The Risky Business of Paying Physicians as Contractors

California Ruling Has Contract Consequences

Both small and large practices often hire physicians as independent contractors—sometimes to fill a temporary need, and sometimes to be able to have another physician in their practice without incurring all the expenses and commitments of having another full-time employee.

Earlier this year, the California employment law landscape shifted in a way that is sure to affect all California business owners. The California Supreme Court, in its Dynamex Operations West v. Superior Court decision, created a new legal test for determining whether your licensed providers should be paid as independent contractors or employees. Before writing this off as legal “pop culture,” it is important to understand the direct consequences this ruling has for healthcare practices in particular.

How a principal company classifies and pays a service provider affects both employers and employees alike. The classification of a service provider as an independent contractor, generally seen as beneficial for the company’s bottom line, strips the protections a service provider would otherwise enjoy if classified as an employee. For example, independent contractors are not eligible for such benefits as participation in retirement plans, paid time off, or health insurance, and they must pay their own expenses, such as malpractice insurance.

Given this push and pull between the service provider and principal company, it comes as no surprise that there have been a number of lawsuits over the years brought by independent contractors who claim they were misclassified as employees, resulting in substantial penalties against the company for failure to follow overtime and meal and rest-break laws, state and federal Social Security and payroll tax requirements, workers’ compensation insurance requirements, and unemployment insurance requirements.

In addition to such lawsuits, companies face fines by the state of up to $25,000 per misclassification. Generally speaking, independent contractors cannot bring claims for discrimination or harassment and do not enjoy the protections afforded by leave laws, such as pregnancy disability leave and family and medical leave.

Applying the ‘ABC’ Test to Physicians

The Dynamex ruling makes these results even more likely. For the last 30 years or so, courts have used the Borello control test, a multifactor test applied on a more subjective, case-by-case basis to determine whether a service provider was properly classified.

In its recent ruling, the California Supreme Court adopted the new, more objective and simplified “ABC” test. There’s now a legal presumption that all service providers are employees, and the burden of proof is on companies to establish that they have properly classified a service provider as an independent contractor. To meet this burden under the ABC test, the principal company must establish all of the following:

1. The service provider is free from the control and direction of the company in the performance of his or her services, by the terms of a written contract and in actuality; and
2. The service provider performs services that are outside the usual scope of the company’s business; and
3. The service provider is customarily engaged in an independently established trade, occupation, or business.

How the Ruling Affects Your Practice

Healthcare practices, in particular, customarily engage the services of licensed physicians and other healthcare providers as independent contractors. However, as the old adage notes: Just because everyone else is doing it does not necessarily make it legal. This seems especially true now under the more demanding test. Under the new ABC test, classifying licensed service providers as independent contractors is problematic because healthcare practices in such situations will often be unlikely to establish part A and part B.

Part A of the test requires the practice to prove that it is not directing or controlling the licensed provider in the rendering of his or her services. This factor was one of the many factors of the old Borello test. Like the Borello test, a court would determine various facts, such as whether the healthcare practice provides the service provider with a facility; professional supplies; equipment; guidelines on how to perform the services; and administrative services, such as scheduling patient visits. The presence of any of these factors has historically indicated substantial control of the service provider by the healthcare practice and would be indicative of an employer-employee relationship.

Part B of the test requires the healthcare practice to prove that the licensed provider it engaged provides services outside the usual scope of services of the practice. For obvious reasons, this will be nearly impossible in the case of a healthcare practice that engages a doctor, because both practitioners render medical services.

It is possible that a court deems all providers to be engaged in the same ‘business’ even when the providers have different specialties or licenses.

An argument can be made that a medical specialist in one area who engages a medical specialist in another meets this test because the services wouldn’t necessarily be in the usual course of business, but this determination ultimately depends on how narrowly or broadly a court interprets this factor. In other words, it is possible that a court deems all providers to be engaged in the same “business” even when the providers have different specialties or licenses. Until enough case precedent has been established here, a healthcare practice runs a risk when it engages providers as independent contractors.

At a minimum, a true independent contractor must be incorporated and must provide services elsewhere. Thus, a healthcare practice could most plausibly establish part C, because many licensed healthcare providers render services in multiple practices and sometimes even have their own practice simultaneously. These factors certainly support an independent contractor classification, but establishing just one—or even two—factors still fails the new test, which requires all three standards to be met. This may prove especially problematic when it comes to locum tenens providers.

Making Sure Proper Classification Is Used

Practices that utilize independent contractors should consult with their legal counsel to ensure they have properly classified all of their providers. This is especially true for practices that regularly utilize locum tenens physicians. This is because the law does not presently distinguish between locum tenens and other types of independent contractors.

At present, the practical effects of this new ruling remain to be seen. Even if independent contractors must be reclassified as employees, many physicians, after transitioning to employee status, may already meet the professional exemption, which eliminates the need for the healthcare practice to follow overtime and break requirements if certain conditions are met. Practices that reclassify contractors as employees may be able to classify these employees as “part-time,” which could make them ineligible for certain types of benefits, such as retirement, medical insurance, and paid vacation, among others.

For example, a practice may have all of the following: (1) a retirement plan that requires an employee to work 1000 hours per year to participate in the plan; (2) a health insurance policy that requires that the employee works 30 hours per week to participate; and (3) a handbook that provides that only full-time employees are eligible for paid vacation. A physician who only works 15 hours per week for this employer would not be eligible for health insurance, retirement, or paid vacation.

Furthermore, in this decision, the court applies the new ABC test to employer wage requirements, but does not explicitly apply it to employer requirements related to workers’ compensation and payroll tax requirements, both of which incorporate their own definitions of “employee” and “independent contractor.”

Because of the uncertain practical effect of this new test, the surest way to mitigate any legal exposure in your practice is to classify your service providers as employees and comply with all employment requirements. Our hope is that as time goes on, the courts or the legislature will provide more clarity as to how to apply the new ABC test.

As a final reminder: If you own a healthcare practice and engage service providers, please remember that whether you classify those providers as independent contractors or employees, healthcare fraud and abuse laws encourage your service relationship to be set forth in a written, compliant contract.

https://www.medscape.com/viewarticle/905628_1