Are you independent? Read your contract to make sure

Contract Language. By Steven M. Harris, amednews contributor. Sept. 2, 2002.

CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

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Prior to signing a contract with a hospital or physician group practice, you should determine whether you are considered an employee or an independent contractor by the employer.

The title of the document which you sign is not dispositive on the issue. So even if the document you sign says "Independent Contractor Agreement," that conclusion is not binding on third parties looking to reclassify the relationship as employer-employee.

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Your employment status will impact all aspects of your contractual relationship, including licensing issues, liability insurance and coverage, and supervision liabilities. This column will explore various pitfalls of independent contractor status and highlight key areas to consider prior to signing your contract.

The Internal Revenue Service and the courts consider specific tax law factors to determine whether a physician is an employee or an independent contractor. The IRS has established a list of 20 factors -- not specific to physicians -- used to determine whether sufficient control exists to establish an employer-employee relationship. While no single fact is conclusive evidence, the IRS balances its 20 factors and comes to a subjective conclusion as to the status of the physician. The IRS factors include:

Whether the employer requires the worker to follow instructions.
Whether the employer trains the worker.
Whether the worker's services are provided personally.
The length of the worker's relationship with the employer.
Whether there are set hours for work.
Whether the worker has worked full time.
Whether the worker receives a set wage or compensation based on the amount of time worked.

Frequently, a physician may rely on the results of a prior audit, a judicial precedent or a commonly accepted practice in the health care industry to determine employment status.

While all of these considerations will shed some light on your status, the key issue is whether your employer has the right to control your physical conduct. This key determinative factor is the degree of control the hiring entity has over your manner and means of performing the tasks and accomplishing the results.

If the employer lacks the right to control your physical conduct, there is usually not an employer-employee relationship and instead the parties are considered as having an independent contractor relationship.

Because physicians exercise independent judgment in diagnosing and treating patients, this often blurs the line between employee or independent contractor. Courts will consider the language of the contract and also focus on the substance and operation of the parties' relationship to determine whether an individual is an employee or independent contractor.

A big distinction is that an employer must withhold federal income and social security taxes from the employee's compensation; however, such withholding does not apply to payments to independent contractors. The IRS treats independent contractors as being self-employed, and therefore responsible for payment of their own income tax and the entire portion of Social Security payroll taxes.

If an employment relationship exists, the employer pays 50% of the payroll tax. An employer is responsible for paying worker's compensation and unemployment insurance based upon amounts paid to employees, but independent contractor payments are not subject to these requirements.

Because employment contracts generally favor the employer, you need to make sure that your contract has a provision which clearly identifies your status. Also remember to plan accordingly for the associated tax consequences of the choice.

Practices that retain physicians as independent contractors often attempt to shift the tax risk to the contractor by requesting an indemnification for tax, interest and penalties associated with a reclassification of the contractor to employee status. Under no circumstances should you agree to such a provision.

No benefits for being independent

Independent contractor status also means that you will be excluded from participating in employer-sponsored benefit plans, including health, life, and disability insurance and pension, profit-sharing and other retirement plans. Independent contractors also do not receive employer-paid sick, holiday or vacation pay.

Unless specified, independent contractors are not covered under the hospital or physician group practices' liability umbrella and are usually responsible for securing and paying for their own liability coverage including any applicable tail coverage.

Employer-paid benefits typically account for 20% or more of an employee's salary. Therefore, you should consider the financial implications of having to pay out of pocket for such benefits.

If you are considering becoming an independent contractor, you should be aware and cautious of any kind of referral, fee-reduction or fee-splitting arrangement in place that involves payment by a federal health care program. Federal fraud and abuse laws impose severe penalties for knowingly soliciting or receiving payment or remuneration in exchange for the referral or arranging for an item or service which is paid by a federal health care program. As an independent contractor, you may not be eligible for protection under the safe harbor exemptions to the federal fraud and abuse laws.

Make sure you review your contract to ensure that the proposed relationship is and will remain faithful to your original agreement with your employer. You should also carefully consider the tax consequences, payment of benefits and regulatory considerations in order to avoid potential pitfalls.

Harris, a partner at McDonald Hopkins in Chicago, concentrates on health care law and has counseled physicians, physician networks and health care groups nationally. The author and publisher are not rendering professional advice and assume no liability in connection with its use. He can be reached at 312-280-0111, or by email (sharris@mcdonaldhopkins.com).