The initial review of ICAs in medicine and medical spas focuses on the Internal Revenue Service (IRS) guidelines. In recent years, the IRS has taken a stronger position in determining that many agreements do not qualify as an ICA. The ramifications of an agreement being disqualified as an ICA are severe. The hiring entity will be required to pay significant payroll taxes and the contractor will lose many deductions that would have been allowed in an ICA. The IRS is thereby incentivized to disallow an independent contractor status. Blatant abuse of the IRS guidelines may result in additional civil and criminal penalties.
The central element is the amount of “control” that the entity has over the “hired” medical personnel (contractor). In medicine this is challenging since most medical facilities and practices have procedures, protocols and policies that need to be consistently followed by all medical personnel. This assures continuity of care for patients. It also creates a nightmare in drafting an ICA that does not appear to have too much control over the contractor. It does not help that contractors need to have set schedules for patient scheduling and proper coverage of office hours. On-call provisions have also proven problematic in drafting an ICA. As you can see, it will take more than calling an agreement an “ICA” for it to be considered as such.
Elements of “control” would be the manner in which the services are performed, the hours of work, uniforms, materials being utilized etc. So for example, if a practice mandates that a medical provider utilize Juvéderm as a filler of choice, this would be one indication that the relationship is one of employment as it illustrates “control” by the practice over the medical provider. Another example of “control” would be if a hiring practice delegates any managerial or personnel supervision upon the contracted medical provider.
Medical benefits, pension, regular bonuses, medical liability insurance and paid Continuing Medical Education (CME) are all additional elements or variables that might lead someone to conclude that there is an employment relationship versus one of independent contractor.
Medical liability insurance is a particularly tricky area since the practice will typically receive a substantial group discount based upon claims history and number of providers. However, it would be another indication that there is an employment situation if the practice provided coverage for the contractor even if the contractor were to reimburse the practice and functionally pay the premium. Additionally, an insurer may deny coverage for an incident occurring during the care provided by an independent contractor. Never, indicate to an insurer that an independent contractor is an employee. A sound practice is to send them a copy of all employment and independent contractor agreements as part of the renewal process. The independent contractor should be required to provide his or her own professional negligence policy and be certain that the hiring practice is included as an additional loss payee/insured. This policy will be more costly than it would be if provided for and by the practice, but this is the more prudent approach. Naturally, it may be necessary to “gross up” the contractor for the cost of the policy. However, I would not recommend mentioning this in the ICA as it may appear that you are mutually attempting to avert the guidelines for an independent contractor. The better approach would be to determine the cost of the coverage and include it in the base compensation and acknowledge in the ICA that the contractor is required to obtain his or her professional negligence policy, pay for it and include the practice and hiring and/or supervising physician as additional loss payees/insureds.
In the event that a prospective contractor indicates that he or she cannot obtain professional negligence insurance, consider this one of those “red flags” that you should learn to recognize. Several years ago, there was tremendous difficulty obtaining professional medical liability insurance particularly in certain specialties (OB/GYN for example). However, today, there is little difficulty unless a contractor has a significant loss history.
Another prudent approach is to indicate in the agreement that the medical practice has policies, procedures and protocols that must be followed for best patient care. This is particularly important in the medical spa arena. The ICA should also include an acknowledgment that the practice has certain hours that it is open for patient care and that medical providers are required to perform services during these hours. This will enable the agreement to provide legitimate business and medical reasons for what would otherwise appear to be “control”.
In most employment situations, the IRS has between 17 and 24 elements (depending upon the industry) that it will consider in determining whether an employment scenario is an independent contractor one. Many areas of business now have their own variables that the IRS employees within that industry. Real estate and many sales positions have clear variables that would be addressed in an ICA. There are no specific variables yet for medical agreements.
The IRS also looks at the type and nature of the agreement to aid in the determination of whether an arrangement qualifies as an independent contractor relationship. A practical example can give some guidance. In medicine, a physician employed as an independent contractor by a medical practice to perform cosmetic procedures while maintaining his or her own independent office would clearly be appropriate for an ICA. However, a physician employing medical personnel for his or her own practice to perform cosmetic procedures under an ICA may be subject to review. The reason is that this latter scenario is one in which the medical personnel performing the cosmetic procedures would typically and historically be an employee. There is a higher degree of control.
Independent Contractor Agreements are very useful in medicine today. In situations in which physicians are either hiring or being hired by a practice, care must be utilized to limit the amount of “control” in which the hiring practice is exerting on the proposed contractor. Careful attention must also be given to the historical nature of a proposed relationship. If it is typically and historically one of employer/employee then additional care must be provided on the ICA to avoid an unfavorable determination on the status of the relationship.
Independent Contractor Agreements are particularly troublesome in situations in which a physician, medical practice or non-medical business entity is “hiring” a medical provider to perform additional services within a practice or even more problematically, another business entity in which the “hiring” physician is supervising such medical personnel. There is an inherent appearance that the hiring entity is exercising control over the contractor and the actual type and nature of agreement is more often than not legally unsupportable.