Focus on Misclassification of Workers as Independent Contractors in the Health Care Industry: Are You Ready to be Audited?

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The federal government wants to put an end to misclassification of workers as independent contractors and has the health care industry in its sights. Earlier this year, the United States Department of Labor (DOL) and the Treasury Department announced an interagency "Misclassification Initiative." The Initiative involves millions of dollars, new personnel, targeted audits, and even training of OSHA investigators to spot misclassification problems and "rewards" for states that are the most successful in finding and correcting misclassification. The DOL is planning on an additional 4,700 investigations targeting problem industries. Home health care is specifically listed as one of those "problem industries." All employers in the health care industry should be on guard.

Treating workers as independent contractors has been a long standing practice in many facets of the health care industry, and with good reason. Many workers in the industry enjoy the freedom and flexibility of independent contractor status. Companies like it because they do not have to provide employee benefits to true independent contractors, do not have to pay them overtime or minimum wage, and do not have to include them for purposes of other laws, including the recent federal health care reform legislation.

If, however, a company misclassifies an employee as an independent contractor, the company is violating a plethora of employment statutes and also is depriving the government of tax dollars. In light of the growing deficit, those lost tax dollars present a huge issue for both state and federal governments – an issue that they are not taking lightly. In addition to the misclassification Initiative, legislation is pending in Congress that would change tax and wage and hour laws regarding independent contractors and impose new requirements on companies. The proposed Employee Misclassification Prevention Act (EMPA), for example, will require employers to notify workers of their status and right to go to the DOL, and presumes that workers are employees if the notice is not given. Even if EMPA does not become law, the DOL has given notice of proposed regulations that would impose similar requirements. States are jumping in on the act as well with their own legislation and task forces.

Are you getting the impression that the government would prefer that your workers be employees? Don’t panic yet. There are steps that you can take now to minimize your company’s risk before the government comes knocking.

The first step is to determine whether any of your independent contractors are actually employees. Look at the workers who get 1099s from your company. The tests applied by courts and governmental agencies vary depending on the law and the state. (See the chart for a summary of the factors applied under three important federal laws.) There are, however, some common themes. The number-one factor is the degree of control that the employer exercises. The more control exerted by the employer, the more likely it is that the person is an employee. If you or your supervisors are telling your workers when, where and how to do the work and requiring them to follow set rules and sequences, those workers are probably employees. Other important factors include the worker’s opportunity for profit or loss by managing the manner in which he or she works. Generally, work that is time oriented, rather than project oriented, will indicate employee status, while the ability of a worker to earn more money by working more efficiently is a factor indicating independent contractor status. The worker’s investment in equipment, materials, insurance or workers that is significantly greater than the employer’s investment in such items indicates independent contractor status.

No single factor is controlling. Factors that are not relevant, however, include a contract describing the worker as an independent contractor and even the worker’s own request to be treated as an independent contractor. In short, if it walks like an employee and quacks like an employee, it probably is.

If your audit indicates that your workers are close to the line, consider whether your company can make changes in the way the workers are treated to increase the factors that make a worker an independent contractor. For example, can your company give the worker discretion over where and how to work, allow the worker to work for other employers, and change the compensation arrangement so that the worker has more opportunity to make more money by working harder or more efficiently? When you’re hiring independent contractors, consider having workers complete a questionnaire verifying their independent contractor status. Also take a look at the terms of your contractor agreement. Remove provisions that set forth specific duties and requirements and instead give the worker discretion over the manner and means of performing services for your company. Require the worker to have his or her own business, federal employer identification number and insurance. Require the worker to provide his or her own truck, tools, equipment and helpers. Make clear in the contract that the worker is responsible for the taxes, workers’ compensation coverage and benefits for himself and his employees. Remove any at-will termination provisions and instead provide for termination only on breach of the agreement, bankruptcy, insolvency or death of a party, the completion of the services, or when both you and the worker agree.

In addition, remember to keep records demonstrating that the worker is an independent contractor. These records include the worker’s 1099s, federal employer number, business licenses, certificates of insurance (including workers’ compensation insurance), public advertisements for his business, business cards, and invoices that the worker uses to bill your company.

If, however, your workers are so far over the employee line that they cannot be brought back to independent contractor status (or you don’t want to bring them back), the best approach is to officially alter their status to that of an employee and fix their tax treatment, workers’ compensation coverage and benefits. Seek the advice of legal counsel. There are a number of pitfalls, particularly with employee benefit plans, if the process is not handled correctly.

Karin McGinnis is a litigator and employment and labor lawyer at Moore & Van Allen (www.mvalaw.com), handling a broad range of workplace-related matters. McGinnis has successfully litigated a wide variety of employment issues on behalf of employers in federal and state court as well as in arbitration. She can be reached at (704) 331-1078 or karinmcginnis@mvalaw.com.