When making the decision to hire an associate, one of the first things you have to decide is whether to hire the associate as an employee or an independent contractor.

On the surface, an independent contractor seems an obvious choice but as we detail below, the choice is anything but obvious and full of potential risks if the wrong decision is made.

The Benefits of Independent Contractors

For Employers

Hiring someone as an independent contractor rather than an employee has many advantages for employers. For example, a dental or medical practice does not have to pay traditional benefits, such as health insurance. The practice itself is not responsible for payroll taxes, unemployment benefits, or workers’ compensation costs. In addition, many of the benefits that are designed by state law to protect employees also do not apply to independent contractors.

For Workers

The independent contractor often has more control over their work, including their specific schedule. They will be able to use their own methods and equipment in many cases, as well.

Why Is This a Hot Topic?

The main reason that the discussion of independent contractors versus employees is a hot topic is because of their tax treatment. Employers and practice owners often want to classify their associates as independent contractors because it costs them less money in payroll taxes and makes issuing paychecks must less complicated.

It actually costs workers less in income tax obligations to be considered an independent contractor too. As a result, the combination of more freedom in their practice and less overall tax obligations is appealing for associates.

However, the IRS does not like independent contractor relationships nearly as much as employee relationships because the overall income tax dollars paid to the IRS declines. In many situations, the only “person” complaining about the independent contractor relationship is the IRS.

The Differences Between Independent Contractors and Employees

An independent contractor simply has a lot more freedom to dictate how and when they work compared to an employee. Typical attributes of an independent contractor include:

• Ability to set working hours
• Use of their own equipment (or contribution to shared equipment)
• Little or no expense reimbursement
• Freedom to determine how you do your job
• A written contract between the worker and the practice
• Payment based on clients seen or another similar measure (such as by the job or by the number of products produced)

Employees, on the other hand, have far less autonomy when it comes to their working life. Signs that you are an employee include:

• Set working hours that you must be at a specific location
• Payment by the hour
• No contract for employment
• Expense reimbursement
• Use of the company’s tools and equipment

Although the IRS has its own general rules about it classifies employees, individual states often have their own rules that apply as well.

California as a Case Study

In California, similar to many other states, independent contractor arrangements are not favored. Although California is perhaps one of the more stringent states, the rules it uses to determine whether a worker is considered an employee or independent contractor can be helpful to understand the difference between the two classifications.

California uses what is commonly referred to as the “ABC Test.” Enacted in September 2019, the California Labor Code sets out very specific requirements that must be addressed.

First, workers are automatically considered employees unless they meet certain standards. In other words, the general rule is that a worker is an employee, and being an independent contractor is an exception to the rule.

The ABC Test requires a company to meet the following requirements for someone to be considered an independent contractor.

1. The person is “free from the control and direction” of the practice when it comes to the performance of their work.

This requirement applies to both the contract for work performed and “in fact,” which refers to the actual practices of the company and the worker. That means that the arrangement must be more than just “on paper”; the worker and entity hiring the worker must function in a way gives the worker autonomy.

2. The worker performs work that is “outside the usual course of the hiring entity’s business.”

This requirement can be very difficult to prove. In fact, for a dental practice or medical facility, hiring a dentist or doctor as an independent contractor would effectively be impossible simply because of this requirement.

Thankfully, however, there is a “carve-out” for certain types of workers, including those who are licensed physicians, surgeons, dentists, podiatrists, and psychologists.

3. The person is “customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

This type of requirement brings to mind some traditional independent contractors, such as those who provide construction work or cleaning services.

The Borello Test for Dentists and Doctors

Because dentists and doctors are exempt from the ABC Test, they must meet the “common law” requirements to be classified as independent contractors in California. These requirements are similar in many other states across the country as well.

The Borello test is a multi-factor test that reviews all of the facts of the relationship between the worker and the hiring entity to determine whether a worker is an employee. Much like the test the IRS uses, the Borello test or common law test focuses on how much control the worker has over the relationship and how the worker contributes to the hiring entity’s business. The “signs” of an independent contractor or employer, as noted above, are examined in-depth to determine the true nature of the relationship between the parties.

The Risks of Employee Misclassification

Because there are many benefits to classifying workers as independent contractors instead of employees, some companies deliberately call workers independent contractors when they actually act as employees. This type of “misclassification” is illegal, and you may be fined for it in some circumstances.

Misclassification audits and investigations are becoming more common. Any employer that misclassifies an employee may be subject to up to 100% of the employment tax due, particularly if the misclassification was deliberate. Employers may also face liability for Social Security taxes, state and federal unemployment taxes, unpaid workers’ compensation coverage, disability insurance, and other fines and penalties.

While misclassification rarely occurs in the context of a dental practice or medical facility, it is worth mentioning so that dental and medical practice owners do not overstep when considering whether to add an associate as a contractor or an employee.

The Importance of an Independent Contractor Agreement

Regardless of whether the independent contractor is considered a full-time associate or a part-time contractor, it is a good idea to have an independent contractor agreement that governs your relationship with this person.

Having an understanding of the rights, obligations, and duties under the relationship at the outset can help you address an array of potential conflict areas before they cause real problems. Although it is not completely determinative, having this type of agreement can decrease the likelihood that your practice gets fined for employee misclassification.

The best way to ensure that you have hit all of the necessary items in your independent contractor agreement is to review the document with an employment attorney.

At Dental & Medical Counsel, we specialize in these types of employment law agreements for dental and medical practices. Contact us to schedule a free consultation with Ali Oromchian to learn more about how we can assist you with your contract agreement.