Employment Misclassification and the Practice of Medicine

If a medical practice misclassifies employees as in­dependent contractors, it may have significant monetary and tax ramifications. These consequences include noncompliance with withholding and employment tax obligations, minimum wage and overtime requirements, wage and hour mandates such as mandatory meal breaks and rest periods, and reallocation of business expenses.

Employers are not responsible for providing workers’ compensation, disability, and social security insurance to independent contractors. A putative employer who has misclassified workers will be subject to liability for withholding taxes, interest, and penalties, including liquidated damages of double the calculated tax as well as potential disqualification of an employee benefits plan that excluded such workers.

A multitude of state and federal agencies are involved with the determination of employment status, including the Internal Revenue Service (IRS); the US Department of Labor; the Equal Employment Opportunity Commission; state workers’ compensation, unemployment, and disability benefits agencies; human rights organizations; labor boards; and tax departments.

There is no one definition of an “independent contractor” and, therefore, the determination of whether a worker is an employee or an independent contractor is subject to a facts and circumstances test to assess whether the worker is subject to the control of the recipient of services. However, there is a statutory presumption that workers are employees. An employer–employee relationship generally exists if the person who is contracting for the services has the right to control not only the results but also the means by which the results are accomplished. It is not necessary that the employer actually control the manner in which services are performed but, rather, it is sufficient that the employer have a right to control.1

The factors identified by the IRS since 1987, as determinative of the employer–employee relationship, are as follows, with the degree of importance attributable to each factor being dependent on the occupation and factual context in which the services are performed2:

  1. Instructions
  2. Training
  3. Integration into business operations
  4. Personally rendered services
  5. Hiring, supervision, and payment of assistants
  6. Ongoing business relationship
  7. Set hours of work
  8. Full-time devotion to the enterprise
  9. Performance of work takes place on the employer’s premises
  10. The order of the work sequence is set by the employer
  11. There is an oral or written re­­porting requirement
  12. Payment is by hour, week, or month rather than by job
  13. Payment of business expenses
  14. Furnishing tools and materials
  15. Significant investment in facilities
  16. Realization of profit or loss
  17. Working for multiple entities at the same time
  18. Making services available to the general public
  19. Right to discharge
  20. Right to terminate.

More recently, the IRS has identified 3 global categories for evaluation: behavioral control, financial control, and relationship of the parties.3 Historically, the courts have recognized that individuals who practice a profession in which services are offered to the public are not employees and that, similarly, they do not require close supervision in the same sense as less skilled workers. However, since the enactment of the Revenue Act of 1978, the IRS has been prohibited from issuing regulations or revenue rulings to clarify the employment status of any individual for the purposes of employment taxes. This lack of guidance has presented challenges to employers and has led to the misinterpretation of workplace scenarios. This is particularly applicable to the relationship between doctors and their associates. In a landmark decision, New York’s highest court held that, notwithstanding that the professional services of ophthalmologists and optometrists do not lend themselves to control over the results produced and means employed, there was substantial evidence of the existence of control beyond results or means, to wit:

  1. Notwithstanding that the professionals worked part time at the putative employer’s premises, the hours worked were regularly scheduled rather than sporadic or occasional.
  2. Appointments were made by the employer’s receptionist.
  3. Patients were treated as those of the employer.
  4. Fees were fixed by the employer.
  5. Services were rendered at the employer’s premises.
  6. The employer’s equipment and facilities were utilized.
  7. Billings and collections were handled by the employer.
  8. Patient records were maintained by the employer.
  9. Any applicable insurance forms were prepared by the employer’s staff.4

Similarly, California courts have held that even where there is an absence of control over work details, an employer–employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole; (2) the worker’s duties are an integral part of the operation; and (3) the nature of the work makes detailed control unnecessary.5 In this regard, the existence of a written agreement purporting to establish an independent contractor relationship is not determinative, nor is the fact that a worker is issued a 1099 form rather than a W-2 form material to the assessment of employment status.

Accordingly, under the current state of the case law, doctors who are hired to work in medical offices or clinics would generally be considered employees. The fact that operatory equipment and supplies, as well as support staff, are provided by the medical office establishes a threshold finding which is difficult, but not impossible, to counteract. Critical indicators to the contrary would include an absence of control, not only over the performance of professional services but over important operational aspects as well.

For example, if an independent medical subspecialist was not held to a schedule whatsoever, treated only his own patients, maintained secured patient records to which the putative employer did not have access, set his own fees, hired his own assistants, and managed his own billing, the services rendered would be in support of his own practice and ancillary to the operation of the clinic. Payment of a leasing fee based on the number of patients seen, hours worked, or other variables would not be contrary to such a determination. The ability to designate a substitute in the event of unavailability would be material as well.

Recently, the courts have focused their analyses on whether business development activities—such as business cards or professional websites—have referenced a relationship between the doctor and the practice. Significantly, they have minimized the effect of corporate entities established by doctors on the determination of the status of the employer–employee relationship.

The essential terms of a contract between a doctor and a practice are, typically, consistent with those in other employment agreements. On occasion, however, such contracts address the doctor’s potential purchase of an ownership interest in the practice. To the degree that a provision reflects the potential to participate in control decisions for the practice at a later point in time, although appearing neutral, it could be suggestive of integration into the practice as well as of privileges or benefits that are not accorded to an independent contractor. Additionally, in the current regulatory environment, it can no longer be said that the fact that a doctor works for multiple practices would determine the relationship of the parties. Governmental agencies could easily find the doctor to be a part-time or per diem employee of each such practice because the existence of an employment relationship with one enterprise would not preclude the existence of multiple such relationships. It is essential for medical practices to reassess their existing classification determinations right now.

An organization should first determine whether independent contractors have been appropriately classified. If this is not the case, creating a plan for voluntary reclassification or restructuring is essential to mitigate the risk of worker litigation or regulatory audit. Experienced counsel can assist in developing and implementing independent contractor agreements that appropriately recognize the dynamics of the workplace relationship as well as help the practice in preparing employee handbooks and procedures containing standards to ensure conformity with the restructured relationship. Alternatively, redistribution of a workforce to a staffing company may be contemplated only with stringent legal safeguards.

Given the enhanced interagency cooperation and state regulatory initiatives, as well as allocation of significant resources to both the IRS and the Department of Labor to detect and deter misclassifications, ensuring that workers are properly classified, should be a leading priority for medical practices in an effort to mitigate exposure.6 Taking the time to review your practice’s employment relationships with your accountant and attorney to determine the right relationship along with ensuring that all of the proper documentation is in order will protect your practice from unwanted exposure from misclassification.

References
1. Internal Revenue Code, section 3121(d)(2); Treas. Reg. sec. 31.3401(c)-(1)(b).
2. Rev. Rul. 87-41, 1987-1 C.B. 296 addressing section 530 of the Revenue Act of 1978.
3. Department of the Treasury, Internal Revenue Service. Independent Contractor or Employee? Training Materials, Training 3320-102 (10-96) TPDS 842381, at 2-7.
4. Matter of Concourse Ophthalmology Associates, P.C., 60 N.Y. 2d 734; 456 N.E. 2d 1201; 469 N.Y.S. 2d 78; 1983 N.Y. LEXIS 3431 (1983).
5. Yellow Cab Cooperative v. Workers Compensation Appeals Board, 226 Cal. App. 3d 1288 (1991).
6. Fiscal Year 2013 Budget of the United States, Department of Labor, page 146.

About the Authors

Judge Ruth Kraft chairs the Employ-ment Law practice at Kirschenbaum & Kirschenbaum. A graduate of Yale Law School, Judge Kraft brings the experience of 14 years on the bench, notably in the commercial frauds and employment adjudications for the City and State of New York, to her practice. To contact Judge Kraft with an employment question, call her at 516-747-6700 x326 or e-mail her at This email address is being protected from spambots. You need JavaScript enabled to view it..

Jennifer Kirschenbaum manages Kirschenbaum & Kirschenbaum’s healthcare department. To contact Jennifer for assistance with your employment contracts and designations, call her at 516-747-6700 x302 or e-mail her at This email address is being protected from spambots. You need JavaScript enabled to view it..

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