By: Tanya Nardone, Esq.
We want to make our dental practice clients aware that, in most instances, associate dentists do not qualify as independent contractors under federal or state law. We certainly understand that some dental practice employers benefit from treating associate dentists as independent contractors. But, the simple fact that a dental practice may benefit does not justify an incorrect worker classification of an associate dentist.
Why Would A Dental Practice Want To Treat An Associate Dentist As An Independent Contractor?
A dental practice may want to classify an associate dentist as an independent contractor to: (i) avoid the payment of payroll taxes—shifting the tax burden to the associate dentist; (ii) exclude the doctor from certain practice benefits that are only available to practice employees; (iii) avoid the potential of other employment related claims, such as workers’ compensation or unemployment compensation, which can ultimately impact the practice’s workers’ compensation or unemployment compensation ratings; or (iv) avoid the potential exposure of certain law suits, such as age discrimination or sex discrimination, including sexual harassment. For further explanation on the exposure of discrimination law suits, state and federal law allows employees to sue their employers for certain types of discrimination. But, those employers—who hire independent contractors, rather than employees—may avoid exposure for discrimination law suits. The reason they may avoid exposure, is that discrimination laws generally do not provide independent contractors the ability to sue, as they do employees. These incentives and factors, however, do not allow an employing dentist to classify an associate dentist as an independent contractor—if they are not truly independent contractors.
Advising a dentist on the proper worker classification, however, is difficult because the case law and statutory law do not establish a clear-cut rule on the determination of whether a particular worker is an employee or independent contractor. Internal Revenue Code, as an example, defines an employee as: any worker who, under common law, has the status of an employee. How helpful is that explanation?
Factors to Determine Independent Contractor Status
Because there is no clear-cut rule, the Internal Revenue Service (“IRS”) and the courts have developed factors that are examined in relation to the facts and circumstances of each case, to determine the worker classification status. These factors are:
- the degree of control exercised by the employer over the details of the work;
- which party invests in the facilities used in the work;
- the opportunity of the worker for profit or loss;
- whether or not the employer has the right to discharge the worker;
- whether the work is part of the employer’s regular business;
- the permanency of the relationship; and
- the relationship that the parties believe they are creating.
Control Factor Considerations are Key
When examining these factors to determine the worker classification status, there are certain factors that have more weight than others, most importantly including, the control factor. The IRS and the courts scrutinize the working relationship to better understand how much and what type of control is placed on the worker by the employer. The IRS and the courts generally find an employer-employee relationship exists when the employer has the right to (i) control and (ii) direct the worker—not only as to the result of the work but as to the manner in which that result is accomplished. It is also important to distinguish between the legal test and the factors determining proper classification. The legal test and inquiry is whether the relevant employer has the right to control the manner in which the work is performed. This is different than the need to control. The right to control does not have to be exercised, it just has to exist for there to be an employer-employee relationship. This is a very important distinction.
Case Examples Analyzing the Factors
In preparing this article, Nardone Limited reviewed cases and certain IRS publications that examined worker classification issues in the dental industry. In one particular Technical Advice Memorandum, as an example, the IRS analyzed an associate dentist’s relationship with the dental practice employer. The IRS determined that the associate dentist was an employee, not an independent contractor. The relevant factors that the Service looked at included whether the dentist: (i) set their own fee schedule; (ii) determined their own office hours and schedule; (iii) handled HR issues including hiring and firing; (iv) directed staff and planned their own patient treatment; (v) ordered supplies separately; (vi) consulted and referred to other dentists as they deemed appropriate; (vii) separately determined how to handle patients that did not pay; (viii) maintained their own patient records separately from the practice; (ix) paid their own entertainment and travel expenses; (x) paid for their own malpractice insurance and continuing education costs; and (xi) risked the possibility of lost profits, which were based exclusively upon the compensation received from each dentist’s patients. The IRS concluded that many of these factors supported a finding that the employer had control over the employee. Thus, the IRS ruled that the associate dentist was an employee.
Now, we are not saying that every case requires an associate dentist to be treated as an employee. As an example, there are specialists that will definitely qualify as independent contractors. Rather, what we are saying is that, in most instances, associate dentists qualify as employees. Thus, careful scrutiny is required based upon the relevant facts and circumstances of each particular case regarding a practice choosing to treat an associate dentist as an independent contractor.
Nardone Limited Practice Note: It is also interesting to note that many dental practices attempt to hire dental hygienists as independent contractors, rather than employees. But, for federal tax purposes and state tax purposes, including unemployment compensation and workers’ compensation, dental hygienists are not independent contractors. This is very clear and there is no gray area here. The simple fact is that, for state law purposes, dental hygienists work under the supervision of the licensed dentist. Thus, the control remains with the dentist, not the dental hygienist.
If you are considering classifying an associate—or another individual to perform work for your practice—as an independent contractor—remember to consult with a tax professional that has experience in this area to ensure the worker is properly classified.