Here's how to avoid a potentially expensive mistake by misclassifying an employee versus a contractor.
Many physicians believe the difference between an “employee” and an “independent contractor” is pure semantics; a distinction with little difference. The truth is you’re free to call your nurse as a “contractor,” but if you treat her like an employee, she’s an employee, and the government will be more than happy to point out the differences between treating someone as a contractor vs. an employee and the consequences for not understanding the real difference.
Whether members of your workforce are contractors or employees impacts many facets of your practice, including: type of insurance (workers’ compensation insurance generally is mandated for employees only); payroll (employees are subject to payroll deductions); and compliance with healthcare regulations (complying with Stark and the Anti-Kickback Statute, for example, varies depending upon whether there is an employment relationship between the parties).
So how can practice determine whether someone truly is an employee or contractor? Each state may have its own “test” set by rule or case law, especially as it relates to whether a worker falls under that state’s wage and hour laws. Accordingly, it is important for you to consult state law in this regard. As a general rule however, if the IRS classifies someone as a contractor or an employee, others will too.
In making the contractor vs. employee distinction, the IRS typically looks at three categories: behavioral control, financial control, and type of relationship. Classifying someone as a contractor or an employee is not based on any one factor, but the totality of the circumstances.
Behavior control relates to whether the practice has a right to direct and control how the worker does the task for which the worker is hired. Typically this means that if you tell someone when and where to provide services, exactly how to provide services, who is to assist them in providing services and train them in what order to perform such services, they likely will be classified as an employee and not a contractor. Most of a practice’s workforce will be classified as employees based on the degree of behavioral control asserted by the practice (nurses, office staff, medical assistances are typically subject to direction and control regarding their provision of services).
Financial control addresses whether a practice has a right to control the business and financial aspects of the worker’s job. For example, contractors are more likely to have unreimbursed expenses related to the provision of services (no mileage or equipment reimbursement). Additionally, contractors are generally free to seek out business opportunities outside the services provided to the practice. With respect to compensation, employees are generally guaranteed a regular wage amount on an annual basis, while a contractor is often paid a flat fee or on a time and materials basis. The issue of how a worker is compensated is very important in complying with the Anti-Kickback Statute, which generally does not restrict compensation to employees, but provides several restrictions for compensating contractors.
Lastly, the type of relationship between a practice and its personnel is important. To determine that relationship requires reviewing written contracts describing the relationship the parties intended to create, examining whether or not the business provides the worker with employee-type benefits (insurance, a pension plan, vacation pay, sick pay), and exploring 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.
While this may seem like another administrative burden chipping away at the actual practice of medicine, it is one of those business details that you’ll wish you hadn’t ignored. Misclassifying an employee as a contractor can result in expensive penalties for failing to pay necessary employment taxes. Paying a contractor in the same fashion as an employee may not fall within the relevant Anti-Kickback compensation safe harbor, and create significant legal risk for the practice. Before deciding how to classify any worker in your practice, make sure you understand these categories and consult your advisors. An expensive mistake is easy to avoid by asking the right questions.
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