Many medical practices and health care services businesses confront circumstances in their business model that justify unique and flexible arrangements with physicians to meet healthcare delivery needs (e.g. call coverage). Unique situations for health care delivery models lead to creative employment situations that may prompt evaluation of whether treatment of physicians as independent contractors (versus employees) makes business and financial sense. Too often, this issue is evaluated short shrift, however, leaving the owners of a medical practice unknowingly exposed to serious financial risks that could have been avoided.
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As with many legal considerations, factual details matter. Therefore, each situation should be examined independently giving due regard to specific facts, rather than relying upon general legal notions one has heard. Each medical practice employer’s situation is inherently different to some degree. Given the fact driven analysis required, what one practice does may not be reliable for another practice. Therefore, medical practice owners and decision makers should not defer too much to what is heard about what others do; others may be wrong. With regard to the question of whether a contracted physician can be properly treated as 1099 versus W2, it is best for a medical practice to consult with its law firm and permit the law firm to fully evaluate the details.
Labeling a contract between a physician and a medical practice to include the words “independent contractor” has little (virtually nothing) to do with the required legal analysis. For the classification question, labels have little bearing upon the issue; rather, facts and substance are determinative. Indeed, in the event of an audit, the Internal Revenue Service relies upon 20 factors to evaluate whether it will deem a contracted physician to be an employee versus an independent contractor. While each of those factors is (apparently) important to the IRS’ legal analysis, the most important factor, broadly speaking, appears to be this one: control. Most of the time, a medical practice will (for business, legal and administrative reasons) necessarily have significant control over most aspects of a contracted physician with little independence left for the physicians, save clinical judgment. The independence of a physician in the realm of clinical judgment will be required by state law (e.g., state medical practice acts) and most often is insufficient, standing alone, to establish an independent contractor relationship.
A proper legal evaluation of a medical practice’s classification of a physician must therefore largely rest upon the continuum of control. On one end of the continuum, the physician comes and goes and does as he/she pleases (rare); at the other end, the medical practice dictates everything (other than clinical judgment). More control will tend to dictate “W2” treatment, while very little control may support “1099” treatment. From a IRS/tax standpoint, the “safest” route will usually be “W2” treatment. But administrative and financial reasons may support a 1099 classification in the eyes of the owners. Most medical practices will have a hurdle to clear to prove that a contracted physician is properly classified as an independent contractor.
So why care?
Because the circumstances under which a physician can be properly classified as independent contractor are limited, medical practices and other health care services businesses and providers should be wary of the serious adverse financial consequences that can attend misclassification. While an improper classification of physicians as independent contractors may not seem to matter much when the decision is made (of course, the medical practice may or may not “get caught”), the adverse financial risks include:
- IRS-related consequences: back taxes, fees and penalties.
- Regulatory consequences: unlike employers in other industries, medical practices and other health care businesses, face unique regulatory risks that can be implicated by how physicians are classified. For example, a medical practice may not be able to rely upon the bona fide employment exception to Stark law if its physicians are classified as independent contractors. Stark law violations can have back-breaking financial consequences and other risks (g., exclusion from Medicare). Stark Law and other regulatory considerations should be properly evaluated.
- Malpractice insurance: whether classification of physicians as “independent contractors” jeopardizes or otherwise affects coverage under a malpractice insurance policy requires evaluation with a qualified agent and, perhaps, legal analysis of the policy itself.
- Employment law: physicians who are excluded from certain benefits based on an independent contractor classification may later challenge the classification and seek recovery of such benefits.
Consequently, the decision of classification should not be made lightly.
We advise and represent hospitals, medical practices, physicians and other healthcare providers. If you have questions about this post, contact us at (404) 685-1662 (Atlanta) or (706) 722-7886 (Augusta), or by email, email@example.com.
*Disclaimer: Thoughts shared here do not constitute legal advice. Please consult with an attorney to discuss your legal issue.
Source: Internal Revenue Service