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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