Independent Contractors a Serious Asset Protection Issue for Doctors

August 19, 2014

Physicians face a wide variety of exposures beyond medical malpractice claims including both labor and tax claims for misclassified contractors.

Lawyers find it hysterical when we ask how many employees a client has, to assess risk and exposure, and we hear "Oh none, we don't have to worry about that, they are all contractors," or even better, "We lease our employees so we don't have any risk." Both are absolutely wrong and both situations leave you substantially exposed to a variety of labor law and tax law related claims including misclassifying an "employee" as a "contractor." Both are very specific legal terms with well-defined qualifications that go far beyond "picking their own hours."

Employment law exposure - contractors and wage claims

I've covered employment lawsuit exposure in substantial detail before in a variety of specific contexts including the basic steps you need to take to protect your practice. The current concern is the renewed prevalence of employee classification audits by the Department of Labor. In plain English, if you have "independent contractors" at your practice you need to carefully review the rules and make sure that you have correctly classified them as such, or face substantial fines and both civil and even criminal legal jeopardy.

To quote an article I sent to my own clients some time ago, most medical practice managers and owners also don't realize that once a violation is established in an Fair Labor Standards Act lawsuit, the burden is on the employer to prove why double damages should not be awarded, and the employer will be liable for the employee's legal fees. Moreover, the owner of the practice, or whoever was responsible for the decisions that led to the violation, will be held personally liable along with the company, regardless of laws that limit personal liability in other contexts. Unlike cases brought under Title VII for discrimination, there are no administrative hoops to jump through before employees can go to court. The means that the practice's owners, executives, and board members face significant personal jeopardy that will typically not be covered by their medical malpractice, general liability, or personal umbrella insurance polices, so making sure that your practice directors' and officers' liability insurance is in place and adequate needs to be part of your plan today.

There's a serious tax issue as well

As pointed out in an excellent Forbes article on the subject, the DOL isn't the only federal agency that has a stake in this issue; the IRS is substantially involved as well, - employment withholding taxes are a substantial source of both federal revenue and social security payments, that are significantly harder to collect directly from contractors than they are from employers.

The DOL and the IRS are now working together under joint agreements, according to one recent government press release, "In the last two years, the Wage Hour Division has secured over $18.2 million in back wages for more than 19,000 workers where the primary reason for minimum wage or overtime violations under the Fair Labor Standards Act was that workers were not treated or classified as employees." This represents a 97 percent increase in collections and claims.

IRS Audit Exposure and the VCSP

If you think you have an audit exposure, it is best to address it upfront. The Voluntary Classification Settlement Program (VCSP) is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods, with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

Surety on this issue requires that you have your own contracts, processes, and qualifications reviewed by an employment law specialist to determine if you have a tax or labor compliance issue, and to prevent it from happening again. In the next installment on this issue I will review the IRS checklist to determine whether an employee is a contractor.