Club Java

Condon O’Meara McGinty & Donnelly LLP

October 23,2015

On July 15, 2015, in Department of Labor (“DOL”) Administrator’s Interpretation No. 2015-1, the DOL advised that misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States.  

Please note this is a workplace specific concern – it is not a club specific concern.

Clubs are workplaces. jr1

DOL Administrator’s Interpretation No. 2015-1

Concern – if employers misclassify employees as independent contractors, employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.

This is not a new development – proper classification has always been a DOL concern.

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DOL No. 2015-1 – Why is the DOL Concerned?

Concern -- Misclassification results in lower tax revenues for government!

DOL No. 2015-1 – Why is the DOL Concerned?

The DOL advised – key consideration in classification (employee vs. independent contractor) decision is whether the worker is economically dependent on the business.

The DOL emphasized its view that most workers are employees under the FLSA. jr4

DOL’s View - Most Workers Are Employees

How far courts will go in accepting DOL July 15, 2015 advice?

Employers should be aware that the DOL will apply a very broad definition of “employee” when investigating a company’s practices.

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DOL’s July 15 View – What Do Courts Think?

Supreme Court previously advised that determination of relationship (employee vs. independent contractor) cannot be based on isolated factors or a single characteristic –relationship depends upon all circumstances.

How does Supreme court’s prior advice comport with the DOL position previously mentioned – key consideration in classification (employee vs. independent contractor) decision is whether the worker is economically dependent on the business.

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DOL’s July 15 View – What Do Courts Think - II?

A. Is the Work an Integral Part of the Employer’s Business? B. Does the Worker’s Managerial Skill Affect the Worker’s

Opportunity for Profit or Loss? C. How Does the Worker’s Relative Investment Compare to

the Employer’s Investment? D. Does the Work Performed Require Special Skill and

Initiative? E. Is the Relationship between the Worker and the Employer

Permanent or Indefinite? F. What is the Nature and Degree of the Employer’s

Control? jr7

Economic Realities Factors

A highly regarded law firm wrote that “[i]t is important to note that the factors described in the [July 15, 2015] guidance do not reflect a change in the law or in the DOL’s view of worker classification. Prior DOL guidance and court decisions have long applied these and similar factors.

In its guidance, the DOL goes out of its way to stress its view that most workers should be treated as employees and indicates that this will be an area of focus for the agency going forward.”

“[I]t remains to be seen how far courts will go in accepting the DOL’s interpretation – employers should be aware that the DOL will apply a very broad definition of “employee” when investigating a company’s practices.”

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Major Law Firm Weighs In

“Therefore, clubs that require the use of caddies or that have golf and tennis professionals working as independent contractors may be forced into major changes to comply with the law.” 

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Another Prominent Voice Weighs In

Will All Caddies Have to Be Employees? Will Caddy Programs Disappear into the Dust Bin

of History if Clubs Can Not Afford the Cost of Adding More Employees?

MAJOR CHANGES – IS THE SKY FALLING?

A prominent labor lawyer told me…. COMD - the Labor Law is outside the scope of our

practice. We provide audit and tax services. Our advice is that a Club should collect all the pertinent facts regarding its caddy program and another non-employee worker relationships and consult with it legal counsel, preferably legal counsel with Labor Law experience. Legal advice has a cost, but the cost may not be as significant as if the Club inadvertently falls on the wrong side of a DOL investigation.

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What a Prominent Labor Lawyer Told Me

Member Capital Contributions to Tax-Exempt Clubs are not subject to the federal income tax.

Are Member Capital Contributions to Taxable Clubs subject to the federal income tax?

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Taxable Club vs. Tax-Exempt Club

Club Receives Insurance Proceeds:◦ Taxable Club – are proceeds taxable?◦ Tax-Exempt Club – are proceeds taxable?

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Taxable Club vs. Tax-Exempt Club

Taxable Club charges its members capital assessments. The Club segregates the funds and uses funds only for capital projects, not to provide services. Subject to income tax?

Taxable Club argues that it properly excludes capital assessments received from its members from taxable income because such funds were (1) earmarked and reserved by the corporation's board of directors for capital improvements, (2) segregated from funds used for ordinary operating expenses, and (3) in fact used for capital improvements. Is the Taxable Club correct?

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Capital Contributions - Taxable Clubs

Do the members have entitlements that are characteristic of capital contributions in order to establish that the payments were not made exclusively, or primarily, for the privileges and services received by the members?

The courts and IRS have a view….

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Capital Contributions - Taxable Clubs - II

Club suffers damage from a hurricane. The club’s board had the foresight to have insurance. The club receives insurance proceeds from an insurance company, a non-member. Are the insurance proceeds taxable and, if so, are there tax provisions that provide relief from taxation.

Taxable Club? Tax-exempt Club?

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Insurance Proceeds

Cash◦ Controls over bank accounts with bank custodian

Hacking Fraudulent checks

Internal controls over check signing/transfers (segregation of duties)

Key Internal Control & Accounting Areas

Petty Cash◦ Keep to a minimum◦ Proper supporting documentation

Accounts receivable◦ Follow up on member payments◦ Reviewing allowance for doubtful accounts

Key Internal Control & Accounting Areas (continued)

Property and equipment◦ Recording damage due to storm

Capital vs. Operating◦ Recording of greens damages

Payroll◦ A little more than 50% of a club’s cost◦ High Risk area

Controls, including computer controls◦ Payroll payoff – What’s that?

Key Internal Control & Accounting Areas (continued)

Credit cards◦ Proper documentation◦ Proper review and authorization◦ Business expense only (no personal expenses!)

Retirement plans◦ Multi-employer plans

Funding status (red, yellow, green)◦ Deferred compensation plan

Assets/liabilities of Club

Key Internal Control & Accounting Areas (continued)

What’s Old◦ Going Concern

Effective date – 12/31/16◦ Lease Accounting

Effective date - ???

Latest Developments / GAAP

What’s New◦ Financial Accounting Standards Board (FASB) Proposed

Accounting Standards Update for Nonprofit Entities (Topic 958)◦ History and background◦ Exposure draft – April 2015◦ Public comments through August 2015◦ Not-for-Profit financial reporting

Net asset classification Combine three net asset classes (unrestricted, temporarily restricted

and Permanently restricted into two net asset classes Assets without donor restrictions Assets with donor restrictions

Latest Developments / GAAP (continued)

Statement of activities◦ Investment fees

Presently – option: gross or net Proposed – net

◦ Presentation of transfers Reflected after change from operations

Latest Developments / GAAP (continued)

Expense reporting◦ Presently - no specific requirement

Hybrid – Functional/nature

◦ Proposed - Reporting by functional basis – separate statement or note to financial statements

Latest Developments / GAAP (continued)

Statement of cash flows◦ Indirect vs. Direct Method

Presently either method is acceptable Proposed – Direct method

Note disclosures◦ Description of board-designated funds◦ Liquidity

Latest Developments / GAAP (continued)

Private Club Environment Challenges for Private

Clubs well documented prior to Great Recession.

Forces at Work Include:◦ Aging of Baby Boomers◦ Changing Lifestyles ◦ Declining Corporate Support ◦ Increased Competition◦ Increased Operating Costs◦ Shrinking Initiation Fee and

Other Revenue◦ Increased Debt

Our Industry Has Been Shrinking(Country Clubs)

0

1000

2000

3000

4000

5000

6000

1990 2000 2010 Est 2020?

199020002010Est 2020?

Down 6%Down 10%

Down ??%

0 - 3 Miles44%

8 - 15 Miles19%

Over 15 Miles7%

4 - 7 Miles30%

Distance From Home to Club

Dues have outpaced inflation for most of the past decade:◦ Country Club dues up 47% since 2004◦ Members down approximately 1% since 2007

Regular members down 6% Other membership categories up 5%

Source of dues and initiation payment is more likely to come from the member than a company.

This has increased demand for year-round value. 80 million people coming into the prime joining age in next

20 years

Perceived Value

Membership Trends

2007 2008 2009 2010 2011 2012 2013 2014 20150

100

200

300

400

500

600 550515 505

481 481 480 479

538 542

250 224 227 211 212 219 218259 262

300290 278 270 268 262 261 279 280 Regular Members

Other CategoriesTotal members

Debt Survey Country Clubs-2014

Total debt carried by Clubs $117,725,505Average debt carried by Clubs with debt $3,363,586Average of all Clubs $3,181,770

RECAP # of Clubs PercentageNo debt 2 5.4%Under $1,000,000 8 21.6%$1,000,000 to $3,000,000 9 24.3%$3,000,000 to $5,000,000 11 29.7%$5,000,000 to $7,000,000 4 10.9%$7,000,000 to $10,000,000 3 8.1%

Total 37 100.0%

Debt Survey Country Clubs-2004

Average debt carried by Clubs with debt $1,834,000

RECAP# of

Clubs PercentageNo debt 12 32.4%Under $1,000,000 9 24.3%$1,000,000 to $3,000,000 8 21.6%$3,000,000 to $5,000,000 3 8.1%$5,000,000 to $7,000,000 3 8.1%$7,000,000 to $10,000,000 2 5.4%

Total 37 100.0%

City Clubs◦ Average debt = $3.7 million – 2014◦ Average debt = $ 3 million – 2007

Up 23% Tennis, Beach and Yacht Clubs

◦ Average debt = $ 900 k – 2014◦ Average debt = $ 605 k – 2007

Up 50%

Debt Survey

Amounts- due to resigned members on the increase

Member Debt-Bonds

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$467k

$547k$596k $604k $597k $581k $566k $546k

$496k $501k

Avg Initiation fee 2004 = $32,000Avg Initiation fee 2014 = $32,000Avg 10 Year = $550,000Down 17% from 2007

Initiation Fees –Country Clubs-10 Years

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$864,235

$1,230,495

$988,947

$1,140,867

$1,177,112

$1,272,858

$1,011,152 $769,084

$815,364

$1,114,170

Chart Title

Capital Expenditures –Country Clubs– 10 years

$384 Million 10 Year Avg = $1,039,000

What clubs are spending capital on?

Golf◦ Practice, fitness & training

Indoor practice facilities Outdoor casual dining

◦ Pub feel◦ Fire pits

Pool facilities◦ Resort style

Tennis◦ Still growing at 40%

Tween/Teen rooms

Initiation Fees –City Clubs-10 Years

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$333 $333$362

$396

$337 $350k $381k $397k $407k

$473k

Initiation Fees

Capital Expenditures –City Clubs– 10 years

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$618,000

$520,000 $487,000

$444,000

$721,000 $639,000

$495,000 $429,000

$631,000

$983,000

Chart TitleCapital Expenditures

Initiation Fees –TBY Clubs-10 Years

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$194

$228 $223$233

$243 $237k $228k $240k $232k $241

Initiation Fees

Capital Expenditures –TBY Clubs– 10 years

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$618,000

$520,000

$487,000

$444,000

$721,000

$639,000

$495,000 $429,000

$631,000

$983,000

Chart TitleCapital Expenditures

Dues54%

Food19%

Beverage8%

Sports12%

Other7%

The Country Club Income Dol-lar….

Club Operating and Management Data

Payroll & Related54%

Operating Supplies & Expenses

26%

Costs of Food &

beverage10%

Real Estate Taxes &

Insurance7%

Balance available for Debt Service Etc3%

Club Operating and Management Data

……And Where It Went

2014 ◦ Food and Beverage Revenue $1,800,000

Average net loss % 0.50% 2004

◦ Food and Beverage Revenue $1,350,000 Average net loss % 3.3%

Focus on members is casual dining Less formal More chef interaction with members

Food and Beverage TrendsCountry Clubs

2014 ◦ Gross cost per hole $78,000◦ Net cost per hole $70,000

2004◦ Gross cost per hole $55,000◦ Net cost per hole $38,000

Percentage increase – Gross 42%Net 85%

Water Consumption

Golf Course Cost Per Hole

Condon O’Meara McGinty & Donnelly LLPJames J Reilly, CPA, JD

PartnerDirect: 646 438 6203

Email: jreilly@comdcpa.com

Kevin P. Foley, CPAPartner

Direct: 646 438 6210Email: kfoley@comdcpa.com

James J Hankowski, CPAPartner

Direct : 646 438 6206Email: jimh@comdcpa.com

Contact Information