By R. Michael Scarano, Jr., Foley Lardner Weissburg & Aronson, Inc., CAPA General Counsel
From the Summer 1991 CAPA Chronicle newsletter of the California Academy of Physician Assistants (also reprinted in the January/February 1994 CAPA Chronicle). Reprinted here with permission of the California Academy of Physician Assistants.
A common question asked by PAs is whether they can structure their relationships with their supervising physicians or the organizations for which they work as independent contractors, rather than as employees. An independent contractor’s wages are not subject to income tax, social security (FICA) or state disability insurance withholding. Although an independent contractor is responsible for paying his own income and social security tax (including the employer’s share, for a total of 15.3 percent of wages), the expense of mandatory disability insurance is avoided. Treating a PA as an independent contractor may also seem desirable to the employer, since this theoretically saves him from having to contribute the employer’s share of social security tax (7.65 percent of wages), pay state and federal unemployment tax, provide workers’ compensation insurance, or provide health insurance and other benefits which the employer may provide to persons classified as “employees.” Often the employer agrees to pass on these savings to the PA/independent contractor in the form of higher wages. Unfortunately, in most cases it is legally inappropriate for a physician or other employer to treat a PA as an independent contractor, and doing so can create substantial risks. For example, even if the PA has paid his/her income taxes, an employer who has erroneously treated a worker as an independent contractor may be liable for an additional payment of approximately two percent of the total compensation paid the worker, as well as interest and penalties in some cases, in the event of audit by the IRS. The employer will also be responsible for unemployment tax payments which should have been made if audited by the state Employment Development Department (EDD). The EDD, which is sometimes alerted by the IRS when it finds a problem, may also assess interest and penalties. Further, if the PA is injured on the job, the employer may be required to pay workers’ compensation benefits plus penalties out of general assets, in the absence of workers’ compensation insurance coverage. If the employer does have coverage, the carrier may sue the employer for back premiums based on the PA’s 1099 income. While the penalties under all of these laws are primarily directed at employers, they can also have a negative impact on the PA, even if the PA has paid his/her own taxes — e.g., the employer may seek to recoup penalties or other payments it is required to make from the PA. Although the employer’s right to do so may be limited if the PA has paid his/her own taxes, at a minimum an audit of his/her employer can have a negative impact on the entire practice and the relationship between the parties.
Two Attorneys’ Opinions on PAs and Independent Contracting
Can a PA Be an Independent Contractor?
Appendix G 93
Two Attorneys’ Opinions on PAs and Independent Contracting Appendix G 94
Under the laws governing the various withholding and benefit programs discussed above, an employer does not have unfettered discretion in determining whether to classify a worker as an “employee” or as an “independent contractor.” Although various laws provide several different definitions of “employee,” as a general rule an “employee” is a person who is subject to the direction and control of the employer not only as to the results of the work, but also as to the details and means by which the work is accomplished. In contrast, a true “independent contractor” is an individual who is hired to perform a particular task or achieve a specific result while working more or less independently. In determining whether an individual should be treated as an “employee,” the IRS and other relevant agencies may examine a variety of factors, including but not limited to whether the workers’ services are integrated into the employer’s business; whether the employer hires, supervises, or pays any assistants required by the worker; whether the employer establishes the worker’s hours; whether the worker performs work on the employer’s premises and uses employer’s equipment or tools; whether the worker submits regular oral or written reports to the employer; and whether the employer pays the worker’s business expenses. One additional factor which has recently become particularly significant is whether the worker performs services for only a single employer; under a new “matching audit” program recently instituted by the IRS, it will audit any employer from whom an independent contractor reports all of his/her wage income. If any one or more of the other factors listed above exist, the IRS may claim that the individual should have been treated as an employee and impose back taxes, as well as interest and penalties in some cases. This may also lead to an EDD audit, resulting in additional liability. As a general rule, the relationship between a supervising physician and his/her PA in a private practice setting fits clearly within the definition of an “employee.” Under the Physician Assistant Practice Act, a supervising physician has both the right and the duty to control the PA’s clinical activities. The fact that a PA may practice somewhat independently does not necessarily make a difference; employees in many settings work independently, subject to the right of the employer to intervene and assert control over his/her activities. It is the right of the employer to do so, which is significant for purposes of these rules. In addition, many of the secondary factors discussed above will point in the direction of employee status in a typical private practice setting. Although under some circumstances or certain non-traditional practice settings a PA may arguably be treated as an independent contractor, each case must be considered individually in light of the overall facts and circumstances.
The “Safe Harbor” Rule In some cases where the facts and circumstances may point toward employee status, a “safe harbor” rule exists which permits an employer to nevertheless treat an individual as an “independent contractor” for income tax purposes only if certain conditions are met. To fall within the safe harbor, (1) the employer must have never treated the worker as an employee in the past; (2) the employer must have filed all federal tax returns on a basis consistent with the designation of the worker as an independent contractor; (3) the employer must have never
Conclusion In summary, PAs and their supervising physicians (or other employers) should think twice before entering into an independent contractor relationship, especially in a traditional private practice setting. Before changing an existing independent contractor relationship to an employer-employee relationship, however, PAs and their employers — particularly in less traditional settings — should consider whether they may be able to fit under the safe harbor rule for tax purposes. Changing the relationship would preclude them from satisfying the first two of the four safe harbor criteria (i.e., a continuous and unbroken practice of independent contractor treatment), thereby destroying their ability to rely on the rule for the past as well as present years in the event of audit. Therefore, it may be wise to consult with a qualified accountant or attorney before making this change.
Determination of Independent Contractor Status: One Attorney’s Opinion on Two Legal Tests in Michigan The following information is extracted from a November 1990 opinion provided by an attorney to a nonprofit clinic in Michigan on the legal question of using independently contracted physicians and physician assistants to staff their facility. It is important to note that this opinion is based on actions by Michigan courts and, therefore, may not necessarily be applicable in other states. It also is worth noting that this opinion does not look at the federal IRS guidelines on independent contracting. A review of case law in Michigan reveals two types of tests for determining whether an independent contractor relationship exists: the “control test” and the “economic reality test.” The control test originates under common law and was adopted by the courts to determine whether a person was a servant (employee) of a master (employer). If the master-servant relationship was found to exist, then the master could be held liable for the acts of the servant under the doctrine of respondeat superior.
Two Attorneys’ Opinions on PAs and Independent Contracting
treated any other individual holding a substantially similar position as an employee; and (4) the employer must have a reasonable basis for treating the individual as an independent contractor. The last test may be met, for example, if the employer can demonstrate a long-standing and generally recognized practice of a significant segment of the industry to treat a particular class of workers as independent contractors. Since each and every one of these tests must be satisfied in order for the safe harbor rule to apply, it may be of limited use to PAs in private practice settings. Moreover, even if it applies, it only provides protection from liability under the income tax withholding laws; problems may nevertheless occur under the other laws discussed above.
Appendix G 95
Two Attorneys’ Opinions on PAs and Independent Contracting Appendix G 96
This generally is known as vicarious liability. Thus, this test could be used to determine whether, for example, a clinic is liable for the negligent acts of a doctor who injures a patient in the course of treatment while the patient is at the clinic, or whether the doctor is operating independently under his or her contract with the clinic. The question would be: Is the relationship such that the clinic becomes liable for the physician’s actions? The answer lies in whether the master (i.e., the clinic) controlled the servant (the physician) to an extent that the master is vicariously liable for the acts of the servant. In doing so, a court would look at degree of direction and control imposed on the servant by the master. If sufficient control were found, presumably liability of the master would follow. Each case is reviewed on its own facts, although there may be general patterns that are followed in making such determinations. The courts have said that the control test is not intended to define independent contractor status, but, in reality, it appears that courts do use this test to determine whether a certain type of relationship exists that would impose liability on the master or employer. Presumably, if the person who is the servant or employee is found to be contracted independently, then the clinic would not be found vicariously liable. The economic reality test is used primarily in workers’ compensation cases to determine whether a person is an employee and, therefore, is eligible for workers’ compensation benefits through the alleged employer. This test looks at the task performed and whether or not it is part of a larger common task and a contribution to the accomplishment of a common objective. The test looks at workers to determine whether or not their work can be characterized as part of the integrative unit of production and whether the work done, in its essence, follows the usual path of an employee. In applying the economic reality test, control is just one factor the courts look at. The ultimate question is whether or not the relationship is that of employer and employee and, therefore, is protected under the Workers’ Compensation Act. There are four key factors in applying the test: (1) control of the worker’s duties; (2) payment of wages; (3) the right to hire, fire, and discipline, and (4) whether performance of the duties is an integral part of the employer’s business toward the accomplishment of a common goal. The court views these elements in total, not in any order of priority. In addressing the clinic, the attorney wrote: I think if you attempt an independent contractor relationship with these parties, you must clearly keep in mind the test used will depend upon the particular type of case presented. It may be that such a relationship would be found to exist for tax consequences but not for workman’s compensation purposes, or that it exists for workman’s compensation purposes but not for liability to third parties. In any agreement created for purposes of establishing such a relationship, I would strongly recommend the nature of the duties imposed on the physicians or physician assistants be stated only in general terms since the more detailed the list and the greater the instruction given about performance demanded, the more
Thus, it is my opinion that it may be somewhat difficult to craft an agreement which will meet the requirements of the law in regard to the relationship sought to be obtained. I do not necessarily think it is impossible to accomplish this but all parties should be aware of the limitations of the situation.
Two Attorneys’ Opinions on PAs and Independent Contracting
likely a court would find an employee relationship to exist or a master-servant relationship to exist. Undoubtedly, the problem in the type of circumstance you are faced with will be the continual and ongoing relationship with the physician or physician assistant. Normally, independent contractor relationships exist in situations where the contractor performs one task or job for the contracting party for a sum specified and, upon completion, the party is paid and the relationship ends. The result of the work is contracted for and the means of accomplishing the result is left entirely to the independent contractor. This of course will not be true in your case. Not only will the physician or physician assistant be on the premises every day, they will be paid periodically, their performances reviewed periodically, and at least generally will be advised on the expectations of [the clinic].
Appendix G 97