September 12, 2022

Independent Contractors Versus Employees

One question we are frequently asked is whether associate doctors should be hired as independent contractors or as W-2 employees.  This is a complex question that involves both legal and tax factors. Although the IRS has issued some guidance, there is no bright line rule for independent contractors. Instead, our attorneys look at a number of potential factors.

Why Do Employers Want To Use Independent Contractors?

There could be several reasons why a practice may want to classify a doctor as an independent contractor.  The primary reason we often hear is that it saves money on taxes. Typically, employers do not have to pay payroll taxes on amounts they pay to independent contractors.  Social Security and Medicare taxes are up to 8.45% of an employee’s gross wages.  Another reason may be to avoid state laws.  Arizona, for example, mandates that employers provide worker’s comp insurance.  Arizona also requires that employers provide paid sick leave for employees.  These requirements can cost an employer hundreds, if not thousands, of dollars per year.

What Are The Independent Contractor Factors?

In determining whether someone is properly classified as an employee or an independent contractor, the IRS generally looks at the degree of control the employer asserts over the individual. The IRS looks at three main categories of information: (1) behavioral control; (2) financial control; and (3) the nature of the relationship.

Does The Practice Have Behavioral Control?

This factor looks at who controls the methods by which the worker performs an assignment.  Does the employer set the schedule, or does the worker set his own schedule? Does the employer provide the tools for the job, or does the worker supply them? Will the employer order the supplies and provide the staff, or does the worker bring his own? Does the employer direct the worker how to perform the work, or does the worker have autonomy?

With the exception of the last question, the behavioral control factor often weighs in favor of there being an employer-employee relationship in the context of associate doctors.  However, there are additional components in the behavioral control analysis.  This includes the degree of instruction given and whether training is provided.  Additionally, this is just one of the three factors the IRS considers.

Does The Practice Have Financial Control?

The financial control factor looks at the financial relationship between the parties.  In the associate doctor context, one primary measure of financial control is exclusivity.  Is the doctor able to work in other practices, or does he work for just one practice?  If a doctor works one day a week for four or five unrelated practices, that weigh more heavily into finding he is an independent contractor.  If the doctor works a full-time schedule in one practice that would cut against being an independent contractor.

Another thing the IRS may look for is whether the employer reimburses expenses. In the associate doctor context, this could include items like CE or malpractice insurance. If so, that weighs in favor of an employee, rather than an independent contractor.  The manner of compensation is also important.  If the employer pays the worker at a fixed wage for a period of time, that indicates an employee relationship. So, if a doctor earns a per diem amount, that might weigh in favor of being an employee. If the doctor is paid as a percentage of production or collections, that may weigh in favor of being an independent contractor.

What Is The Nature Of The Relationship?

This factor looks at the relationship as a whole. For example, is there a written contract? If so, that might weigh in favor of an independent contractor relationship, but the IRS is not bound by the parties’ contract language.  Does the employer provide benefits like health insurance? If so, that weighs against an independent contractor relationship.  Does the worker provide a service that is a key aspect of the business?  In associate contracts, the answer is almost always yes.  The employer operates a medical or dental practice, so the associate doctor providing medical or dental services is, by definition, providing services that are a key aspect of the business. There might be an exception to this if the worker is a specialist, such as an oral surgeon providing service to a general dental practice.

Conclusion

The bottom line is that the determination of whether to properly classify a worker as an independent contractor versus an employee is very fact-specific and dependent on the particular circumstances of your situation. It is important to get it right, though. The IRS can impose significant penalties and back taxes on employers who misclassify workers as independent contractors.  If you have any doubts about whether to classify an associate as an independent contractor, contact an experienced healthcare attorney.

Disclaimer

This post is for informative purposes only and should not be used as a substitute for consultation with a licensed attorney. It provides general information and a general understanding of the law.  However, this post does not provide specific legal advice. No attorney-client relationship is created by the posting of this information.  If you have specific legal questions after reading this post, you should contact a licensed attorney.