INDEPENDENT CONTRACTOR OR EMPLOYEE?  REVISED GUIDELINES EFFECTIVE MARCH 2024

You’ve been in practice for a while, and, happily for you, your business has grown. You are thinking about adding an associate, but you are concerned about the added expense. You know that you will pay less in taxes for a contractual associate than for a salaried employee; you don’t want to provide employee benefits; and you would like to insulate yourself from the associate’s malpractice liability. At the same time, you want full control over your associate’s hours and other conditions of employment. To solve your dilemma, you label the new hire an “independent contractor,” and sit back to admire your business acumen. That is, until the Internal Revenue Service comes calling.

The distinction between a true employee and an independent contractor has significant legal and financial consequences. The Internal Revenue Service (IRS) can hold you liable for hefty back employment taxes, penalties, and interest if you misclassify a worker, and it makes no difference that you have labeled the associate a “contractor” if your business arrangement has the earmarks of true employment. In addition, many state agencies and courts use the same factors outlined by the federal government to determine employee status for other purposes.

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New Rule Effective March 11, 2024

Employers must look to government guidelines to determine whether their workers are true employees or independent contractors.  However, the federal government has revised guidelines multiple times in recent years, On January 10, 2024, the U.S. Department of Labor published the issuance of its final rule[i], Employee or Independent Contractor Classification Under the Fair Labor Standards Act, effective March 11, 2024.

The new rule revises guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA).  The classification is important, because true employee workers are entitled to benefits and other treatment under the FLSA. 

The ICS notes that the new guidelines may not always be clear-cut and that a worker’s job may sometimes have elements of both contractor and employee.  However, because the guidelines have somewhat shifted the analysis, employers should be aware of the changes and review their job classifications.  As any employer, chiropractic physician practice owners should make a good faith effort to apply the most relevant guidance factors to support any job classification.

DOL’s Reasons for the Rule Change

The DOL states as one of its purposes to “reduce the risk that employees are misclassified as independent contractors while providing a consistent approach for businesses that engage with individuals who are in business for themselves.” Therefore, regulators appear to be concerned about the potential for employers to overuse the independent contractor classification when the arrangement actually leans more toward true employment.  For this reason, the ICS recommends that physician practice owners perform a careful reassessment of the work arrangements in their offices.

All prior versions of the independent contractor-employee rule listed multiple factors to consider when determining which classification should be assigned to a particular worker, but the previous rule gave greater weight to two “core factors”—control and opportunity for profit or loss—to make the determination.  The DOL now believes that additional factors may be just as relevant and should be given appropriate weight.  The DOL also cited court precedent holding that that the classification should be made not by two factors, but by the totality of the circumstances, taking into consideration all aspects of the work arrangement.

Final Rule Factors That Distinguish Employee from Independent Contractor

The final rule applies the following six factors to analyze employee or independent contractor status under the FLSA.  The DOL has offered some details for interpretation of each, as noted below:

• Opportunity for profit or loss depending on managerial skill — This factor considers some or all of the following facts: whether the worker determines or can meaningfully negotiate the fee for the work provided; whether the worker accepts or declines jobs or chooses the order or time in which the jobs are performed; whether the worker engages in marketing, advertising, or other efforts to expand business; and whether the worker makes decisions to hire others, purchase materials and equipment, and/or rent space. If a worker has no opportunity for a profit or loss, then this factor suggests that the worker is an employee.
• Investments by the worker and the potential employer — This factor considers whether any investments by a worker are capital or entrepreneurial in nature, which would lean toward independent contractor status.  These investments (such as tools, equipment, or vehicles) would increase the worker’s ability to do different types of or more work, reducing costs, or extending market reach.
• Degree of permanence of the work relationship — This factor weighs in favor of the worker being an employee when the work relationship is indefinite in duration, continuous, or exclusive of work for other employers. However, the worker is more likely an independent contractor when the work relationship is definite in duration, non-exclusive, project-based, or sporadic based on the worker marketing and providing services or labor to multiple entities.
• Nature and degree of control — This factor considers the potential employer’s control, over the performance of the work and the economic aspects of the working relationship. Relevant facts include whether the employer sets the worker’s schedule, supervises the performance of the work, or limits the worker’s ability to work for others. More control by the potential employer favors employee status; more control by the worker favors independent contractor status.
• Extent to which the work performed is an integral part of the potential employer’s business — This factor does not depend on whether any individual worker in particular is an integral part of the business, but rather whether the function he/she performs is an integral part of the business.  If the work is critical, necessary, or central to the potential employer’s principal business, the worker is more likely an employee. This factor weighs in favor of the worker being an independent contractor when the work performed is not critical, necessary, or central to the potential employer’s principal business.
• Skill and initiative — This factor considers whether the worker uses specialized skills to perform the work and whether those skills contribute to business-like initiative. If the worker does not use specialized skills in performing the work or is dependent on training from the potential employer to perform the work, the worker is more likely an employee. This factor can be confusing, because the DOL says that where the worker brings specialized skills to the work relationship, this fact is not itself indicative of independent contractor status because both employees and independent contractors may be skilled workers. It is the worker’s use of those specialized skills in connection with business-like initiative that indicates that the worker is an independent contractor.

The final rule provides details regarding the application of each of these six factors. (Employee or Independent Contractor Classification Under the Fair Labor Standards Act).   Unlike the prior rule, no factor or set of factors among this list of six has a predetermined weight, and the classification should be based on what the DOL calls “a totality-of-the-circumstances economic reality test, where no single factor or group of factors is assigned any predetermined weight.”  DOL also clarifies that not each factor must be present to make a determination whether a worker is economically dependent on a potential employer for work, according to the totality of the circumstances.

Key Takeaway

While understanding that changing regulations can be perplexing, the ICS recommends that physician practice owners conduct a good faith assessment of the new rule’s impact on their business arrangements.  Being able to support the classification of a worker as an employee versus an independent contractor may prove invaluable in the event of a future audit or complaint by a former worker. 

The ICS has observed that more positions have been erroneously misclassified as independent contractor than as an employee.  We recommend that physician employers assess their business objectives and then classify appropriately. In general, it is less risky to characterize your associate as an employee.

You can assume the IRS is in business to enforce collections to the maximum extent. It is not illegal to strive to increase earnings, but taking on an associate should be done in a way where the business agreement matches the amount of control you retain over the associate. If you truly want control, and you want to know you are in a “safe harbor” for federal law purposes, biting the “employment” bullet is the answer.

[i] The rule is referred to as “the final rule” because it is final at this time under the rulemaking process.  However, subsequent administrations may file revisions to any existing administrative rule.  This article refers to the rule effective March 11, 2024, as “the final rule.”

VIDEO SERIES ON INDEPENDENT CONTRACTORS

Are Your Workers Employees or Independent Contractors?
Should Your Physician Workers Classify As Employees?
Behavioral Controls – IRS Worker Classification
Worker Classification: Financial Control and Relationship