If you work as a provider at a dental practice, you can be classified as either an employee or an independent contractor. It may seem like a difference in name only, but in fact, the differentiation matters. It has an impact on how much control your employer has over your work and schedule, as well as how you’ll be taxed.
Whether you’re a practice owner or worker, it’s important to understand the nuances of each classification, as the differentiation is very real and actively enforced. In this article, we break down key differences between employees and independent contractors–and why they matter.
What does control have to do with your classification?
Oftentimes, employers want to categorize workers as independent contractors, as they then do not have to offer workers’ compensation insurance, healthcare, paid leave, or other benefits as they might with employees. However, the Internal Revenue Service (IRS), Department of Labor (DOL) and individual states have their own respective tests for classifying if a worker is an employee or independent contractor to make this determination. Contrary to what many employers wish to believe, it is getting increasingly difficult to meet the requirements to categorize a worker as a contractor. In these tests, employer control is the determining factor.
Below, we walk through federal and state regulations that help with classification. The takeaway is that if the employer is controlling how and when the work is getting done, the worker is probably an employee, not an independent contractor.
The Federal Perspective
As noted above, the IRS has its own test for defining whether a worker is an employee or an independent contractor, and has levied significant fines against employers and workers alike when finding a miscategorization. The IRS defines a contractor as a self-employed person or entity contracted to perform work for another entity as a nonemployee. It is pretty clear to see from the definition that the IRS views a contractor as truly independent of control from the company for which they are providing services. Contrast that with their definition of an employee: Anyone who performs services for you is your employee if you can control what will be done and how it will be done.
The key term, once again, is control. And how do you determine whether or not an employer has control? There are three categories to consider under the IRS test:
Behavioral Control - Does the company control or have the right to control what the worker does and how the worker does the job?
Financial Control - Are the business aspects of the worker’s job controlled by the payer or the worker? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
Type of relationship - Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Is the relationship ongoing or of a short duration? Is the work performed a key aspect of the business?
If your company has behavioral, financial, and relationship control over your work, you should be classified as an employee. You can view IRS form SS-8, which determines status, though it can take up to six months to get determination.
The DOL has a six-prong test that determines classification, known as the Economic Reality Test, under the Fair Labor Standards Act. The elements of this test include:
Opportunity for profit or loss depending upon managerial skill: Looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making. In short, who is making decisions?
Investments by the worker and the employer: Considers investments made by the worker to the business. Is the worker investing to help grow the business? Are they buying their own supplies and equipment?
Degree of permanence of the work relationship: Examines the nature and length of the worker’s relationship with the company. Is it sporadic or continual? Is the worker providing services for multiple businesses or exclusively one company?
Nature and degree of control: This prong looks at the level of control the company has over the worker, as well as economic aspects of the relationship. If the schedule and compensation is dictated to the worker, they’re more likely an employee.
Extent to which the work performed is an integral part of the employer’s business: When the work performed by the worker is “critical, necessary, or central” to the company, it indicates the worker is an employee.
Skill and initiative: Looks at whether the worker uses their own specialized skills together with business planning and effort to perform the work and grow the business. Considers whether the company provides training to the worker.
Consistent with the IRS analysis, the underlying theme of the Economic Reality Test turns primarily on how much control the company has over the worker.
State Regulations on Employees or Independent Contractors
In recent years, a number of states have made it overwhelmingly difficult to categorize a worker as a contractor. For example, Massachusetts rolled out its own three-part test and requires that all three of the following be true in order to qualify as a contractor:
The individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact.
The service is performed outside the usual course of the business of the employer.
The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
In dentistry, the second prong is especially tricky. Though a general dentistry practice could still possibly engage a specialist as a contractor, it is not possible to bring on an additional general dentist in a contract capacity, as they are in the same “usual course of business.”
Similarly, California enacted AB5, which also makes it very tough to qualify via the state’s ABC Test (you can learn more about it here). This seems to be a growing theme across the country, where legislation is making it more difficult for a worker to qualify as an independent contractor.
Why Does it Matter?
These classifications are enforced–for both employers and workers–with penalties for miscategorization. Employers may want to categorize people as independent contractors, but if they are controlling how and when work is getting done, those workers are likely employees.
If you’re a provider or a practice owner who needs guidance on this topic (or wants to better understand classification in your own state), reach out. Our team can help you navigate the nuances of owning your practice or of your employment arrangement.
Want more information on this topic? We offer insight into the benefits of being an employee and an independent contractor in a previous article: Employee vs. Independent Contractor: Spot the Differences.