Should You Be An Employee Or A 1099 Contractor?

Andrea (00:04):
Well, hi there. I am Andrea Watkins, and if you're listening to this while juggling three patient calls, checking in a couple patients, taking a payment, selling skincare, and trying to catch your doctor in between procedures, you might be working in an aesthetic practice.

Blake (00:18):
And I'm Blake Lucas and this is Practiceland. This is not Your doctor's podcast.

Eva (00:26):
Welcome back to Practiceland. I'm Eva Sheie. Thank you for listening. We hope your year is off to a great start. I'm going to apologize in advance for my voice today. I caught the thing that's going around everywhere aware, and I know that you all love money related episodes the most, and I think you might recall that we did a marketing series a while back called "This episode is worth millions of Dollars". Today's episode could probably have the same title because how often do we get to get free legal advice from an expert attorney in aesthetics? So I'm going to try to make the most of this for you audience and if something in today's conversation makes you think, oh no, that's us. We want your questions at practicelandpodcast.com and we can certainly bring Evan back to answer them. My guest today is Evan Sampson. He is from Post Shell, a law firm in Mount Laurel, New Jersey specializing in healthcare matters. Evan, tell us about yourself and tell us where Mount Laurel, New Jersey actually is.

Evan (01:29):
Great, I mean, thank you so much for having me. Before I begin, I do have to make a disclosure. This conversation does not actually constitute legal advice.

Eva (01:39):
Oh no.

Evan (01:39):
And it doesn't create an attorney-client relationship with you or any of your listeners, but if they have any questions about specific predicaments, they're happy to contact me and I can potentially help them with any of their questions.

Eva (01:56):
They say a lawyer's going to lawyer.

Evan (01:58):
Lawyer's going to lawyer. This is for educational purposes only, but I'm hoping I can help as many people as I can. And again, if anybody has any specific questions, they can reach out to me

Eva (02:11):
Or we can put it on another episode of the podcast too.

Evan (02:15):
A secret podcast.

Eva (02:17):
That too. Yeah, it's possible.

Evan (02:20):
Okay.

Eva (02:21):
So we went through and we kind of gathered all together the most common legal issues that come up in practices and I talk to people every day and even in my own work, this comes up with myself and with people that I work with. So this first scenario is very common. I'm going to paint a picture here for you. So let's say someone's been working in a meds spa for a year, probably a provider. They're scheduled every Tuesday and Thursday. They use all the products, all the infrastructure of the practice, and they follow all the practice's protocols, but they're getting a 1099, taxes aren't taken out of their paycheck. What's going on there?

Evan (03:04):
So based on the hypothetical that you gave me, it sounds like that person, that individual got onboarded as a 1099 independent contractor when they joined the practice. Now a 1099 independent contractor is treated differently for tax purposes than a W2 employee. Beyond the tax implications, I mean there are a whole series of laws that apply that distinguish between the two people and fundamentally what we're talking about between an independent contractor and an employee, is that particular independent contractor running a separate business? Is that a separate business that's engaging with that business and that a separate business can include a sole proprietorship, right? Someone, but based on your hypothetical, it sounds like that person got onboarded as an independent contractor. They're treated for tax purposes to be a separate business and there'll be certain tax liabilities. There might be other legal responsibilities like workers' comp insurance, and these are very complicated issues. I'm happy to get into further details on them.

Eva (04:19):
How would we know, I think one of the challenges is did hypothetical, let's say they're an injector, come in and say, I want to be an independent contractor and I have my own patient base and I have my own business and I'm coming to you and I'm bringing my services to the table on my terms versus being told you're going to be a 10 99 independent contractor. I think there's a big distinction there as the injector or the esthetician maybe that's doing that.

Evan (04:52):
So it's a really great question and it's complicated. So there can be benefits or at least perceived benefits from both the 10 99 or the individual, the injector or the aesthetician or the nurse or a nurse practitioner. And there could be perceived benefits from the business standpoint. So as an independent contractor, a lot of people want to be an independent contractor that I've seen in my practice because they can deduct things like travel to and from the office or a home office that they can pay rent. So there are potentially perceived financial benefits for doing that. Same thing on the, I'm going to say employer for lack of a better term, the business side, the practice side, the employer side. When an employer onboards an individual as an independent contractor, they shift a lot of the tax burden to that independent contractor. They also may not necessarily have to pay for workers' comp insurance or health benefits or other kinds of employee benefits.

(06:01):
So there definitely are financial interests on both sides and it might be as simple as accounting right at 1099 if they're working in multiple practices can have all of their income flow to a single LLC or a single corporation and it might just be easier for bookkeeping. So that's something that might make their lives easier or may not actually relate to any tax purpose. What I'll say is one of the weird things about this particular area of the law is that it may not be up to the two parties to the contractor of decide whether someone's an independent contractor or whether someone's an employee. That's really up to the IRS or a state government to decide, right? Right. The IRS uses a very complicated multifactor test to determine whether someone's an independent contractor or an employee. And even if the two parties try to meet that test and even document an independent contractor agreement, which has clear terms, the IRS might feel differently. So that's an issue I see up crop up all the time.

Eva (07:03):
Is it different in every state?

Evan (07:05):
It is different in every state. So the IRS is obviously a federal test that would apply to everybody, but different states have different rules. I mean, what I've seen over the past few years are these workers' comp audits. So like I said before, a business or practice, an employer may want to onboard an individual as a 1099 so they don't have to pay workers' comp insurance. 49 out of 50 states require employers to maintain workers' comp insurance for their employees and sometimes there'll be state auditors that come to a practice check on this and find that if all of the providers, your nurses, your nurse practitioners, even an estheticians are paid as 1099, the state auditors may find you violated the independent contractor rules and that you're required to maintain workers' comp insurance for these misclassified employees.

Eva (08:03):
Which state doesn't require it?

Evan (08:04):
Texas.

Eva (08:06):
So if you're not in Texas and you're an independent contractor, are you required to have your own workers' comp insurance for yourself?

Evan (08:14):
Great question. It depends on state law. Sometimes there are exemptions. Usually the rule is if you have employees, if you're required to maintain workers' comp insurance,

Eva (08:26):
Is it expensive? Just out of curiosity,

Evan (08:28):
I don't think it's too expensive. But again, you're protecting your business from claims of employee injuries. This is what blows my mind about Texas.

Eva (08:40):
Why wouldn't you want to have it?

Evan (08:41):
Exactly. I mean in medical aesthetics practices, needlesticks happen all the time and there are even instances where there are dirty needles and it implicates bloodborne pathogen rules at both the federal and state levels. So why would you not want to protect yourself and your practice and your employees by having workers' comp insurance? A lot of these, from my experience, and this is probably the most frequently seen area where I see workers' comp insurance brought up are these needlestick incidents. These worker comp insurance have very strict protocols. They cover costs for needlestick incidents. It's just a benefit for you and your employees to maintain this coverage.

Eva (09:26):
When you're talking to someone who doesn't carry worker's comp insurance, does this come up in Texas all the time? Do you advise people that even though it's not required, you should definitely get it?

Evan (09:37):
Luckily enough, the workers' comp requirement in Texas, when I've represented clients in other states, it's never an issue because everybody maintains workers' comp insurance. I don't think I've ever had a client in Texas who didn't cover workman's comp or where this was an issue, but again, I would always recommend it for anybody. The issue obviously, where it does come up is where someone's onboard. As an independent contractor, I tend to play it safe. I mean, just as an attorney, I tend to see the instances where things go wrong more often than people do. So I always recommend onboarding, especially healthcare providers or anybody who's going to be treating patients as employees. Just because it's cleaner, it's easier. You avoid mitigate risk around this issue and a whole bunch of other issues. So I mean one example which I've never actually seen in my practice, but if you onboard someone as an independent contractor, let's say it's a doctor, so they're the most trained person. They're coming in, they're doing maybe IV hydration or more invasive procedures, they're onboarded as an independent contractor and they slip and fall in their practice and break their nose. Who's going to cover that, right? I mean in theory, general liability insurance should cover it, but what if they disclaim coverage and they say this person was misclassified, they should have been, this is an employment related injury. Your workers' comp.

Eva (11:15):
Can I give the joke answer though?

Evan (11:17):
Sure.

Eva (11:18):
But they just call their friend who's a facial plastic surgeon and say, I fell and busted my nose.

Evan (11:22):
Okay, Good. Alright. What if they knock out their front teeth? I guess they call their friend who's a dentist, but unfortunately these are the kind of things that I think about all the time, right? Their whole other, the independent contractor versus W2 thing implicates so many different kinds of laws and considerations. Like that slip and fall, OSHA may not apply. OSHA generally doesn't apply to self proprietors. So that doctor, if it's someone, a nurse practitioner or even a registered nurse, they are considered a sole proprietor for the purposes of osha. They wouldn't get the protections that OSHA affords. HIPAA is implicated. HIPAA doesn't distinguish between independent contractors and employees. It has a broader category called workforce members. Do you need a confidentiality, a special confidentiality or a HIPAA workforce confidentiality agreement with someone who's technically an independent contractor or sole proprietor? So it's a complicated subject. I try and cut through a lot of the complexity just by saying, if they're working for you, this is a long-term commitment. They're going to be treating patients just onboard them as an employee just so you don't have to worry about all this stuff. Right.

Eva (12:43):
I think I agree with you and I think the takeaway is probably it's a lot more work for everybody on both sides if you try to make them a 10 99 and you're not really getting away with anything by doing that. That's my sense from what you've explained so far.

Evan (13:02):
Yeah. It just carries too much risks,

Eva (13:04):
Not worth it.

Evan (13:05):
And I always try and take a very practical approach with my clients. I mean, one thing I've heard the argument that there's more buy-in from a person if they get onboarded as an employee. Right. Independent contractors by their very nature are independent.

Eva (13:23):
You can't own me. That's basically the attitude I've been one for my whole life basically.

Evan (13:28):
Exactly.

Eva (13:30):
I totally get the mentality

Evan (13:32):
For your practice owners and maybe that might be a consideration to create a better culture within the practice.

Eva (13:41):
Yeah, makes sense. So just out of curiosity, where does the IRS get you in trouble if you're misclassifying?

Evan (13:51):
So if you're misclassifying employees, it is generally the liability of the employer who's misclassifying. So again, part of onboarding and individuals, an independent contractor is shifting the tax burden if there's an audit and tax audits can come randomly. They can come for specific reasons because some sort of issue is identified and they find a lot of independent contractors who are misclassified. There can be large penalties for a practice.

Eva (14:26):
Have you ever seen it?

Evan (14:27):
I have not seen it personally. I've certainly represented, I'm not a tax attorney, I'm a healthcare attorney, but I have had clients who were audited and the tax auditors did pick up on some of the issues we're probably going to be talking about today. But I did have a colleague who worked at a large multi-site healthcare organization out in California and they would onboard all of their providers as independent contractors. So we're talking about 200 plus providers and they got audited by the IRS and there were heavy penalties levied against the company.

Eva (15:05):
What is heavy? Hundreds of thousands.

Evan (15:08):
Heavy is a lot of money, significantly heavy is a lot of money. I think for any small business owner, which is a lot of my clients, any amount of money is a heavy amount of money. So again, I mean that's why I generally recommend doing these kind of practices of onboarding, especially providers as independent contractors, but it's definitely something worth avoiding and there are more and more people looking at the issue. Like I said, over the past couple of years I've seen these workers comp audits there, other people starting to pay attention to this issue other than just the IRS and state tax authorities.

Eva (15:51):
Can you think of any scenario where it does make sense to be a 1099 working in a med spa or in an aesthetic practice?

Evan (15:59):
Absolutely. I mean, it's common, right? So what does working mean, right? The definition, what does that mean? So what I often see are transition agreements where someone, one person, either my client is either selling a practice or buying a practice and they decide to stay on for three months or six months to help with the transition and then be paid as an independent contractor. So it's short term, they're really not seeing patients, right? They're working on transition services, they're trying to smooth things over and maybe they get brought in on their expertise for some sort of key business consulting reason. You have consultants who help start projects. But I think, again, when we go back to the beginning, what is really the purpose of the relationship? Is there a specific project in mind that this person is helping with? Are they acting as their own business? These are the considerations that need to be asked beyond the 21 point test that the IRS has, right? Is this short term, what's the scope of the engagement? Is this person operating as their own business so it can make sense? Absolutely.

Eva (17:19):
There is a 21 point test. Are you saying that's a thing?

Evan (17:22):
It keeps changing. I believe it is a 21 point test at this point because they just implemented a new test, I think last year or two years ago. So it keeps evolving. Again, all of these rules are different at the state level, so it's complicated. It's tough to stay on top of, but again, this is why, another reason why it might just make sense to onboard people as employees so you just don't have to worry about it.

Eva (17:46):
Agree. There's a couple things, things that I want to add. One being the limit for a 1099. When do you need to issue the actual 1099 form to someone that used to be $600 for, I don't know, decades. It was always $600 on the fringes of the economy. There's places where this comes up all the time in my world. One is I happen to sell a lot of kids' clothes online just because I'm in some groups. My kids wear cute clothes, other moms wear the same cute clothes and we sell the clothes to each other all the time. And there was a really big effort two, three years ago to try to tax all these people doing clothing resale in the fringes of PayPal and Facebook. And it was so stressful because a lot of these people are trying to make ends meet by reselling their kids' clothes and then all of a sudden they have to build a business around it, which is insane.

Evan (18:49):
It is insane. Sometimes a regulator, they find something, right? So what probably happened is someone got in trouble at one time and the regulators catch wind of it. They learn the industry or the practice, they start to go after other people. One thing I always try and talk to my clients about whenever you're evaluating risk, and this is absolutely true in a medical practice or an aesthetics practice, it's routine issues that tend to get you caught. The analogy I use is every risk. It's kind of like speeding. If you go 42 miles per hour in a 25 mile an hour zone once, you're probably not going to get pulled over. But if you're doing it two times a day to work from work every single day of the week, you're probably getting pulled over.

Eva (19:45):
If go 75 down the same hill every day, I'm going to get caught.

Evan (19:50):
Exactly right.

Eva (19:51):
Not saying I did. I did.

Evan (19:59):
Yeah. So just to use a real word, example, maybe you onboard your first provider as a 1099, but everybody after that is just onboarded as a W2 and you grow and grow and grow after years. You sort of grandfather that first person in. Are you going to get in trouble by the IRS? Are you going to get in trouble doing a workman's comp audit? I mean, maybe, but you only have one person there. Like I said before, if you've got 200 plus independent contractors, you're probably getting caught eventually. And certainly the penalties for one provider versus 200 plus providers, I mean those are going to be very different.

Eva (20:39):
And then there's also things, I think there's a few really common things you can't do, especially just coming from tech side. Freelancers are very common in creative spaces, which is where I live in podcasting. You can't tell people when they can work, which that's really uncommon in a medical spa. There's appointments you have to tell people when they're working because patients are there. So if that's one of the tests that's like you're already failing from the start.

Evan (21:16):
If you have a set schedule, you're bringing in somebody, you have a set schedule, you're assigning them, it's going to be hard to make the argument that person's an independent contractor,

Eva (21:24):
Right?

Evan (21:24):
I've always heard the excuse. Well, they bring their own tools. Well, that's one factor. Again, I think fundamentally is that person running their own business. There are clearer examples of this, right? Maybe you used to own the med spa, but you've retired and now all you do is rent out the space and another med spa owner has come in. You're not really a med spa owner anymore. You're a landlord. That's a different business.

Eva (21:55):
I could see the trainer of the injectors who travels around and trains lots of offices. That scenario is not an employee, that's a trainer with their own business as a trainer coming in and out.

Evan (22:07):
Right? That's a different business. That's a person with a defined scope of what the responsibilities are. And that might not be a long-term engagement. That might only be for several months or maybe it's per a

Eva (22:23):
Day.

Evan (22:23):
Yeah, it might be a day or it might be occasionally when an injector is hired. So again, this is a complicated issue. States are going to have their own rules, but fundamentally is that person running their own business?

Eva (22:38):
That's the perfect place to end this topic.

Blake (22:43):
Got a wild customer service story or a sticky patient situation? Send us a message or voicemail. If your tale makes it into our "She did what ?segment, we'll send a thank you gift you'll actually love. Promise no cheap swag here.

Andrea (22:55):
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