Monday, February 01, 1999
by Richard D. Weber, J.D.
MDA Legal Counsel
Published in the February 1999 issue of the Journal
Question: We have a relatively large dental professional corporation. Our corporation employs non-owner dentists and other personnel, such as dental hygienists. We have always treated the dentists as independent contractors and the dental hygienists as employees. With respect to employees, we understand that we must withhold federal and state taxes and pay Social Security, but that this is not necessary with respect to independent contractors. Are we on a sound legal basis in treating our non-shareholder dentists as independent contractors and our dental hygienists as employees?
Answer: Whether or not a person is an employee or an independent contractor depends upon the control that is exercised by the employer. The IRS has developed a list of 20 factors which the IRS applies in making this determination. Essentially, the 20 factors are used to determine how much and what type of control the employer has over the person. No one factor is determinative. A review of the 20 factors is beyond the length and scope of this column, but a general discussion should be helpful.
Dentists who engage in the pursuit of a profession and offer services to the public are typically independent contractors and not employees. On the other hand, it is possible that an employer could exert sufficient direction and control over a dentist to create an employee relationship. In determining what constitutes the requisite degree of direction and control, it must be borne in mind that the methods by which a dentist works are prescribed by the techniques and standards of his profession, and the high degree of skill required by a dentist sometimes makes it difficult or impossible for the employer to supervise or control his services. Therefore, the IRS has reasoned that the control of an employer over the manner in which dentists conduct the duties of their profession must necessarily be more general than the control over non-professional employees.
A limited number of judicial decisions have considered the issue with respect to dentists. In comparing the facts of a particular case to the IRS's 20 factors, one significant federal court ruling held that the dentist was an independent contractor. In that case, the dentist set his own fees and schedules, directed staff and dental assistants, and planned his own treatment of the patients. The dentist also ordered supplies, consulted with and referred to other dentists as he saw fit, decided how to handle patients who did not pay, maintained records, and paid his own expenses and insurance premiums. Significantly, his compensation depended on fees received from patients, so that he had a risk of the possibility of lost income.
Another significant federal decision relied upon Section 530 of the Revenue Act of 1978. This statute was enacted to protect from liability employers who reasonably made a determination that a given individual was an independent contractor rather than an employee. This act establishes a safe harbor test which, if met, will avoid employer tax liability. The safe harbor test requires a reasonable basis for treating the worker as an independent contractor, and requires that the employer file all relevant federal tax forms on a basis consistent with an independent contractor classification. According to case law, the "reasonable basis" test is met if the employer relies upon judicial precedent or IRS rulings, a past IRS audit or a long-standing recognized practice of a significant segment of the industry in which such individual was employed.
Section 530 is uniquely applicable to dentists. This statute was applied to a dental clinic by a federal court, based upon the clinic's showing that all federal tax returns were filed consistent with the treatment of the dentists as independent contractors. The facts of that case indicated that the dentists practiced according to their own training, background and experience. They developed their own treatment plans and had discretion to schedule treatments, determined the scope and method of treatment or examination, determined whether the services of a specialist were required, and set their own fees. The employer did not provide the dentists with any minimum guaranteed income, sick leave or employee benefits.
The determination as to whether a dentist is an employee or independent contractor is fact-intensive. Since you have not expressed the specific facts in your question, no definitive answer can be made. Suffice it to say that it should not be difficult to create a factual arrangement with a non-owner dentist that would be consistent with a determination that the dentist is an independent contractor and not an employee.
Making the right call as to whether a dentist is an independent contractor or employee is critical. A contract expressing the fact that the dentist is an independent contractor is important, but is certainly not determinative. It is important that the contract spell out provisions which establish the independence of the dentist and the lack of control by the employer over the dentist's practice. Also, the actual facts should fit the contractual provisions. Making the wrong call and treating a dentist as an independent contractor when the dentist is, in fact, an employee, would be costly. The employer would have to pay Social Security taxes and other employee benefits. Most significantly, the IRS and the state could assess an employer with income taxes that were not paid but should have been withheld.
With respect to dental hygienists, the IRS has generally taken the position that they are employees. A significant fact is that dental hygienists typically get paid whether or not the fee is collected from the patient. Dental hygienists typically do not secure patients, and office expenses are generally paid by the dentist, who provides both space and the necessary supplies and equipment. It would be an unusual situation for a dental hygienist to be treated other than an employee.