The misclassification of an employee as an independent contractor can result in serious financial ramifications, including taxes, fines, and penalties from both state and federal agencies.
What is an independent contractor?
William Barrett is the CEO of the law firm Mandelbaum Salsburg in Roseland, NJ. Casey Gocel is a member in the firm's corporate and professional practice transitions groups.
Generally, dentists are independent contractors if they have control over the number of patients they see and their work schedule. They are not independent contractors if they perform services that can be controlled by the practice.
Practices often classify dentists as independent contractors to avoid having to comply with state and federal withholding requirements and payroll taxes. The practice simply issues 1099s to the dentists at the end of each year, and the dentists are responsible for reporting their income, which is subject to self-employment tax.
What is an employee?
If the practice has control over the dentists' patient load and schedule, they are employees of the practice. Employees are supervised by the practice and may be entitled to certain benefits and protections under state and federal laws. For instance, the practice is responsible for withholding a portion of employees' earnings for tax purposes.
4 classification factors
Independent contractors have complete autonomy over their work lives, whereas employees must answer to and abide by their employers. State and federal agencies consider four primary factors when determining if a dentist is an employee or an independent contractor.
The first factor is who supervises the dentist. There are four questions to be answered:
- Is the dentist under direct control of the practice's supervisors?
- Does the dentist work for other practices?
- Who is responsible for corrective treatment and addressing such issues with the patients?
- Does the practice provide the dentist with any training?
This factor concerns a dentist's schedule and hours:
- Do the patients belong to the practice or the dentist?
- Who schedules the patients?
- Who determines the dentist's hours?
- Can the dentist refuse to treat certain patients?
- Does the dentist have to request time off?
3. Benefits and insurance
This category focuses on insurance, healthcare coverage, and more:
- Who pays for the dentist's healthcare insurance?
- Who pays for the dentist's malpractice insurance?
- Who pays for the dentist's licensing fees and continuing education credits?
- Is the dentist entitled to any benefits from the practice, such as paid time off or a retirement account?
4. Payment and expenses
The following five questions can sometimes be contentious, so it's best to spell them out clearly:
- Who determines the rates paid by the dentist's patients?
- How is the dentist paid?
- Does the practice provide the dentist with tools, supplies, and equipment?
- Who pays for laboratory fees?
- Does the dentist independently pay to advertise services?
If an agency, such as a state department of labor or the U.S. Internal Revenue Service, audits a practice and finds that the practice has misclassified a dentist as an independent contractor, the consequences of a misclassification can be severe. The agency will likely seek payment of unpaid employment, disability, and Social Security taxes, along with additional interest and penalties. This could potentially cost the practice millions of dollars.
In addition, the misclassified dentist may be retroactively entitled to insurance coverage and other benefits that should have been offered by the practice if the dentist had been properly classified as an employee. If the dentist is deemed to be a nonexempt employee and worked more than 40 hours in any given week, the practice will also be responsible for back payment of overtime.
What can a practice do to protect itself?
The only fail-safe way to survive an audit is to classify dentists and staff in compliance with the criteria established by federal and state laws. Although this list is not exhaustive or foolproof, it is a start for identifying the best practices for maintaining classification as independent contractors:
“Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.”
- The dentists establish their own business entity with its own Federal Employer Identification Number that the practice will contract with.
- The dentists procure their own general and professional liability insurance.
- The dentists are solely responsible for paying appropriate taxes on revenue they receive from the practice.
- The dentists are solely responsible for their own business expenses and provide their own tools, supplies, and materials, as necessary.
- The dentists do not receive any benefits or bonuses from the practice.
- The dentists establish their own work schedule and vacation schedule.
- The dentists sign a written agreement that provides that they are an independent contractor, that they meet the criteria of an independent contractor, and will indemnify and hold the practice harmless.
Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.
William Barrett, Esq., is the CEO of Mandelbaum Salsburg, a law firm in Roseland, NJ.
Casey Gocel, Esq., is a member in Mandelbaum Salsburg's corporate and professional practice transitions groups.
Disclaimer: Nothing contained in this column is intended as legal advice. DrBicuspid.com recommends that you consult with a lawyer in your area to help understand any applicable laws.
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