PAs as Independent Contractors
Excerpted from the California Physician Assistant’s and Supervising Physician’s Legal Handbook, Fourth Edition © 2014.
a. Contractors Compared to Employees. A common question asked by PAs is whether they can structure their relationships with their supervising physicians or the organizations for which they work as independent contractors, rather than employees. An independent contractor’s wages are not subject to income tax, social security (FICA) or state disability insurance withholding by the employer. Although an independent contractor is responsible for paying his own income and social security tax (including the employer’s share), the expense of mandatory disability insurance is avoided.
Treating a PA as an independent contractor may seem desirable to the employer, since this theoretically saves the employer from having to contribute the employer’s share of social security tax, pay state and federal unemployment tax, provide workers’ compensation insurance or provide health insurance and other benefits which the employer may provide to persons classified as “employees.” Often the employer agrees to pass on these savings to the independent contractor PA in the form of higher wages.
However, under the laws governing the various withholding and benefit programs discussed above, an employer does not have unfettered discretion in determining whether to classify a worker as an “employee” or an “independent contractor.” Although various laws provide several different definitions of “employee,” as a general rule an “employee” is a person who is subject to the direction and control of the employer not only as to the results of the work, but also as to the details and means by which the work is accomplished. In contrast, a true “independent contractor” is an individual who is hired to perform a particular task or achieve a specific result while working more or less independently.
b. Test for Employee Status. In determining whether an individual should be treated as an “employee,” the IRS and other relevant agencies may examine a variety of factors, including, but not limited to, whether the worker’s services are integrated into the employer’s business; whether the employer hires, supervises or pays any assistants required by the worker; whether the employer establishes the worker’s hours; whether the worker performs work on the employer’s premises and uses employer’s equipment or tools; whether the worker submits regular oral or written reports to the employer; and whether the employer pays the worker’s business expenses. One additional factor is whether the worker performs services for only a single employer; under a “matching audit” program that the IRS has previously implemented, it is more likely to audit any employer from whom an independent contractor reports all of his/her wage income. If any one or more of the other factors listed above exist, the IRS may claim that the individual should have been treated as an employee and impose back taxes, as well as interest and penalties in some cases. This may also lead to an audit by the State Employment Development Department (“EDD”), resulting in additional liability.
c. Traditional Employment Situations. As a general rule, the relationship between a supervising physician and his PA in a traditional private practice setting will likely be deemed to fit within the definition of an “employee.” Under the Physician Assistant Practice Act, a supervising physician has both the right and the duty to control the PA’s clinical activities. The fact that a PA may practice somewhat independently does not necessarily make a difference; employees in many settings work independently, subject to the right of the employer to intervene and assert control over their activities. It is the right of the employer to do so which is most significant for purposes of these rules. In addition, many of the secondary factors discussed above will point in the direction of employee status in a typical private practice setting.
d. Penalties for Inappropriate Independent Contractor Status. Although a PA who is inappropriately treated as an independent contractor will generally not be subject to fines or sanctions so long as the PA pays taxes appropriately, the employer is at significant risk. For example, even if the PA has paid his/her income taxes, the employer may nevertheless be liable for taxes that should have been withheld, as well as interest and penalties in some cases, in the event of audit by the IRS. The employer will also be responsible for unemployment tax payments which should have been made if audited by the EDD. The EDD, which is sometimes alerted by the IRS when it finds a problem, may also assess interest and penalties. Further, if the PA is injured on the job, the employer may be required to pay workers’ compensation benefits plus penalties out of general assets, in the absence of workers’ compensation insurance coverage. If the employer does have coverage, the carrier may sue the employer for back premiums based on the PA’s 1099 income.
While the penalties under all of these laws are primarily directed at employers, they can also have a negative impact on the PA, even if the PA has paid his/her own taxes. For example, the employer may seek to recoup penalties or other payments it is required to make from the PA. Although the employer may not be entitled under the law to do so, especially if the PA has paid his/her own taxes, at a minimum, an audit of his/ her employer and potential fines can have a negative impact on the entire practice and the relationship between the parties.
e. Permissible Independent Contractor Situations. In certain less traditional practice settings, it may be permissible for a PA to be treated as an independent contractor. For example, if a PA provides first assisting services for a number of separate medical practices or health facilities on a part-time basis, this would be more likely to survive scrutiny as a valid independent contractor situation. Each case must be considered individually in light of the overall facts and circumstances. Another way to approximate independent contractor status is for the PA to form a personal service corporation (e.g., a PA corporation or general business corporation). The PA will be the sole shareholder of the corporation will also be an employee of the corporation. The corporation will be a contractor of a medical practice or other employer, which will pay it without withholding taxes. As the PA’s employer, the corporation must withhold taxes and comply with other requirements imposed on employers. Such arrangements have historically been viewed as permissible. There have, however, been a few situations in which the IRS or EDD has challenged whether such arrangements were intended to circumvent employer tax withholding requirements. Therefore, an attorney or accountant familiar with these rules should be consulted before taking this approach.