Choosing the Right Group Practice Model – Independent Contractors vs. Employees

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To grow and make an ever-larger impact, at some point a practice must expand beyond a single practitioner and become a group practice. This doesn’t mean every practice has to become a group practice, but those that don’t will reach a ceiling of how much of a difference they can make. This ceiling is dictated by the limited time of a sole practitioner, especially if she also does all her own marketing, purchasing, appointment-setting, etc.

Group practices add associates either as independent contractors (ICs, a.k.a. 1099 workers) or as employees. Whether you run a group practice or are planning to expand into a group practice, below are some critical things you must consider. In the second part of this series, I detail what you need to do if you’re shifting to an employee-based model, some extra benefits of doing so, and best practices of managing your team through the transition. If you’re on the associate side, I provide some tips and guidance in a parallel article.

First, as a disclosure, I’m neither an attorney nor an accountant so the following is general information, informed by my wife’s journey in expanding to an IC-based group practice, and now transitioning to an employee-based model. What I describe here can serve as a primer that points out the right questions to ask, but you should consult with an attorney and an accountant before making your own moves. We did.

Legal Realities for Group Practice Owners

In general, an IC-based setup minimizes your overhead both financially and organizationally. You don’t need to set up payroll and withhold employee payroll and income taxes; set up and pay for benefits; or pay attention to paid/unpaid leave, overtime, workers comp, unemployment insurance, equal employment opportunity legislation, etc. That’s why many practice owners choose this path.

The problem is that the government has an incentive to audit your practice and determine that you’ve misclassified as ICs people who should have been employees. That’s exactly what happened to one of my wife’s colleagues. His IC-based practice was audited by the state government. They ruled that he had misclassified his therapists as ICs when he should have classified them as employees. He was fined $300,000 and, worse, they went after his and his wife’s personal assets in addition to the practice itself! Thankfully, rather than completely bankrupt him both professionally and personally, they reduced the fine so while painful, it was manageable.

This served as a wakeup call. We consulted with an attorney to make sure that my wife was dealing with her IC associates in a way that any audit would consider them properly classified. The results of this consultation were less than fully reassuring. It turns out that the law in this arena is very complicated, and the government uses a laundry list of tests to determine if ICs are truly that. These include:

  • Are you (as the group practice owner) setting your associates’ schedule?
  • Are you requiring associates to meet your clients at a particular location?
  • Are you providing your associates computers, phones, supplies, etc.?
  • Are you requiring your associates to attend meetings?
  • Are your associates carrying out duties that are central to the business of your practice?
  • Are your associates serving as ICs only at your practice?

If your answer is “yes” to (m)any of these and other questions, the government (state or federal) could very well determine that your associates are misclassified as ICs, leading to fines, back taxes, etc. Especially the last two questions above make this proposition legally risky to you as the practice owner.

Can you say that associates providing therapy services are not doing something that’s central to the business of your practice? That’s a tough sell. Are you happy to let your associates’ choices of what they do when they’re not at your practice determine whether you’re at risk for being heavily fined? Yeah, right, not so much. Even if you require associates to set up their own LLC, but don’t use that structure to contract with other practices as ICs, the government may not be convinced that they truly have a business intention.

Bottom Line for Choosing the Right Model for Your Group Practice

In the final analysis, nobody will come after you if you choose to go the employee-based route. That’s less certain if you continue using the IC-based model. This was why my wife decided to transition to the employee-based model.

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