Transitioning Your Group Practice from Independent Contractors to Employees

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As we discussed in the first part of this series, many therapists in private practice decide at some point to expand by adding on associates, either as independent contractors (ICs) or as employees. If you have a group practice based on ICs and are contemplating transitioning to an employee-based model, here are the steps we took to transition my wife’s practice to an employee-based model, including deciding on benefits for the staff, and best practices of managing the team through the change.

If you’re an employee associate at a group practice, or if you’re considering if this would be right for you, in this parallel article I list benefits given to employee associates at some practices.

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

What Do You Need to Do if You Decide to Go the Employee-Based Path?

The answer to this broad question really requires that you talk with your attorney and accountant, because it varies from state to state and from one case to another. However, here are the things my wife is doing in Maryland, many of which should apply to group practices elsewhere.

First, do the math to compare your current revenues and expenses to those you’ll have as an employer. This includes but may not be limited to:

  • Therapist salary per session
  • Therapist salary for required meetings and no-show sessions
  • Swallowing no-show, bounced check, and chargeback costs
  • Employer part of payroll taxes (7.65% up to $128,400 of pay for 2018, 1.65% above that)
  • Federal and state unemployment insurance
  • Adding associates to the practice’s malpractice and general liability insurance, as well as any other coverages you decide to add on (e.g., covering liability for business use of non-owned vehicles if any of your staff go shopping for business supplies using their car)
  • Workers comp insurance (if your state requires it)
  • Retirement plan matching (if you plan to offer this)
  • Allowances toward CEUs, professional license fees, Psychology Today listing, etc. (if you plan to offer this)
  • Payroll processing
  • Retirement plan administration costs (if you plan to offer this)
  • Accounting and bookkeeping (if you plan to outsource these)

To avoid losing associates due to the transition, make sure you set things up such that they don’t experience any reduction in their net compensation for the same number of sessions, and preferably make at least a little more as employees.

You may find that with the higher expenses of the employee-based model, you need to increase client session fees. As long as the increase isn’t excessive, you should be able to make that work. My wife decided to increase associate client fees by $10 per session for new clients.

Current and returning clients will be grandfathered to their current rates. That’s not a requirement though. You could notify clients that come back after a break that the new higher rate applies. If needed, you can even increase rates for current clients, but that could backfire and cause some to leave or have negative feelings that may affect their clinical rapport.

Next, with your attorney’s help, draft employee contracts or offer letters. These should cover all the important stuff that’s not likely to change much, leaving details of policies, procedures, bonuses, etc. to an Employee Handbook.

Once you have a good idea of what the offer letters will say, meet with each associate individually to explain why you’re making the change and how it will affect them positively. As soon as they’re finalized, give them the contract or offer letter to take home, review, consult with their spouse, accountant, and/or attorney, and (assuming you managed the process right) sign.

Set up payroll for those associates who stay. Direct deposit and bi-weekly or semi-monthly payments can be an extra convenience that helps convince associates who might be on the fence (some states, like Maryland, require payroll be done at least semi-monthly for salaries above a certain low threshold). You can do this through your accountant, or you can use any of several Internet-based services which are somewhat less expensive but require more of your time and effort.

If you choose to offer a retirement plan with matching, set that up for employees who sign up. If you care about your employees (and if not, you’re probably in the wrong line of business :) ), encourage them to contribute as much as possible to take care of their future selves.

Extra Benefits of an Employee-Based Practice

First, when your associates are employees, they feel more a part of your team, so you can expect them to be more loyal and supportive of your vision for the practice.

Second, as employees, you can set certain expectations that would not be legally acceptable in the case of ICs. This includes requiring them to attend practice-wide meetings, helping with marketing efforts (you may want to make this voluntary since many therapists don’t like these tasks), and even determining availability for scheduling sessions.

Finally, and perhaps most important, you would be creating something of lasting value. The reality of the therapy world is that you constantly need to find new clients as current clients reach the end of their course of therapy. If your associates are all ICs, then what value does the practice have if you ever want to sell it? Almost none. As an IC-based group practice owner who wishes to retire, all you have to sell is your practice website, which is probably not worth all that much (in the unlikely case that you bought rather than leased your offices, you can sell those).

On the other hand, if your associates are employees, your practice can continue to generate revenue even if you yourself have moved on. In this scenario, the practice has actual value that you can capitalize on when you call it a career. Finding someone to buy you out may not be trivial, or it may be as simple as selling to one or more of your associates.

To make this feasible for them, you can start by bringing them on as junior partners, allowing them to pay for that partnership stake gradually out of their salary. Over time you can let them continue to buy portions of your stake until you are the minority partner. At that point they take over active responsibility for running things while you simply see the clients you want to see. Finally, you sell them your remaining stake when you decide that it’s time to be done.

Years ago, a friend, call him Jack, got an offer from the owner of the business he managed. This wasn’t a therapy practice, but my advice would have been similar if it had been. The owner offered to sell him the business for $1,000,000. He knew Jack didn’t have a million dollars laying around, so he offered to take $100,000/year out of business profits for 10 years.

Jack had been the manager there for years and knew there were enough profits to pay out $100,000 and still take an acceptable salary. If he declined, the owner would find another buyer, who might not keep Jack as manager. In that case, Jack could start his own competing business, but as I pointed out to him, over half of new businesses fail in their first five years, and only a third make it to their 10th anniversary. The business in question had been around and profitable for decades, so Jack knew it was viable for the long haul.

Jack did as I advised and took the offer. When he paid off the owner a few years ago, that $100,000/year he had been paying the previous owner became extra profit.

Best Practice for Transitioning from an IC-Based to an Employee-Based Model

The most important asset of a group practice is its team members. Therapists, billing specialists, and administrative assistants, these are the people who make the practice what it is. That’s why my wife, when transitioning her group practice from IC-based to employee-based made the following decisions.

  • Each team member would make at least as much per year as an employee
  • Everyone would gain new benefits
  • Before the change-over, she would explain in person to each team member about the changes, why they were taking place, and how they would make things better for them
  • Any team member who had concerns would be encouraged to share them, and she would address those to the best of her abilities
  • Nobody on the team would be pressured to take on new duties that they did not wish

These decisions made it easy to communicate to all team members in a clear and transparent manner that demonstrated that she cares about each and every one of them and is committed to keeping the team together and happy. 

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