Risks and Issues in Treating Anesthesesia Group Professional Staff As Independent Contractors
John T. Mulligan, Esq.
McDonald, Hopkins, LLC, Cleveland, OH
While generally anesthesia groups consider their physician and non-physician professional staff as “employees,” some groups treat certain, or even all, of their professional staff as “independent contractors.” What is sometimes forgotten is that this is not simply a matter of choice. It is the nature of the relationship between the group and the individual that determines whether the individual is an “employee” or “independent contractor.”
Practice groups that treat some or all of their personnel as independent contractors typically do so for one or more of the following reasons:
- Certain personnel are considered “PRN” or whose short-term services are obtained from a staffing agency.
- The group desires to avoid having to make the payroll tax and withholding tax payments that are required in an employer-employee situation, sometimes as a means to maximize (or appear to maximize) the individual’s wages.
- The group desires to avoid having to provide its personnel with retirement plan or other fringe benefits.
- The group desires to try to reduce its potential liability for the acts or omissions of the personnel.
The IRS Viewpoint on Treating of Workforce Personnel As “Independent Contractors.”
The Internal Revenue Service has tended to view the characterization of regular workforce personnel as “independent contractors” as improper attempts to avoid having to pay payroll taxes and take withholding on wages. The IRS has issued numerous rulings and announcements distinguishing an “employee” from an “independent contractor.”
Current guidance on this subject can be found in IRS Publication 15A. A full examination of all of the factors that would be considered by the IRS in determining whether a physician, CRNA or AA is an “employee” of an anesthesia group practice or is an “independent contractor” is beyond the intended scope of this article. However, there are a number of factors that, if present in a particular relationship, would indicate that the individual was an “employee” of the group regardless of how the group may have characterized him or her.
Of these factors, the most significant one is whether a business entity, such as a physician group, has the right to control the performance of services by the individual. The following factors would indicate “control.”
- The business entity can control when and where the work is done.
- The business entity determines and provides the equipment and supplies.
- The business entity determines who is to assist the individual in performing the work.
- The business entity has the right to determine which specific individual is to perform which task, and in what sequence or order the work is to be done.
- The individual is paid on a standard wage rate for weekly, hourly, or other period of time, rather than a flat fee for the job.
- The individual is restricted in his or her ability to achieve a “profit” by, for example, performing the service in a more efficient manner or by subcontracting the work to someone to perform it at a lesser rate.
- The relationship between the individual and the business entity is a long-term one.
- The individual cannot perform other services either on his or her own behalf or for other business entities.
- The entity is subject to an agreement with a third party (e.g., a hospital) that obligates it to exercise control over those individuals who render services for it.
There are situations in which the relationship between a physician and a physician group is such that the individual can properly be considered an independent contractor. Examples of this would include a physician who provides services on a temporary locums basis, or a radiologist who performs teleradiology services for a teleradiology company, but provides those services out of her own home using equipment that she has purchased herself, has her own malpractice insurance, and provides services for multiple teleradiology firms.
In the context of a typical anesthesia group it would be extremely difficult to argue successfully that full-time regular staff are anything other than employees. This would be true even if the physician or other professional had a service contract that stated that he or she was an “independent contractor,” or even if the medical practice contracted with a legal entity such as a corporation or limited liability company for the services of the individual.
Payroll Tax and Withholding Issues
From a tax perspective, the risk in mischaracterizing individuals as independent contractors is that the group can be liable for the payroll taxes (primarily Social Security, Medicare, and federal unemployment) that employers are obligated to pay and for withholding tax obligations.
The response that we have sometimes heard when we have raised concerns about independent contractor characterization is that “we have been doing this for years and it has never been a problem.” While that may well be true, times are changing. Federal and state agencies and officials, in the face of record deficits, are beginning to aggressively pursue businesses that treat “employees” as “independent contractors.” The 2010 federal budget assumes that federal enforcement activities in this area will yield at least $7,000,000,000 of additional revenue over 10 years.
A number of states have begun to step up activity as well. A report issued by the Ohio Attorney General, for example, estimates that Ohio currently has approximately 92,500 misclassified workers who have cost the state up to $35,000,000 a year in unemployment insurance taxes, up to $103,000,000 per year in Workers’ Compensation premiums, and up to $223,000,000 in income tax revenue. A bill pending in the Ohio legislature would create narrow criteria for independent contractor status and provide sweeping new investigation and enforcement mechanisms to combat what is viewed as rampant worker misclassification.
Simply put, any physician group that characterizes its regular personnel as independent contractors should assume that at some point this characterization will be challenged by either state or federal agencies.
Retirement Plan Issues
One of the reasons sometimes given for classifying personnel as “independent contractors,” is so “we do not have to include them in our pension plan.” Sometimes this occurs in a situation in which certain, selected personnel are treated as “employees” who participate in the plan while others are treated as independent contractors who do not. In other situations, everyone is treated as self-employed independent contractors who are free to establish their own personal pension plans, often through wholly-owned legal entities.
The subject of what the Internal Revenue Code and IRS regulations require with regard to the inclusion of personnel in qualified retirement plans could be an article unto itself. Those requirements have evolved over the years often in response to creative efforts by businesses and their advisers to devise means to exclude personnel from participating.
Simply calling an individual an “independent contractor” will not guarantee that a court or the Internal Revenue Service might not take the position that the individual is an “employee” who should be eligible to participate in a plan sponsored by the group practice or by the owners of the group practice. If a court or the Internal Revenue Service were to determine that an individual who had been characterized as an “independent contractor” was actually an “employee,” and if the individual otherwise met the test for participating in a qualified retirement plan sponsored by the group by virtue of age, length of service, and hours of service, failure to have included the individual as a participant in the plan could cause the disqualification of the plan and could give rise to a claim by the individual for benefits.
The Internal Revenue Code abounds with concepts such as “affiliated service groups,” “controlled groups,” and “leased employees” all of which must be considered in determining whether a qualified retirement plan has met the participation standards necessary to assure tax qualified status. Of particular significance is the concept of a “leased employee” under which even a true “independent contractor” may be deemed to be an “eligible employee” if he or she renders 1,500 hours or more of service in a year for the group.
An annual exercise for any group that maintains a qualified plan, or by any group physician who considers himself or herself an independent contractor of the group and who maintains his or her own retirement plan, is to apply the provisions of the group’s plan, or his or her plan, and the provisions of the Internal Revenue Code to each employee or independent contractor who provides services to the group. To the extent that an individual is not being treated as a participant in any such plan, the group or the physician should confirm that such non-participation is consistent with both what its own plan provides and with what the Internal Revenue Code requires.
Liability and Insurance Issues
A person or business entity that engages the services of a true independent contractor is generally not responsible for the acts or omissions of the independent contractor. There are some exceptions to this principle. An entity will, however, be liable for the acts or omissions of its employees in the course of employment under the legal doctrine of respondeat superior. It would be difficult for a medical group to make a convincing case that, for example, an anesthesiologist who was regularly performing services for the group, and for whose services the group billed, should be considered anything other than an “employee” for liability purposes.
From the standpoint of professional liability insurance, where professional personnel are treated as “employees,” generally the group will provide insurance coverage under one policy in which both the personnel and the group are named insureds. On an ongoing basis the only complication (at least where the insurance was of a “claims-made” type) involves “tail” coverage after an individual has terminated employment.
Often, independent contractors are expected to provide their own professional liability insurance. While this can eliminate issues involving “tail” coverage in that, for example, a physician can retain the policy even after terminating his or her relationship with the group, other issues exist such as:
- Does the group as an entity have any ongoing coverage for its liability for the contractor’s acts or omissions?
- What is the source of coverage for non-physician professional staff, both during and following association with the group?
- Are the terms of the various liability insurance policies maintained by independent physicians in compliance with the requirements of the group’s service agreements (e.g., with its hospital)?
- The involvement of a host of insurance companies can create issues under the group’s contract with a hospital or medical facility that may require that any policy be rated at a certain level, or that the policy name the hospital or medical facility as an additional insured or require notice of change or termination. Negotiating issues, such as indemnification obligations, under hospital contracts is a simpler process where there is only one insurance company involved.
- While independent contractors could be covered under one common policy obtained by the group, this could be viewed by the Internal Revenue Service as evidence that the independent contractors were actually employees, particularly where the cost for the insurance was paid by the group.The existence of appropriate Workers Compensation coverage should be confirmed for each person who is treated as an independent contractor. An “employer-employee” relationship is more conducive to assuring compliance with Workers’ Compensation and Unemployment Compensation legal requirements. Having appropriate Workers’ Compensation coverage in place is extremely important in any situation involving a work related injury. It may be possible for a group to provide Workers’ Compensation coverage for independent contractors, or the independent contractors may provide their own coverage. However, confirming the existence of contractor provided coverage may be difficult. A lack of coverage can present the group with a significant financial loss.
If your group uses the services of independent contractor personnel, whether they be health care professionals or other personnel, you should reassess your situation. Given the announced scrutiny that independent contractor status is receiving at both the state and federal level, what may have “worked” or been “under the IRS radar” in the past will not likely continue to do so in the future.
John T. Mulligan is a member of the law firm McDonald Hopkins, LLC, in its Cleveland, Ohio office. McDonald Hopkins has other offices in Chicago, Detroit, Columbus, West Palm Beach, and Dennis, Mass. Mr. Mulligan’s practice focuses on the representation of physicians and physician groups, with a particular focus on the representation of hospital-based groups. He is listed in the “Best Lawyers in America” for health care law. He can be reached at (216) 348-5435 or firstname.lastname@example.org.