United States: Independent Contractor Versus Employee

The following was published in the April Edition of Memphis Medical News.

It is critical that healthcare businesses correctly classify the individuals providing services for them as either employees or independent contractors.  Misclassification matters to both the business and the service provider.  Businesses are typically required to withhold income taxes and employment taxes on employees whereas they are generally not required to withhold such taxes on independent contractors.  Instead, it is the independent contractor's obligation to report and pay such taxes.  Businesses also do not have to include independent contractors in certain fringe benefit programs such as retirement plans or health insurance.  Additionally, the business does not have to provide workers compensation benefits or unemployment insurance for independent contractors or abide by wage and hour laws.  And in the context of hospitals and doctors, there is perhaps an even bigger difference:  if a doctor commits malpractice, whether or not the doctor is an employee or independent contractor will be an important factor in determining if the hospital can be held liable for the doctor's negligence. For these reasons, businesses may be quick to classify individuals as independent contractors based on the budget savings.  As additional considerations, independent contractors do not have certain rights under anti-discrimination laws such as the Americans with Disabilities Act and the Age Discrimination in Employment Act.

Businesses' classification of workers has come under recent scrutiny from the Internal Revenue Service, the Department of Labor, and state agencies.   But how do you properly classify an individual as an employee or as an independent contractor?  It is a facts and circumstances type test with control being the critical and dominant factor.

The Internal Revenue Service breaks down the determining factors into three categories:  behavioral control, financial control, and relationship of the parties.  When analyzing behavioral control, you will look at factors such as whether the business has a right to direct and control what work is accomplished and how the work is done.  Businesses can control how work is accomplished through training or through giving instructions to the work.  The relationship of employer and employee exist when the person for whom the services are performed has the right to control and direct the individual who performs not only as to the result to be accomplished by the work but also as to the details and means by which the work is accomplished.

Financial control involves determining if the business has a right to direct or control the financial and business aspects of the worker's job.  This includes the extent to which the worker has unreimbursed business expenses, the extent of the worker' investment in the facilities or tools used in performing services, the extent to which the worker makes his or her services available to the relevant market, how the business pays the worker (salary, per job, etc.), and the extent to which the worker can realize a profit or make a loss.

Relationship of the parties looks at facts that show the type of relationship the parties have and includes written contracts describing the relationship the parties intend to create, whether the business provides the worker with employee-type benefits (insurance, vacation, etc.), the permanency of the relationship, and the extent to which services performed by the worker are a key aspect of the regular business of the company.  Importantly, how the parties classify their relationship in their service provider and other contracts is not controlling.

The question is whether the principal had the right to control, not whether control was actually exercised. The control necessary to find an employee-employer relationship varies depending on the type of work at issue with the control necessary to find employee status lower when applied to professional services than to nonprofessional services. The following list provides a summary of factors to assist a practice or hospital in determining whether a relationship may be classified as an independent contractor or employee status:

Factors Pointing to an Independent Contractor Relationship:

  • The entity does not reimburse the individual for expenses such as travel expenses or continuing licensure requirements
  • The entity does not provide benefits: vacation, sick days, health insurance, vision or dental coverage, retirement benefits, workers' compensation or disability insurance
  • The individual is free to offer services to the general public on a regular or consistent basis or can work for another group/facility without the consent of the entity

Factors Pointing to an Employee Relationship:

  • The entity trains the individual
  • The entity has the authority to mandate days and times in which the individual provides services
  • Work is performed at the entity's premises and the entity furnishes tools, materials, and other necessary equipment
  • The entity has the authority to direct the individual's tasks and how those are carried out
  • The entity provides benefits mentioned above
  • Contracts between the parties require a prolonged term that automatically renews, indicating a continuing relationship
  • The individual is required to participate in all training and quality review programs
  • The entity reimburses the individual for expenses and pays a set salary for services

Additional Pointers:

  • Be wary of converting an existing employee to an independent contractor, unless there is a major change in job function
  • Ensure all tax returns are filed consistent with the designated status
  • Be mindful that certain fraud and abuse laws, such as the federal Anti-Kickback Statute and the Stark Law, have different requirements for compensation arrangements involving independent contractors versus employees
  • Misclassification of an individual's status can lead to the IRS imposing penalties, including repayment of all back payroll taxes, workers compensation, and overtime

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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