Sometimes, classifying employees for your practice is easy. If you hire someone to open the office and greet patients from 9 a.m. to 1 p.m., you have an employee. However, if you hire a bookkeeper to prepare your corporate tax return, you’re using an independent contractor.
In the past, dental practices frequently hired dental assistants, dental hygienists, and associate doctors and classified them as independent contractors. If the new person didn’t fit into the practice, termination was quick and easy. There were no human resource issues, and there was no risk of increasing your unemployment rate. Unfortunately, this is against the law.
The Affordable Care Acthas created added pressure. As of Jan. 1, 2014, employers with more than 50 employees are required to pay for employee health benefits. If you can keep your employment numbers under 50 by using independent contractors, you can avoid paying for those benefits.
Federal and state agencies are now heavily scrutinizing businesses that frequently issue 1099 tax forms to independent contractors. For a small business that is unaware of the ever-changing laws, penalties and fines for misclassification can be heavy and may include shutting down the business until the errors are corrected.
Although fines are different in every state, companies can be penalized with closures and up to $1,000 per day per employee for knowingly violating the classification laws. Fines can also be based on unpaid taxes and the cost of a free-market workers compensation policy. Penalties can also come in the form of jail time. In New York, officials are less focused on collecting money for the accidental and occasional infraction, and instead are looking for cases of deliberate and egregious avoidance of the laws in order to criminally prosecute. Missouri will jail an employer for up to six months per violation (per employee) for deliberate misclassification.
In 2010, the IRS, Department of Labor, and more than a dozen state employment offices set a long-term goal of investigating more than 6,000 employers for misclassification. The reason? Money. By investigating misclassification, these state and federal groups not only look closely at employers, but the independent contractors. Because independent contractors are typically lax about paying their quarterly taxes, the misclassification investigations are increasing revenue from both the reclassified employees and the tax-dodging contractors.
If found guilty of misclassification, businesses not only pay back taxes per employee, but pay lost wages for those workers. According to a Forbes magazine report from November 2013, the Department of Labor collected over $18 million in back pay for 19,000 employees incorrectly categorized as “independent contractors.”
While states may collect on taxes, there are additional financial incentives for states over and above tax revenue. Not only are states losing out on employment taxes, many are finding themselves paying disability to state residents who were injured on jobs where they were classified as independent contractors. Had the employees been classified correctly, the state would be off the hook for those disability costs because the business’s workers compensation policies would be responsible for the lost wages.
Some states, including California, have found a compromise. If the business owner carries a worker’s compensation policy for everyone including independent contractors, the state is less likely to pursue an employment misclassification case. In 95% of cases, dental offices should classify newly hired staff members as employees, not independent contractors. While there are some businesses that fall into vague areas of employment law, dental offices generally do not meet the qualifications to classify anyone as an independent contractor.
If you still think that the new dentist you hired is an independent contractor, consider these questions. If you answer yes to just one, your new dentist is likely not an independent contractor.
• Does a senior dentist review the work and the diagnoses of the new associate?
• Does the new associate use equipment owned by the dental office?
• Do you bill the patients seen by the new dentist?
• Does the new associate work for any other dental practices?
• Did you give the new associate an employee handbook?
Control is key when it comes to determining whether a worker is an independent contractor or an employee. Three of the major determinants for control are training, time management, and work supplies.
Training is a determining factor because the hiring company is dictating (through training) how the work is to be completed. For example, many companies use practice management software for patient and financial management. Showing an independent contractor how to access this kind of system would not convert him or her into an employee. Time management is probably the best way to determine control. If you require the contractor to perform work within a schedule, you are likely in violation. Lastly, providing the independent contractor with work materials, such as a workspace or X-ray machine, indicates that she or he is under your control as an employee.
There are four categories for classifying employees — common law employee, statutory employee, statutory exempt employee, and independent contractor. Common law employees are typical employees, such as the front desk employee. Statutory employees and statutory exempt employees are two categories for specific jobs in predetermined industries. Dental offices would not use either one of those employment categories. Lastly, an independent contractor working with a dental office would most likely be someone providing temporary consultation regarding nonmedical issues, such as interior design.
A word of additional caution — if you use a placement agency to test new staff without the headache of hiring and firing, ask a dental business attorney to review the contract. Placement companies are trying to cut costs as well. Many have changed the standard language in their contracts and now assign the role of employer to the company using the new staffer.
Worker misclassification has become a major source of revenue and a means of cost reduction for federal and state government offices. Just like turning over your corporate taxes to an accountant, employment classification is best left in the hands of a human resources official or corporate attorney.
Mr. Oromchian serves as a legal consultant for numerous health care practice management firms who rely on his expertise for their client’s businesses. He is recognized as an exceptional speaker and educator who simplifies complex legal topics. He has lectured extensively throughout the U.S., including the American Dental Association, California Dental Association, and Hawaiian Dental Society meetings, to name a few. He is also a frequent guest lecturer at dental, veterinarian, optometrist, and physician societies and study groups.