Employee v. Independent Contractors in Dental Practices: It's Not Up To You.
Jordan Uditsky • March 3, 2020
The professionals who own dental practices are like the owners of any other business in many respects. They want to keep expenses down, minimize tax obligations, and reduce the amount of time spent worrying about personnel and payroll matters such as overtime pay, sick leave, insurance, and other employment law issues. Many dental practice owners try to secure these advantages by classifying the associate dentists, hygienists, and others who provide care and services for patients as independent contractors instead of employees. If all it takes is calling them the former instead of the latter, why wouldn’t you choose to do so?
But that’s not how it works. Whether key team members of a practice are contractors or employees isn’t up to the owner. In the end, the Internal Revenue Service (IRS) will decide that issue based on legal criteria that define the distinction between the two. And dental practices found to be misclassifying members of their workforce can face fines, the payment of back taxes for such workers, and other penalties and disruptions.
Who’s In Control?
From the IRS’ perspective, whether a non-owner dentist or hygienist is an employee comes down to a single issue, though one with many components: control. Given the way most dentist-owners run their practices, it is usually the case that the people they see and work with in the office every day are employees, not contractors.
The IRS breaks down its analysis of control into two broad categories: behavioral control and financial control.
Behavioral control
refers to the decisions about how, when, and where a worker does their job. In dental practices, the owner almost always exerts behavioral control over associate dentists, dental assistants, and hygienists. That is because it is the owner, not these other folks, who decide:
- Hours of operation, including when the worker needs to be on the job;
- What dental equipment to purchase and use;
- Location and facilities of the practice;
- Staffing and personnel matters;
- Patient scheduling;
- Collection of patient receipts;
- Billing protocols;
- Restrictions on a worker (e.g., non-compete and non-solicitation agreements)
Whether a practice owner exerts financial control
over an individual depends on whether the individual has “skin in the game” or how financially dependent they are on the owner. The IRS will look to see whether the individual:
- Has an ownership interest in the practice
- Has an investment in the facilities or tools used in delivering services
- Has other patients outside of the practice
- Can realize a profit or incur a loss
- Has any control as to how and when he or she is paid.
Control May Not Mean What You Think It Means
Understandably, many dentist-owners think of “control” over their workforce in the context of the supervisory requirements of their state’s dental practice act. One has nothing to do with the other. The IRS won’t care whether or not you provided sufficient supervision over a hygienist or assistant for purposes of professional licensing or liability. What the IRS does care about are its own definitions and whether a dental practice is using employee misclassification as a transparent tax dodge.
In addition to the IRS criteria that determine a worker’s status, individual states are also establishing similar rules to crack down on attempts by employers to game the system. For example, under Illinois law, a worker will be deemed an employee unless and until it's proven in any proceeding that:
- Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
- Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
- Such individual is engaged in an independently established trade, occupation, profession, or business.
An Owner Who Owns Nothing
The rise of dental service organizations (DSOs) has seen a variation on the employee misclassification theme. A DSO may try to avoid its tax and employment obligations by designating a dentist as an “owner” of a specific office or practice group. But such “owners” may, in reality, wield little if any actual control over how the practice is run or have any ownership or financial stake in the DSO. Such illusory ownership may also be part of an effort to skirt state rules prohibiting non-dentists from owning or operating a dental practice.
Some Exceptions To The Rule
There exist a few cases within IRS rules when workers are truly independent contractors. One such example involves dental specialists who work at a dental practice for a limited period and supply their own staff, equipment, and disposable supplies. Such specialists may also generate separate patient billings and collections as well as operate independently without restrictions upon other outside work. Similarly, dentists or hygienists hired on a locum tenens basis will likely not be considered employees of the practice.
Don’t Put Your Practice At Risk By Playing Games With Employment Classification
Given how much employee misclassification hurts workers who inappropriately wind up on the contractor side of the fence, and considering how much tax revenue is lost when businesses wrongfully classify workers, it’s no surprise that the IRS and individual states are cracking down on the practice. When they do so, they crack down hard. The financial cost to the practice can be substantial, but it can also cost owners personally as they can be held liable individually for any intentional misclassification.
To avoid such consequences, dental practice owners should discuss any questions or concerns with an experienced employment and dental practice attorney.
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As all dental practice owners know, insurance companies frequently make adjustments to their reimbursement amounts, leading to the common circumstance that a patient who paid a certain amount at the time of treatment may be entitled to a credit from the practice. That credit, usually kept on the practice’s books so that the patient can apply it to future services, has two distinct qualities that have significant legal and financial implications when a practice is about to be purchased or sold. Failure to account for and address such outstanding patient credits early in a transaction can lead to unwanted surprises as well as potentially costly penalties. That is because a patient credit is not only a liability on the books of the practice, it is also the as-yet unclaimed personal property of the patient. That latter characteristic comes with legal obligations under state unclaimed property laws. If you are buying or selling a dental practice, here is what you need to know about handling patient credits during and after the transaction. Are you interested in speaking with one of our attorneys? Click here to contact us now. Accounting For Credits in the Purchase Price More often than not, unused patient credits remain just that – unused. If a practice purchaser knew for an absolute certainty that the patient would never return and ask for the credit to be applied to new services, it would not impact the underlying practice valuation or sale price. Of course, nothing is certain, and if a practice has thousands, tens of thousands, or hundreds of thousands of credits on the books, even a fraction of those credits, if redeemed, could have a significant impact on the practice’s profitability. That is why any patient credits should be disclosed, identified, and addressed as early in the transaction as possible so that neither the buyer nor seller find themselves in the uncomfortable position of renegotiating the purchase price or providing the buyer with a credit. Reporting and Accounting Obligations Under Unclaimed Property Laws Any business holding goods or funds that belong to a customer, client, or other company or individual cannot simply pocket that property or money because its owner may have forgotten about it or is unaware of its existence. If a business holding such property, which includes patient credits, loses contact with the owner for a certain period set by law (called the “dormancy period”), the company effectively becomes the trustee of that property, holding it for the benefit of the owner until they make a claim for its return. In Illinois, that claim may come after the owner searches the Illinois State Treasurer’s unclaimed property database . The information in that database comes from businesses that must provide the Treasurer’s Office with detailed and frequent reports about any unclaimed property they hold pursuant to the requirements of Illinois’ Revised Uniform Unclaimed Property Act (the “Act”). Most U.S. states have adopted this model act, so the following discussion of Illinois’ version is representative of unclaimed property laws generally. When Does Property Become “Unclaimed”? As noted, property is considered unclaimed and abandoned if it has not had any activity within a designated “dormancy period” and the holder is unable to locate the property owner. Under Sec. 15-201 of the Act, the dormancy period is three years for most types of property, though others have longer or shorter periods. For example, there is a 15-year period for traveler's checks, a five-year period for money orders, and a one-year period for payroll checks. Patient credits would fall under the three-year period. Reporting and Notice Obligations For Holders of Unclaimed Property Any for-profit and not-for-profit business entities that conduct business in Illinois are required to electronically report unclaimed property to the Treasurer’s Office on an annual basis. Even businesses not holding any unclaimed property must file a negative report advising as such if they meet any of the following criteria: Annual sales of more than $1,000,000; Securities that are publicly traded; A net worth of more than $10,000,000; or More than 100 employees. The deadline for Illinois dental practices to file unclaimed property reports for unused patient credits is May 1 of each year. The report should reflect one year of account activity three years prior to the last calendar year. Example: If your report is due May 1, 2018, your report will cover activity from January 1, 2014, through December 31, 2014. The detailed requirements as to what must be included in the report are set forth in Section 760.410 of the Illinois Administrative Code . At the same time the report is filed, unclaimed property must be remitted to the Treasurer’s Office. Holders of unclaimed property also must make efforts to reach out to the owner before filing their report and remitting the property. Specifically, the holder of property presumed abandoned shall send a due diligence notice to the apparent owner by first-class U.S. Mail between 60 days and one year before reporting the property. The required contents of the due diligence notice are set forth in Section 760.460 of the Illinois Administrative Code . Consequences of Non-Compliance Holders of unclaimed property face significant penalties for failing to comply with the reporting, notice, and remittance requirements of the Act. Interest and penalties may be imposed on the failure to file, pay, or deliver property by the required due date. Specifically, the state can charge interest at 1% per month on the value of the unreported/unpaid property and impose a penalty of $200 per day up to a maximum of $5,000 until the date a report is filed or the unclaimed property is paid or delivered. For businesses that may have neglected their obligations under the Act, Illinois (and most other states that have adopted the uniform act) offers a Voluntary Disclosure Agreement (VDA) program for unclaimed property holders. In exchange for voluntary compliance through an executed VDA, the Treasurer's Office will agree to forgo the right to assess penalties and interest outlined in the Act. How To Address Unclaimed Property Obligations in a Practice Sale As part of transactional due diligence, a practice purchaser should ensure that the seller has satisfied all of its reporting obligations under applicable law. If it has not, the purchaser should require the seller to complete a Voluntary Disclosure Agreement prior to closing and also include a robust indemnification clause in the purchase agreement should the practice later face penalties for noncompliance. Because of the financial complexities and legal risks involved relating to unclaimed patient credits, practice buyers and sellers alike should consult with experienced counsel to help them navigate this significant and oft-neglected aspect of the practice’s finances and operations. If you are a dental professional considering a sale, acquisition, or merger, please contact us at ddslawyers.com at (630) 833-5533 or contact us online to arrange for your complimentary initial consultation. We focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices, and this blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
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As all dental practice owners know, insurance companies frequently make adjustments to their reimbursement amounts, leading to the common circumstance that a patient who paid a certain amount at the time of treatment may be entitled to a credit from the practice. That credit, usually kept on the practice’s books so that the patient can apply it to future services, has two distinct qualities that have significant legal and financial implications when a practice is about to be purchased or sold. Failure to account for and address such outstanding patient credits early in a transaction can lead to unwanted surprises as well as potentially costly penalties. That is because a patient credit is not only a liability on the books of the practice, it is also the as-yet unclaimed personal property of the patient. That latter characteristic comes with legal obligations under state unclaimed property laws. If you are buying or selling a dental practice, here is what you need to know about handling patient credits during and after the transaction. Are you interested in speaking with one of our attorneys? Click here to contact us now. Accounting For Credits in the Purchase Price More often than not, unused patient credits remain just that – unused. If a practice purchaser knew for an absolute certainty that the patient would never return and ask for the credit to be applied to new services, it would not impact the underlying practice valuation or sale price. Of course, nothing is certain, and if a practice has thousands, tens of thousands, or hundreds of thousands of credits on the books, even a fraction of those credits, if redeemed, could have a significant impact on the practice’s profitability. That is why any patient credits should be disclosed, identified, and addressed as early in the transaction as possible so that neither the buyer nor seller find themselves in the uncomfortable position of renegotiating the purchase price or providing the buyer with a credit. Reporting and Accounting Obligations Under Unclaimed Property Laws Any business holding goods or funds that belong to a customer, client, or other company or individual cannot simply pocket that property or money because its owner may have forgotten about it or is unaware of its existence. If a business holding such property, which includes patient credits, loses contact with the owner for a certain period set by law (called the “dormancy period”), the company effectively becomes the trustee of that property, holding it for the benefit of the owner until they make a claim for its return. In Illinois, that claim may come after the owner searches the Illinois State Treasurer’s unclaimed property database . The information in that database comes from businesses that must provide the Treasurer’s Office with detailed and frequent reports about any unclaimed property they hold pursuant to the requirements of Illinois’ Revised Uniform Unclaimed Property Act (the “Act”). Most U.S. states have adopted this model act, so the following discussion of Illinois’ version is representative of unclaimed property laws generally. When Does Property Become “Unclaimed”? As noted, property is considered unclaimed and abandoned if it has not had any activity within a designated “dormancy period” and the holder is unable to locate the property owner. Under Sec. 15-201 of the Act, the dormancy period is three years for most types of property, though others have longer or shorter periods. For example, there is a 15-year period for traveler's checks, a five-year period for money orders, and a one-year period for payroll checks. Patient credits would fall under the three-year period. Reporting and Notice Obligations For Holders of Unclaimed Property Any for-profit and not-for-profit business entities that conduct business in Illinois are required to electronically report unclaimed property to the Treasurer’s Office on an annual basis. Even businesses not holding any unclaimed property must file a negative report advising as such if they meet any of the following criteria: Annual sales of more than $1,000,000; Securities that are publicly traded; A net worth of more than $10,000,000; or More than 100 employees. The deadline for Illinois dental practices to file unclaimed property reports for unused patient credits is May 1 of each year. The report should reflect one year of account activity three years prior to the last calendar year. Example: If your report is due May 1, 2018, your report will cover activity from January 1, 2014, through December 31, 2014. The detailed requirements as to what must be included in the report are set forth in Section 760.410 of the Illinois Administrative Code . At the same time the report is filed, unclaimed property must be remitted to the Treasurer’s Office. Holders of unclaimed property also must make efforts to reach out to the owner before filing their report and remitting the property. Specifically, the holder of property presumed abandoned shall send a due diligence notice to the apparent owner by first-class U.S. Mail between 60 days and one year before reporting the property. The required contents of the due diligence notice are set forth in Section 760.460 of the Illinois Administrative Code . Consequences of Non-Compliance Holders of unclaimed property face significant penalties for failing to comply with the reporting, notice, and remittance requirements of the Act. Interest and penalties may be imposed on the failure to file, pay, or deliver property by the required due date. Specifically, the state can charge interest at 1% per month on the value of the unreported/unpaid property and impose a penalty of $200 per day up to a maximum of $5,000 until the date a report is filed or the unclaimed property is paid or delivered. For businesses that may have neglected their obligations under the Act, Illinois (and most other states that have adopted the uniform act) offers a Voluntary Disclosure Agreement (VDA) program for unclaimed property holders. In exchange for voluntary compliance through an executed VDA, the Treasurer's Office will agree to forgo the right to assess penalties and interest outlined in the Act. How To Address Unclaimed Property Obligations in a Practice Sale As part of transactional due diligence, a practice purchaser should ensure that the seller has satisfied all of its reporting obligations under applicable law. If it has not, the purchaser should require the seller to complete a Voluntary Disclosure Agreement prior to closing and also include a robust indemnification clause in the purchase agreement should the practice later face penalties for noncompliance. Because of the financial complexities and legal risks involved relating to unclaimed patient credits, practice buyers and sellers alike should consult with experienced counsel to help them navigate this significant and oft-neglected aspect of the practice’s finances and operations. If you are a dental professional considering a sale, acquisition, or merger, please contact us at ddslawyers.com at (630) 833-5533 or contact us online to arrange for your complimentary initial consultation. We focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you. Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices, and this blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
