Employee or Contractor: Doctors are Long-Term Independent Contractors

I had a great question come through this past week and I going to take a few blogs to answer it:

 An anesthesiologist recently asked:

“I have a potential new contract with the hospital in September to serve in a GME role. Would like to take this as 1099 income to a PLLC. A partner is in a similar arrangement but the hospital is refusing 1099 and instead doing W2 with tax withholding. We are not employed by the hospital currently. We work for an anesthesia management company contracted with the hospital. Not sure if you can help with this, but figured it was worth the time to type it out.”

My answer has multiple layers that need unpacked, and I will do that over the next several weeks.

So let’s get started right at the beginning: 

Gatekeepers

“I have a potential new contract with the hospital……A partner is in a similar arrangement but the hospital is refusing 1099 and instead doing W2 with tax withholding.”

Medical practice has evolved to a point where gatekeepers surround us everywhere we turn. This includes the trend of corporate control over medical care and the subjugation of patients and doctors to become pawns on their giant chessboard. As more doctors become employees of these corporations, the corporations themselves act as gatekeepers, determining whether doctors are considered employees or independent contractors.

The IRS separates and classifies workers as independent contractors or employees for employment tax purposes, and expects businesses that hire workers to do the same.

In essence, the IRS makes businesses the gatekeepers in the process of classifying workers. The problem is that many of these gatekeepers are using outdated systems and standards to make their decisions, and the worker this impacts the most is you.

Cultural Views On Work Are Changing

As I will explain later, this classification of workers need not be framed by the planned duration of employment. The old classification system was informed by this, categorizing workers as permanent and non-permanent labor.

Today, very few of us are "lifers" who work for one company throughout our careers. This antiquated view no longer applies to professionals like doctors, whose perspective on work mirrors their Generation Z and millennial peers, considering work as non-permanent. This is supported by a recent LinkedIn survey indicating that nearly 70% of Gen Z and Millenials plan to leave their job in 2023. It’s also a factor in why 47% of healthcare workers plan to leave their position by 2025.

The cultural view of work is changing, and therefore our classifications of workers need to evolve with those changes.

The Need for 3 Classes Of Workers

The more progressive classification framework is to designate workers as having either a short-term or long-term relationship with the hiring corporation. Then, within the long-term category, there should be an allowance for both employees and independent contractors to be hired by corporations for those roles. The decision to designate someone as an employee or an independent contractor should ideally be a mutual decision made in collaboration with one another.

You should know that the idea of adding long-term independent contracting as a physician labor category is a disruptive change to the current status quo view held by corporate employers. Thus, less progressive, larger, and inflexible corporations will be slow to embrace the idea.

Long-term independent contracting as a space for workers is desperately needed within the job landscape for physicians, and it may require empowered doctors to demand and expect it from those who hire them in order for this disruptive change to affect the marketplace.

It has become incredibly frustrating for many of you that large corporate employers are able to unilaterally control the decision regarding your taxable income and can now force you to receive your earnings for your professional services as an employed W-2 recipient, rather than as an independent contractor (1099) regardless of your preferences.

Doctors Need To Be Empowered

Instead of large corporations having the sole power to force doctors to be funneled through as W-2 employees, doctors should be empowered to determine how they want to receive their taxable earnings from professional services—either as W-2 employees or as 1099 independent contractors.

The truth is that because most doctors are not equipped for this moment, their decision-making power is lost to their corporate gatekeepers. And to be fair, those corporations have IRS compliance rules that they must follow in making their determinations.

Check out the IRS’s summary document on the subject of categorizing workers as employees or independent contractors. This is helpful for you to digest and thankfully is much more simplistic than their old 20-point matrix.

For a deeper review of how the IRS, and thus employers, determine independent contractor status, check out this article.

You should know that the IRS presumes that a worker is an employee unless proven otherwise. So the burden of proof is on the business that hires workers to show that it has classified a worker correctly. This is why you must be prepared to demonstrate that you can and want to be considered an independent contractor.

You Should Have A Voice

Your earnings classification in a long-term job should be a choice you help determine, but you must be prepared to meet the necessary conditions to receive it as an independent contractor (IC). Otherwise, you will be considered an employee. Enclosed is a summary of those conditions from a doctor's perspective:

You don't have to passively await a decision that is unilaterally made by the business paying for your services. You have a voice, and you have the power to be prepared to discuss this when the time comes.

In fact, I think your best option is to communicate upfront in your job searches that you are looking for a long-term role, but you want to consider the option of being designated a long-term independent contractor (employment-lite) versus an employee. This may exclude some job opportunities, but it may also open other doors.

The lack of preparation for this job opportunity will empower the hiring company to unilaterally decide your work classification, whether it's your primary job or a side job. If you're not ready, you'll forfeit the right to be part of the decision because you won't meet the conditions required to be an independent contractor. This will cause you to fully defer the decision about your work classification to the business paying for your professional services.

Long-Term Work Relationships

Most corporations assume that long-term relationships with doctors they hire for professional services will be designated as permanent employees. Permanent implies no set end date for the job. However, this designation is immediately contradicted by most physician employers through the 2-3 year contract they present. This is hardly permanent, but it demonstrates the true non-permanent yet long-term relationship that corporations want to have with doctors.

There are many traditional ideas being redefined in our modern world, and those changes include the definitions of permanent and non-permanent labor.

It is now possible to have a renewable long-term contracting relationship with a corporation due to these evolving definitions of labor. That is because in reality there is no limit to how long a contractor can work for the same company. This is a real game-changer for you as a doctor and is quite disruptive to the status quo of corporations who want to designate all long-term job relationships as employees.

Most large corporations don't care which tax entity receives your earnings—you as an individual (W-2) or you as an independent contractor (1099). In reality, the designation that saves them the most money on physician labor expenses will be their preference.

Their primary concern is to remain compliant with the IRS's recommended checklist for making this determination. Frankly, there is some subjective interpretation of this decision by a corporation's legal and accounting departments as they review the aforementioned IRS checklist. Since there is an interpretive quality to this, clarification from case law also sheds light on current interpretations. For instance, the Department of Labor has shared the following fact sheet about the Supreme Court's input on determining if a worker is an independent contractor or employee.

Two Types of Contracts

In the end, the business that hires you will be responsible for interpreting and determining if you are an employee and whether you will receive a corporate employee contract (W-2), or if you will be determined to be an independent contractor and receive a professional services agreement (PSA) (1099).

In the context of long-term contracting work, I prefer to call a professional services agreement (PSA) “employment lite” because it is a better descriptor of the business relationship. You are very similar to an employee, but really are a long-term independent contractor receiving your earnings as 1099 income.

Employed doctors and employment-lite doctors are functional mirror images of one another in their clinical settings. Their differences are essentially invisible to patients and associates because they involve undisclosed business, tax, benefit, and other financial aspects that aren't seen by others.

That has been my personal experience with employment-lite; basically, I appear just like an employee to everyone except those who need to know.

I happen to believe that “employment lite” is the best long-term business relationship for both doctors and the corporations that hire them. It should be an upfront job structure for you because it is so similar to the gold standard of traditional employment.

The Who Matters

The core elements of a corporate employment agreement and an employment-lite agreement (PSA) are virtually identical regarding your professional services, the agreed-upon price point for those services, and the length of the contract.

The primary difference lies in how you are identified in the first line of the contract. Are you identified as an individual doctor, e.g., Tod Stillson MD, or is it a business-to-business contract, and you are identified as a micro-business, e.g., Tod Stillson MD, PC? Believe it or not, those two little letters tacked onto the end of your name change everything. This is what it looks like:

The Decision When You Are Hired

Granted it’s a whole lot easier for any large corporation to shove you through their boiler-plated employee matrix if the assumption is that you plan to work for their corporation long-term.

The reality is that it takes a little due diligence on their part to ensure you meet the necessary criteria to be considered an independent contractor rather than an employee.

Once you meet the criteria to be designated as an independent contractor, it shouldn't matter whether you are labeled as long-term or short-term labor. The result for either of these is that you will be offered a professional services agreement, and your earnings will be designated to the IRS as 1099 income.

Definitions of Labor Are Changing

The modern definitions and views of labor as being long-term, short-term, permanent, and non-permanent are changing and evolving. Thus, the length of your job regarding contractual terms is becoming less important in determining whether you are an employee or an independent contractor, and other factors are becoming more significant.

Interpretations Are Changing

The decision matrix for classifying workers from the IRS is finite and not overly complicated, but it is fraught with interpretive considerations.

A progressive corporation will have a more liberal interpretation of long-term job relationships and embrace modern views of labor, while a more conservative corporation will lean towards traditional definitions of labor and arbitrarily consider all long-term job relationships as employment.

Time For Physicians To Change Who Is In Control

In my opinion, it's time for our profession to regain control over our professional work by moving on from the old paradigms and embracing new views and definitions of labor.

Don’t put yourself in the position to let someone else make this decision for you. Regardless of whether you choose to be an employee, a long-term independent contractor (employment lite), or a short-term independent contractor (locums), the choice should be yours.

If you think you would like to regain control of your professional life, let’s explore whether a micro-corporation can help you. Sign up here for SimpliMD business consult and I’ll provide your personalized coaching.

You can purchase my course "Creating A Practice Without Walls" here.  It will be published later this summer. If you sign up now you will save 20%.