About 3.4 million staff members in the U.S. are erroneously being classified as independent contractors when they should be listed as employees. Part of the issue is that many businesses don’t understand the difference between contractor vs. employee. But under a new rule that takes effect March 11, practices that are making this mistake could face up to a year in jail.
Discover how to differentiate contractor vs. employee, along with tips on why this issue is important to grasp.
Difference 1: Payment Structure
In most cases, independent contractors are paid a fee for work done, whereas employees are paid an hourly wage or a salary.
Difference 2: Employees Are Entitled to Benefits
Depending on the number of hours they work, most employees are entitled to company benefits. Contractors, on the other hand, generally have no access or right to benefits.
Difference 3: Supervision Levels Are Different
When you have an employee on staff, the manager is providing supervision, giving feedback, and guiding their day-to-day activities. When it comes to a contractor, however, the employer doesn’t usually have any control over the daily schedule or activities, and they usually have much less supervision than employees do.
Difference 4: 1099 vs. W2
At the end of the year, contractors will be sent 1099 forms by the employer so they can report their income to the government on their taxes. Employees will instead get a W2 form that outlines the income they received.
Why the Contractor Vs. Employee Distinction Matters
In many cases, practices classify staffers as contractors instead of as employees because the staff member requests it. They may want fewer taxes taken out of their pay, less supervision over their work or more flexible hours, among other reasons. But just because someone wants something doesn’t mean they’re entitled to it — and misclassifying the contractor vs. employee situation can cause major legal problems, including audits and penalties from the agencies listed below.
- Hourly employees who work more than 40 hours a week are entitled to overtime pay, and if you misclassify a team member to get around having to pay overtime, you could be placed under investigation by the Department of Labor.
- Contractors are not subject to the Equal Employment Opportunity Commission anti-discrimination employment laws such as Title Seven, which says you can’t discriminate against an employee on the basis of race, national origin, religion or sexual orientation. This law doesn’t apply to contractors in the same way, which means some organizations could skirt the contractor vs. employee rules to justify discriminating against staff.
- You take out far fewer taxes for contractor than you do for your employees, so the IRS is watching. If the IRS audits your practice and finds such misclassifications, they’ll ask for money back to make up for the taxes you didn’t properly take out of the staff member’s pay.
- The National Labor Relations Board is another organization that cares deeply about contractor vs. employee misclassifications. While employees have the right to engage in concerted activity and may attempt to unionize, contractors have no such rights.
- You must also give employees the option to take protected Family Medical Leave Act (FMLA) time off, but you don’t need to extend this right to contractors. If you don’t make FMLA available when you should, you could face big penalties
- Contractors aren’t entitled to workers’ compensation or unemployment, but employees are, so your state may investigate you if you aren’t providing these benefits to team members who are misclassified as contractors.
In addition to finding yourself in trouble with the entities listed above, you could also face a class action litigation suit from staff members who were misclassified as contractors. That’s on top of the new penalties that take effect in March, which could find you facing a year in jail, up to $1,000 in fines per misclassified employee and more.
For example: Suppose a medical transcriptionist who works from home and uses her own equipment does transcription for your practice 35 hours every week for a weekly contractor fee of $1,200. You require that the transcriptionist returns all dictation to you within 10 hours, and your practice manager meets with the transcriptionist once a week to provide them with updates on their performance. In many cases, the government agencies would consider this transcriptionist to be an employee, and would fine you for misclassifying her as a contractor, since her work and supervision levels mirror those of an employee.
If you have any confusion over how your team members are classified, talk to a healthcare attorney and make sure you’re designating everyone properly.
You must comply with the updated regulations if you want to avoid fines and penalties this year. Let healthcare attorney Kelly Holden, JD, help during her online training, NEW Independent Contractor Rule: Practical Tactics to Halt Violations. Register today!
Watch this quick expert video describing 11 traits of independent contractors, and subscribe to our YouTube channel for more expert advice!
 | Subscribe to Healthcare Practice Advisor |
| Get actionable advice to help improve your practice’s reimbursement, compliance, and success in this weekly eNewsletter. | |
| |