Therapists: Employees or Independent Contractors?
When you own or operate a group therapy practice, you need to determine whether to classify therapists and other clinicians as independent contractors or employees. While classifying a therapist as an independent contractor has many advantages, the costs of misclassification can be high.
Benefits of Classifying Therapists as Independent Contractors
Classifying a therapist as an independent contractor instead of an employee offers a number of benefits.
The cost savings for your practice can be significant. With an independent contractor, your practice is not responsible for payroll taxes, unemployment compensation, or workers' compensation. In addition, you don’t have to provide independent contractors with employee benefits, such as health insurance and paid time off.
An independent contractor arrangement also offers your practice increased flexibility and reduced legal obligations. For example, let’s say you bring on a clinician to fill a short term need. If they are hired as an employee, when the work is over and you need to either reduce their hours or let them go, they may be entitled to unemployment compensation. As an independent contractor, you can bring the clinician on as needed without having to worry about unemployment compensation or other costs and legal requirements associated with reducing an employee’s hours or laying them off.
When is a Therapist an Independent Contractor?
As with many other legal questions, the answer to whether a therapist can be classified as an independent contractor is not straightforward as there is no single standard for making that determination. Instead, there are multiple standards and the applicable one depends on the purpose of the classification. For example:
For federal tax purposes, the Internal Revenue Service (IRS) uses the right-to-control test. A worker is considered an independent contractor if the company has the right to control or direct only the result of the work and not what will be done and how it will be done.
For purposes of the Fair Labor Standards Act (FLSA), the Department of Labor (DOL) uses the economic realities test. A worker is considered an employee if the worker is economically dependent on the employer for work.
Every situation is unique. Regardless of which standard applies, an individualized assessment of relevant factors is required to determine whether a therapist is an independent contractor. Examples of relevant factors include:
Degree of Instruction - When you give a therapist detailed instructions on how to work that indicates that they are an employee. Whereas, less detailed instructions indicate less control over the therapist and that they are more likely an independent contractor.
Method of Payment - If you pay the therapist on a hourly basis, that usually indicates that they are an employee. Independent contractors are usually paid on a project basis.
Permanency of the Relationship - When your arrangement with the therapist has a fixed ending date or involves regularly occurring fixed periods of work, that supports them being an independent contractor. If there is no fixed ending date, the therapist is likely an employee.
Risks of Misclassifying Therapists as Independent Contractors
Deciding whether a therapist is an independent contractor or an employee is more than just a choice of words. Misclassification can result in significant legal and financial consequences, including fines and tax obligations.
Minimizing the Risks of Misclassification
Fortunately, there are proactive steps that your practice can take to reduce the risks of misclassification. These include:
Evaluating all current and future classifications to determine whether they comply with federal and state law.
Drafting a detailed independent contractor agreement that sets forth the terms of the relationship.
The decision to classify a therapist as an independent contractor cannot be a choice of convenience dictated by financial and logistical benefits. Rather, it is a determination that requires a careful and individualized assessment in order to minimize the risk of misclassification and the potential liability it entails. Taking proactive steps now can save your practice from significant legal and financial consequences in the future.
Levene Legal can help you take these steps. We can evaluate your current classifications as well as draft and review independent contractor agreements.
