Anti-Kickback Pitfall to Avoid: Sales Force Compensation

If you are a physician, be mindful that payments to a commissioned sales force for the referral or recommendation of business can be illegal.

Most physicians are aware that paying kickbacks for referrals is a felony under the Federal Anti-Kickback Statute. You can get in to very big financial trouble, and lose your license. Unlike Stark Law, which only applies to physician referrals, the Anti-Kickback Statute applies to remuneration paid to anyone for arranging in whole, or in part, the furnishing of services or items covered by a federal healthcare program. This means the statute is broad enough to cover payments to a sales force that is paid on commission.

The actual wording of the statute reads: Whoever knowingly and willfully solicits or receives any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind - in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program, or in return for purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program, shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.

The statute specifically exempts bona fide employees. It does not apply to “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services."

In 1989, the OIG expressly stated in the proposed rules that “We have decided to adopt the definition of employee from the Internal Revenue Service set forth in 26 U.S.C. 3121(d)(2)." 

In other words, the bona fide employee exemption only applies to bona fide, W-2 employees. 

The OIG continued, “We believe that if individuals and entities desire to pay a salesperson on the basis of the amount of business they generate, then to be exempt from civil or criminal prosecution, they should make these salespersons employees where they can and should exert appropriate supervision for the individual’s acts.” 

Under the Tax Code, a company typically is responsible for controlling the actions of its employees, but is not allowed to control the details of the work of an independent contractor. 

The distinction likely also has its roots in the traditional application of any anti-solicitation rule. Typically, a person or company is allowed to solicit business for itself. This typically extends to a company’s employees. 

Independent contractors paid under a 1099 would be required to meet some other “safe harbor.” Usually the “Personal Services” safe harbor is the closest fit. However, this safe harbor will not be met if the compensation fluctuates with the amount of business generated. Thus, the 1099 sales contractor must be paid a fixed rate. 

There are additional requirements that further make this safe harbor difficult to meet. State Laws may also prohibit payment for solicitation of healthcare business. These may be even stricter than Stark Law and the Anti-Kickback Statute.

If you are a physician considering opening or investing in a clinical or nonclinical healthcare business be mindful that the Anti-Kickback Statute is broader than Stark Law. Payments to a commissioned sales force for the referral or recommendation of business can be illegal. It is best to consult a health lawyer in your area, who can guide you through the process.