This resource has been prepared by Studebaker Nault, PLLC. It is not a substitute for legal advice or individual analysis of a particular legal matter. Transmission and receipt of this resource does not create an attorney-client relationship.

A common question dental practices confront is whether to classify workers as independent contractors or employees. The question arises, in part, because of various standards employed by government agencies and the courts to assess whether a business should classify an individual as an independent contractor or an employee, and in part due to the desire to broadly categorize workers as independent contractors.

There are several factors for dental practices to consider in determining whether to employ or engage dentists as independent contractors.

Benefits of Hiring an Employee Versus Engaging an Independent Contractor

When a practice employs a dentist, the dentist typically works only for the practice; in contrast, a dentist engaged as an independent contractor may work for more than one practice. The practice is able to train the employee dentist and direct his or her performance in an ongoing employment relationship, and the employee dentist is motivated to contribute to the practice and advance his or her career in the practice.

Despite the advantages of employment, sometimes a dental practice and/or dentist may want to enter into an independent contractor relationship. It is often less costly for a practice to engage an independent contractor because independent contractors do not receive benefits, and a practice is generally not required to withhold income taxes, withhold and pay Social Security and Medicare taxes, or pay unemployment tax on amounts paid to an independent contractor. For the dentist, being an independent contractor may provide greater independence and flexibility, as independent contractors are able to complete their work without supervision and control.

Regardless of the considerations above, it is typically infeasible for practices to properly characterize dentists as independent contractors. Dental practices should evaluate any existing or contemplated independent contractor relationship under Internal Revenue Service (IRS) rules, as well as state governmental regulations and court rulings to ensure proper classification.

Classification of Employees and Independent Contractors by the Government

The IRS has extensive authority regarding the classification of employees and independent contractors. Originally, the IRS utilized a 20-factor test that it considered in determining whether sufficient direction and control is present to establish an employer-employee relationship (Revenue Ruling 87-41, 1987-1 C.B. 296). Subsequently, in recent years, the IRS shifted its analysis to consider three categories of facts that provide evidence of the degree of control and independence between the parties: behavioral, financial, and the relationship of the parties. If the practice has the right to direct and control the work done by the dentist, including when, where, how, and what the dentist will do, then these factors indicate that the practice should consider the dentist an employee. How the parties work together, including whether there is a written contract, benefits provided by the practice, an expectation of providing services indefinitely, and if the dentist’s services are a key aspect of the practice, can demonstrate how the dentist and the practice perceive their relationship to each other. If the practice has the right to control the economic aspects of the dentist’s job, such as paying a regular wage, and restricting the dentist’s ability to provide services elsewhere, it may indicate that a dentist is an employee.

Dental practices must weigh all these factors in determining whether a dentist is an independent contractor or an employee. While there is no set number of factors that determine employee or independent contractor status, if a dentist is working full-time and exclusively for a practice, then the practice will need to treat the dentist as an employee. Language in the agreement indicating that the dentist has exclusive control over dental and clinical decision-making may be helpful; but this type of language is not dispositive. In cases of uncertainty, either the practice or the dentist may request that the IRS officially determine the dentist’s status by submitting Form SS-8; however, it can take up to six months for the IRS to make such a determination.

Courts, as well as other government agencies, such as the Washington Department of Labor and Industries and the Equal Employment Opportunity Commission, employ different tests in assessing whether an individual is an independent contractor or employee.

Risks of Misclassifying Employees as Independent Contractors

Dental practices and dentists should be aware that improper classification of an individual as an independent contractor is an active area of enforcement by state and federal agencies, and failure to properly classify a dentist as an employee can have severe repercussions.

• If it is determined that an individual is in fact an employee, and not an independent contractor, the practice may incur significant penalties and fines, including: payments for industrial insurance premiums, with interest and penalties, to the Washington Department of Labor and Industries; payments for unemployment insurance premiums to the Employment Security Department; and penalties and back payment of Social Security, Medicare taxes, and unemployment taxes for the improperly classified individual.
• If the dentist should have been covered by the practice’s qualified retirement plan as an employee, but he or she was not because of the misclassification, the practice’s plan could be disqualified, and penalties assessed.
• While an independent contractor dentist may have their own professional liability insurance, if a dentist should have been treated as an employee and was not, then the practice’s professional liability insurance may not cover the dentist’s alleged negligence.
• Treating a dentist as an independent contractor may prevent the parties from being able to avail themselves of certain protections under the federal Anti-kickback Statute, 42 U.S.C. § 1320a-7b, and/or the Stark Law, 42 U.S.C. § 1395nn, for bona fide employment arrangements.

Conclusion

There is not one specific test that establishes whether the individual is an independent contractor or employee. Practices classifying individuals as independent contractors should carefully review these relationships to ensure that they properly classify these individuals, and, if necessary, incorporate changes in those relationships to support that classification.