The vast majority of non-owner dentists and hygienists working in clinical care are employees as determined by Internal Revenue Service (IRS) rules. Dental business owners should particularly examine IRS key points for control when classifying workers.
The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:
- The extent of the worker’s investment in the facilities or tools used in performing services
- The extent to which the worker makes his or her services available to the relevant market
- How the business pays the worker
- The extent to which the worker can realize a profit or incur a loss
When the owner controls dental equipment, supplies, staffing, patient scheduling, collection of patient receipts, billing protocols, hours of operation, and employment restrictions on a worker, the worker is classified as an employee. Thus, the overwhelming majority of dentists and hygienists working for a clinic owner are employees under IRS rules.
Exceptions to Employee Status
There exist a few cases within IRS rules when workers are truly independent contractors. For example, dental specialists may come into a dental practice for a limited time frame and supply their own staff, equipment, and disposable supplies. They also may generate separate patient billings and collections as well as operate independently without restrictions upon other outside work.
In many ways, this is similar to an office cleaning service, which may work for a variety of business owners. The independent contractor would be free to operate for any number of facilities without a restrictive contract covenant. Such contractors provide their own personnel, cleaning supplies, and equipment and have some significant degree of freedom in hours of operation.
However, one is strongly advised to consult with legal counsel, as state statutes may differ substantially from IRS rules.
Misrepresentations of Independent Contractor Employment Designation
Dental industry employers may seem incentivized to misrepresent employees as independent contractors as a tax dodge. Employers are not required to pay into the Federal Insurance Contribution Act (FICA) for independent contractors. Independent contractors pay the full FICA tax themselves. By contrast, this tax is split between employers and employees. Additionally, employers pay no unemployment insurance or workers’ compensation injury insurance for independent contractors.
Independent contractors are exempt from laws relating to mandatory work breaks and lunch breaks for employees. They are also exempt from overtime laws. They accrue no benefits such as vacation time, sick leave, insurance coverage, or retirement funding. They are exempt from civil rights protections of the Equal Employment Opportunity Commission (EEOC). It’s also often a mechanism to thwart laws related to verification of immigration status.
Some employers attempt to skirt FICA tax laws by asserting under a state’s dental practice act that doctors and hygienists are not under their control. This is an attempt to conflate the definition of “control” under IRS rules with state administrative law under the dental practice act. The IRS asserts a distinct definition of “control” that is very unique and separate from state administrative codes of the dental practice act. Employers are highly unlikely to prevail with such a defense.
Some employers, especially within the dental service organization (DSO) industry, may artificially designate some doctor workers as “owners.” These nominal owners don’t pass the legal definition of company owners, and they have minimal or no control of beneficial dental clinic ownership.1,2
I don’t know of a specific legal case relating to tax law for misrepresentations of dental clinic owners by corporate dentistry. However, other legal challenges of sham-owner doctors are common within the healthcare management industry.
“Whether a worker is properly characterized as an independent contractor or an employee depends on an analysis of a number of fact-specific circumstances that vary from situation to situation. In large part, the relevant questions involve the extent to which a practice owner controls the day-to-day activities of a dentist worker, such as work hours, patient scheduling, choice of lab, and the like,” said Jeffery S. Fraum, senior associate general counsel for the ADA’s Division of Legal Affairs.
“How the parties contractually characterize the relationship is virtually immaterial. Mistakenly classifying a worker as an independent contractor when the factual circumstances establish that the person is really an employee can create legal liability on the part of the practice, which could include the practice being held responsible for the worker’s unpaid taxes. When in doubt, the parties should consult with a local attorney with expertise in employment matters to determine the proper classification under the practice’s specific facts and circumstances,” Fraum continued.
Consequences for Employment Misrepresentation
The IRS has invoked fines and penalties for employers abusing an employee’s work status as an independent contractor. Additionally, some states have their own employment status determination guides, which are generally more focused and stricter than IRS Rules.3,4 Violations have reached such a critical mass that the California Dental Association (CDA) has published a review of a recent California State Supreme Court ruling:
“As of May 1 (2018), workers in California can now only be considered independent contractors if the employer can establish that all of the following factors are true:
- The worker is free from control and direction over performance of the work, both under the contract and in fact.
- The work provided is outside the usual course of the business for which the work is performed.
- The worker is customarily engaged in an independently established trade, occupation or business (hence the ABC standard).
The new case is a reminder that the classification of an individual as an independent contractor is largely dependent on federal and state tests, not an employer’s desire to reduce administrative burdens or payroll costs. The standards for determining whether an individual is an independent contractor or an employee are different under federal and state laws depending on the purpose of the analysis. Dentist owners should assume that all workers are employees unless they clearly meet all legal requirements and pass all the various state and federal tests that are used by agencies to determine independent contractor status.”
Earlier this year, the CDA also published guidelines for the determination of employee or independent contractor employment status. That report placed additional attention upon penalties relating to state labor laws regarding violation to employees’ rights for overtime pay and meal and rest breaks. Misclassification of a worker’s employment status could quickly add up to multiple costly state and federal violations.
The CDA has been a proactive leader in the dental community by highlighting these important workplace issues.
Vulnerability for Dental Professionals
The cited IRS rules have been in standing for many years. The same is true for many states’ designations on worker status. Potential fines and penalties against violating employers are a serious matter, yet violations and abuses persist within the dental industry.
We see this problem among small practice owners as well as some larger corporate DSOs. The misclassification of employees as independent contractors extends to dentists, registered dental hygienists, dental assistants, and office staff, as well as workers within the insurance industry.5 Violator owners may include brick-and-mortar dental clinics, mobile dental clinics, and temporary employment (locum tenens) agencies.
Levels of student loan debt have reached a level of near debt bondage for far too many serving in the dental profession. Some are forced to assume any work, under any conditions, to service debt loads. Sadly, the practice of indentured servitude has apparently been reborn in the United States.
Further, numbers of dental facilities retain foreign nationals who are dependent upon clinic ownership to either sponsor their work visa status or ignore an undocumented status. Some owners play by the rules. Others establish a variety of schemes to take advantage of these guest workers.
Certainly, recent steps taken by the CDA to highlight these workplace abuses didn’t occur in a vacuum. In 2015, I interviewed attorney David Sohn, who prevailed in a legal precedence-setting labor law case against a DSO that is California’s largest employer of dentists.
Immediately upon the court’s ruling and the DSO’s decision not to appeal, Sohn contacted the CDA’s chief legal counsel. He offered to write up a report for the state dental journal on the meanings of the justices’ ruling.
“The CDA’s top legal officer informed me that the CDA would not grant my request because doing so would be taking an adverse position against many of their readers, who are employers,” Sohn said.
Hopefully, as evidenced by the recent publications of the CDA on workplace rights for dental professionals, perspectives and attitudes in the leadership of the CDA have matured. No group within organized dentistry merits survival if it’s willing to sell out member doctors.
Regardless of federal and state statutes, as well as legal rulings, workplace abuses continue today in a wide variety of dental employment settings. Raising awareness as exemplified by the recent work of the CDA is to be lauded. More is needed, especially on a national level.
If a dental owner offers a dental professional a position as “independent contractor,” it’s usually a misrepresentation of valid employment designation. It’s frequently a mechanism to cheat employees as well as state and federal taxation. Such dental owners are not to be trusted, especially misrepresenting on such a basic issue like the difference between employees and independent contractors.
If a doctor is proffered a position as nominal dental facility “owner” (sham-owner), strings are always attached. Are the beneficial owners attempting to circumvent FICA taxation and state labor laws relating to mandatory work breaks, lunch breaks, and overtime? Is the sham-owner dentist tasked with sponsorship liability, oversight, and possible workplace abuse of foreign nationals operating under work visas or undocumented? Is the bogus title of owner a mechanism to restrict an employee doctor’s potential future employment (restrictive employment covenant)? Is the sham designation of owner a wall of fraud and liability protection favoring the corporate beneficial ownership?
If someone (or some company) is unethical and willing to operate outside the law for their benefit (and your possible detriment), how can they be trusted on other workplace issues? What will be the next deception or misrepresentation? What length will they go to place you further in harm’s way to maximize their financials to your disadvantage? Don’t be a patsy for such deplorable types.
Our responsibility is to alert colleagues, students, and the entire dental team. Dental employment workplace abuses are not to be tolerated. This definitely includes misclassification of employees as independent contractors or even as owners.
- Davis MW. Carothers Versus Progressive Holds Implications for the Dental Industry. Dentistry Today Mar 8, 2018; http://www.dentistrytoday.com/news/todays-dental-news/item/3022-carothers-versus-progressive-holds-implications-for-the-dental-industry
- Davis MW. NJ Supreme Court Decision Has Implications for the DSO Industry. Dentistry Today Dec 7, 2017; http://www.dentistrytoday.com/news/todays-dental-news/item/2703-nj-supreme-court-decision-has-implications-for-the-dso-industry?highlight=WyJsZWdhbCJd
- Employment Development Department- State of California. Employment Determination Guide. https://www.edd.ca.gov/pdf_pub_ctr/de38.pdf
- New York State Department of Labor. Independent Contractors. https://www.labor.ny.gov/ui/dande/ic.shtm
- Smith R. Agents are employees, judge rules. Insurance Business America Aug 8, 2017. https://www.insurancebusinessmag.com/us/news/breaking-news/agents-are-employees-judge-rules-75389.aspx
Dr. Davis practices general dentistry in Santa Fe, NM. He assists as an expert witness in dental fraud and malpractice legal cases. He currently chairs the Santa Fe District Dental Society Peer-Review Committee and serves as a state dental association member to its house of delegates. He extensively writes and lectures on related matters. He may be reached at email@example.com or smilesofsantafe.com.