June 29, 2019
Independent Contractor or Employee: What’s the Difference?
By: William S. Barrett, Esq. and Casey Gocel, Esq., LL.M.
It's a vexing question for practice owners: How do you classify a potential new veterinarian who is joining your practice? Is the veterinarian an independent contractor or an employee?
The misclassification of an employee as an independent contractor can result in serious financial ramifications, including taxes, fines, and penalties from both state and federal agencies.
What is an independent contractor?
Generally, veterinarians are independent contractors if they have control over the number of patients they see and their work schedule. They are not independent contractors if they perform services that can be controlled by the practice.
Practices often classify veterinarians as independent contractors to avoid having to comply with state and federal withholding requirements and payroll taxes. The practice simply issues 1099s to the veterinarian at the end of each year, and the veterinarians are responsible for reporting their income, which is subject to self-employment tax.
What is an employee?
If the practice has control over the veterinarians' patient load and schedule, they are employees of the practice. Employees are supervised by the practice and may be entitled to certain benefits and protections under state and federal laws. For instance, the practice is responsible for withholding a portion of employees' earnings for tax purposes.
4 classification factors
Independent contractors have complete autonomy over their work lives, whereas employees must answer to and abide by their employers. State and federal agencies consider four primary factors when determining if a veterinarian is an employee or an independent contractor.
The first factor is who supervises the veterinarian. There are four questions to be answered:
This factor concerns a veterinarian’s schedule and hours:
3. Benefits and insurance
This category focuses on insurance, healthcare coverage, and more:
4. Payment and expenses
The following five questions can sometimes be contentious, so it's best to spell them out clearly:
If an agency, such as a state department of labor or the U.S. Internal Revenue Service, audits a practice and finds that the practice has misclassified a veterinarian as an independent contractor, the consequences of a misclassification can be severe. The agency will likely seek payment of unpaid employment, disability, and Social Security taxes, along with additional interest and penalties. This could potentially cost the practice millions of dollars.
In addition, the misclassified veterinarian may be retroactively entitled to insurance coverage and other benefits that should have been offered by the practice if the veterinarian had been properly classified as an employee. If the veterinarian is deemed to be a nonexempt employee and worked more than 40 hours in any given week, the practice will also be responsible for back payment of overtime.
What can a practice do to protect itself?
The only fail-safe way to survive an audit is to classify veterinarian and staff in compliance with the criteria established by federal and state laws. Although this list is not exhaustive or foolproof, it is a start for identifying the best practices for maintaining classification as independent contractors:
“Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.”
Compliance with a well-crafted independent contractor agreement is the best defense in a reclassification audit.
William Barrett, Esq., is the CEO of Mandelbaum Salsburg, a law firm in Roseland, NJ.Casey Gocel, Esq., LL.M. is a member in Mandelbaum Salsburg's corporate and professional practice transitions groups.