (MTAS), the Massage Therapist Association of Manitoba (MTAM), the Association of Massage Therapists of New Brunswick (ANBMT), the Massage Therapist Association of Nova Scotia (MTANS) and the Ontario Massage Therapist Association (OMTA). He also presented to the pre-graduating class of 2008 at the Atlantic College of Massage Therapists.
[1] Employee or Self Employed?: RC4110(E) Rev. 06, pg 3