The Compliance Divas Podcast
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The Compliance Divas Podcast
#146 Independent Contractors or Employees? New Rule Finalized
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Are you confused in making the determination of whether an individual is an independent contractor or an employee. For example, often a hygienist is misclassified as an independent contractor. The US Department of Labor announced its new final rule providing clarification on classification. Tune into this episode to see if this rule changes the interpretation.
Department of Labor: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking/faqs#g4
Welcome. I'm Leslie Cannon. I'm Mary Gavoni.
SPEAKER_01I'm Linda Harvey. I'm Olivia Juan. And together we are the Compliance Divas. Welcome to the Compliance Divas podcast. My name is Olivia Wann and I'll be your moderator. The United States Department of Labor issued a final rule of the employee or independent contractor classification under the Fair Labor Standards Act recently, and this will take effect March 11th. So we thought that this would be a great topic to cover. This is probably the most misunderstood concept as it relates to labor laws in determining whether an individual in the workforce is an employee or an independent contractor. As the compliance divas, we bring clarity and simplicity to compliance by navigating regulatory compliance to keep you on course. Please subscribe to the Compliance Divas podcast through your favorite podcast channel or on our website, thecompliancedeevas.com. You may also submit your questions to support at thecompliancedeevas.com. So the Department of Labor issued these new regulations on how to determine and work through whether a workforce member is an independent contractor or an employee. So the myth has been that if you are a 1099 worker and you give someone a 1099, that they're automatically classified an independent contractor. Or if you pay an individual hourly and you give them a W-2, that that automatically makes them an employee. But that's not the case. And we see this has been misunderstood quite a bit in the world of dentistry, particularly as it relates to the relationship of the dentist and the dental hygienist. But why does it matter in the first place? Well, the independent contractor is not subject to the Fair Labor Standards Act. So minimum wage wouldn't apply, neither would overtime. And if we misclassify an employee, the employer could end up owing back taxes and owe overtime. So people need to be classified correctly. I thought a good way to start out would be to interview our diva, Leslie Canham, and have her discuss with us how the final rule does not adopt the ABC test, but rather the multi-factor economic reality test. Leslie, could you elaborate on this to show how the test differs from what we previously understood?
SPEAKER_00Well, sure, Olivia. And it seems that the ABC tests will no longer be considered, but for the sake of providing a little bit of background on what the ABC test consisted of, it was when a worker is considered an employee and not an independent contractor, it would be unless the hiring entity satisfies all three of the conditions. So an independent contractor would mean that the worker is free from the control and direction of the hiring entity in connection with the performance of work, both under contract for the performance of work and in fact. The next item, so this would be like B the worker performs work that is outside the usual course of the hiring entity's business. And then the C would be the worker is customarily engaged in an independently established trade occupation or business of the same nature as that involved of the work performed. So that is the ABC test that we are no longer going to be utilizing. And Olivia, if you could explain what that multi-factor economic reality test is, that would help our listeners understand what now we have to look at to determine independent contractor versus employee.
SPEAKER_01Sure. So it is a different way of looking at it to employ this analysis. And uh basically there are six factors to analyze whether an individual is an employee or an independent contractor. One is opportunity for loss and profit, depending on managerial skill. Second would be investment by the worker and the potential employer. Third is degree of permanence of the working relationship. Fourth, nature and degree of control, fifth, extent to which the work is performed is an integral part of the potential employer's business. And six, skill and initiative. And so, you know, these these are the factors that we look at, but we also look at you know the permanency of the relationship of the parties, the degree of skill, the workers' investment. Um, it's a lot different than how we looked at it before, but by the same token, Leslie, it's pretty much similar, maybe in the analysis. So, for example, the rule clarifies that the control necessary to comply with specific legal requirements does not automatically classify a worker as an employee. Um, so we have to add these other factors in. So it shifts from dollar-to-dollar comparison in the assessment of relative investments. So it focuses more on whether the worker is making similar types of investments, indicating a move toward independent operation. Also, in evaluating tools and equipment, in our case could be instruments and equipment, the final rule considers unilaterally imposed by the potential employer, distinguishing them from those initiated by the worker in determining independence. And fourth, when it talks about the profit and loss, the rule specifies that the ability to earn more by working is more is not entrepreneurial when paid a fixed rate per hour or job, but that other payment methods may suggest independence, and that the rule emphasizes the specialized skill alone does not automatically confer independent contractor status. So the key factor is whether the worker uses specialized skill in connection with business-like initiative. So when looking at, I mean, that says a lot, how do you jumble all that up and come up with an answer? Um, you know, it's not just about control, you know, who's in control of that business, but we're looking at, you know, when when you work with a contractor, they work with other businesses. They're not exclusively working with one. So if you have a hygienist working with one dental practice, and the dentist is overseeing that work, and in like an employee relationship, and the dentist is providing the dental chair, the dentist is providing the patients, the dentist provides the instruments, the dentist provides the appointment scheduling. And then, you know, the hygienist, if the uh business or practice were to fail or suffer, you know, they're they're usually paid. Now I understand that some are paying with some commissioner bonus incentives, but it's defined more like an employee. And I wanted to focus on this because I think that the dental hygienist is so misclassified. And I've had that happen where the Department of Labor audited a dental practice and the dental office was paying them as independent contractors, which was shorting them because their taxes were not being matched, and they had to pay their own self-employment taxes. And so when the department audited them, they audited everybody. So everybody that was paid incorrectly, they had to make the back payments. So we need to get this right. What's more of an independent contractor is the plumber that comes in and works in the dental office to make repairs, not the dental hygienist that's there day in, day out, meeting this multitude of factors. Um, Linda, I'm really curious to ask you what your thoughts are. You know, and you work with clients day in and day out. What happens when a worker in the dental office, such as, let's say, a dental hygienist, asks to waive their status as an employee, that they would prefer to be an independent contractor. Now, I'm not talking about states that allow you to set up your own practice, but it's states that require a dentist to provide supervision. How would you address that?
SPEAKER_02Olivia, this is a really key point because we see it happen so many times in our profession where adult hygienist in particular is not classified under the correct classification with the Fair Labor Standards Act. So the short answer is a worker who's employed by a dentist under the FLSA is an employee and not an independent contractor.
unknownOkay.
SPEAKER_02Especially if they are, as a matter of economic reality, economically dependent on the employer for work. So as you mentioned, that means that the employer is providing all the supplies and the equipment. And let's face it, the dentist does oversee the hygienist work because the doctor is checking hygiene patients. They may not check every three months or every six months, but you know that they are checking those patients. So that this means that they're not independent. So while businesses can organize how they want to many times over, they have to do so within the constraints of the applicable federal and state laws. And then workers are free to choose which opportunities which suit them the most. If they don't like working with Dr. A, they can go over and work with Dr. B across town. But hygienists as such do not classify as an independent contractor. And employees who are already an employee under the FLSA cannot waive those protections under that law. So that means they cannot waive their minimum wage and they cannot waive their overtime pay. So if I'm a hygienist and I'm an employee in Dr. Smith's office, and now I want to go to him and say, I want to become an independent contractor, so you can pay me more per hour and I'll pay my own taxes. Um that's not possible and that's not permitted under this law, Olivia. So it's very, very important that offices get this classification right, as you mentioned just a minute ago, because there are consequences of fines after the audits happen. And it's just it's not good for the practice financially, it's not good for the reputation. And it's best to stay on track and stay within the law when it comes to the employee status. And Olivia, I'd like to also comment on temp services if I can for just a moment. And that is, you know, that's there's such a shortage, as we know, of employees for dentists, dental practices, assistants, hygienists, front office, all the team members, that it's easy to use a temp service. And I think they provide value as that bridge while the office is trying to find an ongoing regular employee. And sometimes a temp service will do placement as well as providing a temporary um option. In those cases, if the temp agency is not paying those taxes, it is incumbent upon the doctor and the high channels to do so. There's only one national temp company that I know of that does pay all the W-2s and gives their temporary employees, I'll say temporary employees, temporary workers, a W-2 form at the end of the year. And so I know it's easy, Olivia, because it's when somebody comes in on short notice, so you don't know how many times they're going to come into your office and temp, it's so much easier to write them a check right then or the full rate, and it's easier for the employee, or I mean to say, I got not the employee, the temporary worker, right? To act as an independent contractor. But it's not productive and it's not financially going to be productive long term because if the doctor is audited, they're going to have to pay the piper at that time and probably some fines on top of that. Other thoughts that you might have, Olivia?
SPEAKER_01I'm glad you brought that up, Linda, because I get that question a lot with temp agencies. And I've worked with a few that are doing it well. You know, they pay that their temps as employees, and then the temp agency is the 1099 to the dental office. Uh, so it does make it very important that we know who are responsible for these people. So I'm glad that you brought that up, Linda. And so a worker cannot voluntarily waive being an employee just to be able to take more off their taxes and not have to pay the uh or or have the employer match the taxes for an employee. Did you have another thought, Linda?
SPEAKER_02Olivia, I just wanted to also explain that this has gone up to the Supreme Court. So this is not something that the doctor has a choice in the matter. It's not just the diva saying you need to do this or you need to do that. It's not just their state, it's not just the federal law, but the Supreme Court stands behind this as well. So we want to make sure that we stay compliant in this area.
SPEAKER_01And and definitely, as I mentioned, when I had this practice that was audited, those uh back taxes had to be paid in, not just on the one that there was the complaint, but on everyone that they audited. So in looking at the new classification, it doesn't really change anything on how we've been looking at independent contractors versus employees, but it just adds to how we evaluate that relationship and provides greater clarity and consistency for businesses such as dental offices to make sure that they're classifying people correctly. And I think that the new rule uh with the multi-factor test tips the scales in favor of the worker being an employee if that work that they're doing is critical, necessary, and central to the dentist's practice. So we want to get it right. And the divas are all about helping dental practices to stay in compliance. Leslie, what's your thought?
SPEAKER_00I wanted to add in just to give a little bit of a uh window of what it looks like to be an independent contractor in dentistry. In California, we have a category of dental hygienists called registered dental hygienists in alternative practice. Now, they provide dental hygiene care to those with limited access to traditional dental care settings, uh, and sometimes it's homebound, might be nursing homes, might be uh other types of situations where there's access to care issues. They can also have their own office or practice, a brick and mortar building. So they're buying all their own equipment, they're uh providing care for their patients, they're uh deciding uh what kind of radiographs to take. Uh, they are also paying sometimes for someone to help them in their uh practices. They're billing the patient's dental insurance directly. So they are indeed truly an independent contractor, uh, different than you might have a hygienist that is working for a dentist in a dental practice. So in California, these types of advanced practitioners do exist. And just want to caution anyone that's listening in California, it does take an advanced dental hygiene program. You do have to go to school to get a specific certificate in alternative practice and be registered with the Dental Hygiene Board of California as such. Thank you for supplementing those thoughts.
SPEAKER_01So I think this has been a good opportunity for us to collaborate with the Divas and our listeners to make sure that they are current because this final rule rescinds the 2021 independent contractor rule, which many have felt was not in sync with judicial precedence and there was more likelihood to misclassify a worker. So we hope that with the new final rule that we can make those classifications accurately and make sure that the people on our staff are classified properly to avoid any conflict with the Department of Labor. As the compliance divas, we bring clarity and simplicity to compliance by navigating regulatory compliance to keep you on course. Please submit any questions to support at the compliancedevas.com. Any resources that we mentioned and website links will be available in the show notes. Thank you again for tuning in. We'll see you next week.