Are You Misclassifying Your Team Members?
Let’s play a game. The following five scenarios describe commonly seen employment relationships in a practice. Can you guess which team members are “employees” and which ones are “contractors”?
- You have a receptionist who only comes in on Fridays for about five hours to answer the phones and book patient appointments.
- Your assistant is going on maternity leave, and you need to find someone to replace her for the eight weeks she will be out. You hire a temporary assistant who is taking over the full schedule for the assistant on leave, but knows she’s only needed for eight weeks.
- You’ve hired a new treatment coordinator, and tell her that she’s on a 90-day probationary period, at which time you’ll revisit her compensation, pending review of her work.
- You’re in the process of hiring a new hygienist, and have asked one of the candidates to come in for a compensated “working interview.”
- You hire an associate to take patients two days per week. They’re currently working at another location, but when they’re working in your office they’re representing themselves as a team member of your practice, complete with practice uniform and using practice-provided tools.
If you answered “employee” to each of these scenarios, you are correct!
Employees vs. Contractors
The litmus test for determining whether a team member is a contractor or employee looks at the type of relationship between the employer and team member, terms of payment, and who controls the behavior of the team member. The amount of time the team member spends working each week or the duration of the time they spend working for you doesn’t really matter – if they’re coming to your office when you tell them to, to provide services related to the work of your practice, using your tools, wearing the required uniform, drawing a paycheck on the same pay cycle as you’ve set for your employees, and performing the work of the practice as a representative of the practice where you control how the work is completed, then that team member is likely an employee. If they’re working on projects for you that aren’t related to the work the practice produces (ex: a web designer creating your site, an IT person setting up your network, a carpenter hanging a door, an anesthesiologist who comes in a few times a month to assist a pediatric dentist with certain procedures, etc.), they have their own business card and email address, provide this type of work or service to other businesses, aren’t wearing your uniform, send you an invoice to bill you for services rendered, you pay them for the results of the work and don’t control the details of how it’s accomplished, and you have an actual written contract with terms of service – that’s a contractor.
Not every employment situation is black and white. However, there isn’t a penalty for classifying a team member as an employee when they could potentially be a contractor. On the flip side, there’s definite potential for liability to your practice if you classify someone who should be an employee as a contractor.
“But what about my contract employee…?”
Q: What do unicorns and “contract employees” have in common?
A: They don’t exist!
The term “contract employee” is an oxymoron. This designation is frequently used to describe someone who provides a service to a practice – serving in an employee capacity – for a short period of time or on a limited schedule. However, as previously mentioned, the relationship between the employer and the person providing the service to the employer is the controlling factor, not the amount of service they provide. You could have a new assistant for two hours and fire them… they’re still an employee, you still need to have their employment paperwork (W-4 and I-9) filed and pay payroll taxes for them. Unless you want to jeopardize the “at-will” employment status by creating an actual written contract for an employee (unwise, talk to your employment attorney first), this is not a classification you want to use. A service provider to your practice is either a “W-2 Employee” or a “1099 Contractor.” You can’t have it both ways.
What’s the Big Deal?
For starters, did you know that contractors can file unemployment claims? You may not be deemed liable for the chargeback after the hearing, but if a team member you’ve misclassified as a contractor separates from your practice and files for unemployment insurance benefits through the Texas Workforce Commission (TWC), your pay practices may be red-flagged and open to scrutiny via audit if that former team member is found to have been misclassified. You may also be selected for a random TWC or IRS audit, which would uncover these issues and open your practice up to further investigation in addition to fees, fines, and back wages and taxes owed.
What should you do?
If you think you may have misclassified team members as contractors when they should have been categorized as employees, talk with your employment attorney or CPA immediately. If you’re currently employing misclassified team members, the likely course will be to switch their employment status immediately and – depending on how long they have been misclassified – discuss a plan for rectifying your payroll issues.
“But I don’t want these employees to get benefits…” That’s fine! Include limitations in your total compensation policy that state employees who work under a certain number of hours per week are ineligible for benefits. You can also include a statement that requires 90-days of consecutive employment with the practice before employees who qualify with hours worked per week are eligible for other benefits, such as holiday pay or bonuses. This won’t remove your potential liability as an employer in the event of an Unemployment Insurance Claim with TWC, but it’s perfectly reasonable to deny short-term or extremely part-time employees the benefits your full-time, long-term employees enjoy.
Misclassification can be a serious problem that comes with hefty fines, back wages owed, back taxes owed, and audit potential. Talk with an advisor who is well-versed in federal and state payday rules to ensure your payroll system is compliant and you’re accurately classifying your team members.