A previous version of this insight was posted in the Los Angeles Business Journal.
On April 30, 2018, the California Supreme Court issued a unanimous opinion in Dynamex Operations West, Inc. v. Superior Court creating a challenging new standard for classifying workers as independent contractors versus employees.
The ruling has important implications for health care organizations that hire contractors. These employers can benefit from understanding the new classification requirements and new best practices for future hiring.
Federal and state agencies have frequently questioned employee versus independent contractor classifications. This will likely intensify in California due to the Dynamex decision.
From legal and tax perspectives, workers are classified as either employees or independent contractors. Independent contractors are individuals who have their own business, whereas employees work for someone else’s business.
A hiring firm may pay an independent contractor and an employee for the same or similar work, but there are important differences between the two that might result in significant tax implications and possible penalties if not properly classified. The hiring firm makes the initial determination, usually as part of the discussion with the service provider to be hired, as to whether the person hired is an employee or an independent contractor.
The court adopted a three-pronged ABC Test, requiring a hiring business to demonstrate that it meets all of these requirements if classifying a worker as a contractor:
- The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The worker performs work that is outside the usual course of the hiring entity's business.
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
A worker who fails any of these criteria is presumed to be an employee by California’s Supreme Court.
The B test may pose the most difficulty for health care organizations.
Medical group practices are particularly susceptible to worker misclassification issues because they’ve historically used both employee physicians and independent contractor physicians to provide the same or similar health care services, and those medical services are the primary business of the practice.
Hospitals and health systems are also likely affected, given the extent to which they rely on independent contractor service providers, including locum tenens, whose arrangements will need to be reevaluated under the new rules. This is further complicated by California’s conflicting rules making it difficult for hospitals to directly employ physicians.
Consequences of Misclassification
A hiring misclassification error can significantly impact several aspects of a health care organization’s operations, including:
- Care delivery
- Tax exposure
- Employee benefits
- Compliance with wage and hour and antidiscrimination laws
- Compliance with Stark and anti-kickback laws
There are several steps organizations can take to decrease the likelihood of facing negative misclassification errors. These include the following:
- Audit your workforce to identify current independent contractors and reevaluate their status under the new standards
- Incorporate the ABC Test into evaluations of any new service provider relationships
- Educate management and those in hiring positions on the new classification test and consequences of misclassification
- Establish controls—for example, in internal audits or annual or semiannual reviews—to prevent or detect misclassification
We're Here to Help
If you have questions or would like to learn more about how this decision might impact your organization, contact your Moss Adams professional.