Independent Contractor or Employee?co-author of The ADA Practical Guide to Associateships: Success Strategies for Dentist-owners and Prospective Associates (previously titled: Associateships:

Independent Contractor or Employee?

Planning the Dental Practice Associateship

A Guide for Dentists and their

Professional Advisors

Material Prepared by:

Randall K. Berning, J.D., LL.M.

Healthcare Attorney Serving Dentists

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Title: Independent Contractor or Employee? Planning the Dental Practice Associateship

By: Randall K. Berning, J.D., LL.M.

Publication Correspondence Address: Berning & Affiliates, Inc. THE EXPERT SERIES FOR DENTISTS™ 6017 Pine Ridge Road, #260 Naples, Florida 34119-3956 Website: www.BerningAffiliates.com . Telephone: 239-262-8121 or 800-999-8121

Independent Contractor or Employee? Planning the Dental Practice Associateship

THE EXPERT SERIES FOR DENTISTS™

About the Author

Randall K. Berning, J.D., LL.M.

Randall K. Berning is President of Berning & Affiliates, Inc., a nationwide dental practice transition consulting firm and publisher of Smart Doctor CEO™ Expert Series for Dentists™ and a healthcare attorney practicing in Illinois and the District of Columbia. Before entering private practice, Mr. Berning served as an Illinois Assistant Attorney General and hearing officer for the Illinois Secretary of State. He received his Master of Laws in Health Law (LL.M.) from Loyola University of Chicago, School of Law in 1989. Mr. Berning is experienced in business and transactional matters, mergers, acquisitions, contract negotiations, planning for practice succession. His practice concentrates on legal, financial & practice transition issues. Since 2006 he has hosted a Blog at www.SmartDoctorCEO.com for dentists and dental specialists.

Mr. Berning has spoken and written widely on general dental and specialty practice associateship, partnership formation and practice sale. For the American Dental Association (ADA), Mr. Berning is the co-author of The ADA Practical Guide to Associateships: Success Strategies for Dentist-owners and Prospective Associates (previously titled: Associateships: A Guide for Owners and Prospective Associates) (1988, 92, 96, 01, 06 & 2013) and co–author of Valuing a Practice: A Guide for Dentists (1989, 92, 96, 01, 06 & 2013). He co-presented the ADA seminar topic "Do's and Don'ts of Associateships and Practice Valuation" (1987-1992) and "Dental Practice Financing and Debt Management" (1989-1992). Mr. Berning served as a Consultant to the ADA Council on Dental Practice for over 20 years, a volunteer presenter for the ADA Success/Options seminars for 15 years, a member of the ADA Blue Ribbon Editorial Advisory Panel, and as an article reviewer for the Journal of the American Dental Association. He was also a Trustee Advisor for the American Fund for Dental Health (1994-1996). For the American Association of Orthodontists (AAO) he presented at the first Practice Transition Program and frequently thereafter; co-authored the AAO's monographs Guide to Orthodontic Practice Valuation for Residents and Practitioners and Guide to Financing the Orthodontic Practice for Residents and Practitioners for the Practice Alternatives binders; was one of the experts on the 2000 AAO Ethics Video and the 2005 Practice Alternatives Program video What Do I Do When I Graduate? He assisted AAO’s COOP to develop and present as the moderator the first Orthodontist as CEO program in 2003 and follow up programs in 2006 and 2008. He has spoken at many AAO and AAOF programs and was an early AAOF Case Partner.

Mr. Berning was Adjunct Professor of Dental Jurisprudence and also Director of Practice Administration at the University of Illinois at Chicago, College of Dentistry (1993-2000). He also served as a Clinical Assistant Professor at the University of Maryland, Baltimore College of Dental Surgery and also as a Clinical Instructor at the University of California-San Francisco, School of Dentistry.

Mr. Berning has over 125 articles on topics of interest to dentists published in ADA News, Dental Practice Report, Dental Economics, Dentistry Today, AJO-DO American Journal of Orthodontics& Dentofacial Orthopedics and others. Mr. Berning was featured as one of two experts for the article "Avoiding the Pitfalls of an Associateship Buy-In: A Case" in the Journal of the American Dental Association. He wrote the monthly Legal Briefs column for Dentalpractice magazine and was the lead author of Volume VII of the C.V. Mosby’s Dental Practice Management series, Personalized Guide to Legal Issues. Mr. Berning has also served as an Editorial Board Member for the Journal of Law and Ethics in Dentistry, the Journal of Dental Practice Administration, Healthcare Advertising Review, Dentist magazine and the Journal of Health Care Marketing.



Acknowledgments

his publication is dedicated to my wonderful wife, Carol Ann, who continues to be enthusiastic every time a new publication is proposed. The author

wishes to extend special thanks to Ashley Craig, J.D. for her research and writing assistance in the preparation of the current revision of this publication.

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Preface

he material in this publication reviews a topic with many ramifications for dentists and dentistry as a profession. Some of the ramifications, as discussed in the material, can have a significant

impact on the individual dentists involved. My involvement with the dental profession leads me to conclude that there is simply no denying that many dentists may be open to a challenge directed to the classification of their associateship employment relationships. This does not have to be a situation that dentists or dentistry permits to exist. With sound information a dentist can adjust the employment relationship and avoid difficulty.

Study of a topic often opens new areas of insight for an author as well as for a reader. In my case, as the author of this material, I have tried to explore both the pertinent legal as well as the practice issues of classification of associate dentists as independent contractors. It is the combination of the practice issues in contrast with the legal issues that has drawn most heavily on my twenty years of work with virtually every size and type of practice from solo to group and all dental specialties. I hope this aspect, which gave me new insight in applying the legal standard, will be of value to the reader.

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Table of Contents

Contents Page Overview of Law and Practice Issues ............................................................ 1 Introduction—Dentistry has Historically had Associates ......................... 1 Recent Congressional and IRS Interest ..................................................... 1 A Controversial Issue for the Dental Profession ....................................... 2 Independent Contractor Status of Associate & Worker Classification ...... 4 Primary Inquiry: Is the Worker an Independent Contractor or an Employee? .................................................................. 4 Tax Penalties on Finding Improper Classification .................................... 17 Related Legal Areas ........................................................................................ 19 Fair Labor Standards Act .......................................................................... 19 National Labor Relations Act .................................................................... 22 Employee Retirement Income Security Act and Microsoft III ................. 24 Title VII of the Civil Rights Act ............................................................... 26 Summary Observations .................................................................................. 28 Addendum: Detailed Review of Common Law Factors ............................. 29 Control of Worker ..................................................................................... 29 Additional Workers Hired by Worker ....................................................... 29 Providing Instruments, Materials and Supplies ......................................... 30 Worker Part of the Practice ....................................................................... 30 Skill, Nature of Occupation and Personal Service .................................... 31 Worker In or Out of Practice ..................................................................... 31 Scheduling ................................................................................................. 31 Discharge of Worker and Term of Employment ....................................... 32 Compensation ............................................................................................ 32 Fringe Benefits .......................................................................................... 32 Competition with Practice ......................................................................... 32 Other Factors ............................................................................................. 34 The Job's Not Done ....................................................................................... 36 Suggested References ...................................................................................... 37


THE EXPERT SERIES FOR DENTISTS™ Page 1

Overview of Legal and Practice Issues

Introduction—Dentistry has Historically had Associates

his publication will explore the pertinent legal and practice issues of classification of associate dentists as independent contractors.

Dentistry has always had the associate dentist.1 In recent years, however, the number of associate dentists and those continuing their education into a specialty or GPR program has grown significantly.2 This growth can be attributed to the debt most dental school graduates have upon graduating, the costs of setting up a practice, and the questionable demand for dental services that a new practice would experience currently and for the foreseeable future in many desirable geographical areas of the country.3

Recent Congressional and IRS Interest

Dentists have had an attraction for a significant number of years for hiring an associate dentist as an associate independent contractor4 and not as an employee. The number of articles in the dental literature on the subject of whether and how to hire an associate and whether it should be an

1 "An associate in dentistry is a term that applies to a dentist working at or in the practice of another dentist as

either an employee or independent contractor, preferably under the terms of a written contract. However, it is well understood that in dentistry there can be many variations of associate. These include the new graduate associate, the clinic/capitation associate, the independent contractor, the space-sharing associate, the veteran associate and the kinship associate." George Layman, DDS & Pat Muchmore, How To Hire An Associate 29 (1982).

2 See the 2000 Survey of Dental Practice, Characteristics of Dentists in Private Practice and Their Patients, American Dental Association, with a chart showing distribution of dentists solo proprietors, partners, independent contractors and non-owner dentists; See also Dentists in Non-Solo and Solo Practice, American Dental Association,(1997). Dentistry has always had at least a limited number of associate dentists practicing in the office of an owner dentist, for a limited discussion see the Introduction to the course manual for American Dental Association 1987-89 National Seminar Series, Do's and Don'ts of Associateship and Practice Valuation, presented by Larry R. Domer and Randall K. Berning.

3 In addition to the growth there are also new forms of associateship. Traditionally, there was only the associate employee or associate independent contractor. Today, in addition to the former there is the solo group and time share associateship which from a traditional view may not be associateships. The scope of this publication will not include a discussion of the solo group and time share associateships.

4 The use of independent contractor dentists in the practice of dentistry has been a common arrangement in the dental profession for many years. See Richard Berry, "Employment Relationships", 115 J. Am. Dental Assn. 114 (July 1987); Phillip Bonner & Randall K. Berning, 4:9 The DDS' Alert (Sept. 28, 1987).

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independent contractor arrangement is significant.5 There is concurrent attention being given to the issue at the federal level. Many dentists are aware that the Internal Revenue Service (Service) is reviewing suspect classification worker arrangements. From dental profession trade journals to the Wall Street Journal to tax magazines the issue is very much on center stage.6 Congressional interest continues in the area7, and a significant case from the 9th Circuit made its way to the federal Court of Appeals (see later discussion of Microsoft III at page 15).

A Controversial Issue for the Dental Profession

The issue of the associate dentist as an independent contractor has generated controversy as a result of both public and professional examination.8 Aside from the public spotlight, the controversy stems from the tension inherent in practice owners who hire associates as independent contractors instead of employees for financial and liability exposure reasons. On the financial side the practice owners wish to save payment or reporting as required of federal

5 Readers Guide of Dental Periodical Literature has a comprehensive list of topical headings relating to the area of

associateship. 6 See "See Sharper Line Is Sought Between Employee, Contractor, The Wall Street Journal, May 25, 1999 B2

relating how Congress may take action to make the distinction more readily apparent. Regarding classification issues and disputes, Congress did provide for immediate appeals of IRS classification determinations pursuant to the Taxpayer Relieft Action of 1997. See also earlier and on-going efforts, "IRS To Expand Withholding Tax Compliance Initiative", Tax News, Mar. 7, 1988, in pertinent part states:

"The initiative is designed to reduce misclassification of employees as independent contractors for tax purposes and to improve employer reporting of wages paid to these individuals on the mandated information return …" According to the article, the Service is attempting to deal with the problem on three levels. The third level being an attempt by the Service to determine if employers are misclassifying their workers as independent contractors or paying them without reporting their wages. "Currently IRS has nearly 400 collection officers working nationwide to investigate employers who misclassify workers. So far, the investigations have yielded an average of $4000 of additional tax assessed per return. The biggest source of leads in this area has been through tips from IRS collection officers and referrals from various states. The Service has attempted to tap into existing state compliance efforts because of the tendency of states to more closely monitor this area. Through the auspices of the National Association of Tax Administrators (NATA), IRS has cooperative agreements with over 25 states."

See also, Tax Report—"Workers misclassed as independent contractors are sought by IRS", Wall Street Journal, Nov. 16, 1988 at 1, col.5.

7 In the Summary of H.R. 4333, The Miscellaneous Revenue Act of 1988, as reported to the House Committee on Ways and Means, dated July 15, 1988, the following statement was found:

"The Committee agreed to require that the Treasury Department conduct a study of §1706 of the Tax Reform Act of 1986, relating to the status of independent contractors who provide services through third parties, and report to the House Committee on Way and Means and the Senate Committee on Finance no later than September 1, 1989."

8 Paul C. Gerber, "Facts You Should Know About Independent Contractor Status", Dental Management, Dec. 1987, at 38-42; John K. McGill and Bud Schulman, "IRS Issues Independent Contractor Guidelines", Dental Economics, Nov. 1987, at 77-80.



income tax, employer FICA, and FUTA (unemployment tax). At the state level owners want to save income tax, if the state has an income tax, disability insurance, if the state has a disability insurance program, and unemployment insurance (related to FUTA). On the liability side the law clearly treats the true associate independent contractor as a separate business contractor. Such treatment may be beneficial as it relates to insulating the practice owner from the independent contractor's professional negligence; indeed, the concept of the independent contractor arose from tort law.

Yet pitted against the above is a desire often equally strong. It is the desire of the practice owner in many cases to control the associates' methods and means of practicing. As will be discussed in this publication the controlling of the associate independent contractor can place the practice owner in a tenuous legal position. It is that legal position that is the subject of this publication.



Independent Contractor Status of Associate and Worker Classification

n determining whether an associate or worker is an independent contractor or an employee there are several considerations. These considerations are how the Internal Revenue Service defines employee

and independent contractor, the common law definitions of these terms, whether a contract delineating the relationship is effective, and the steps the Service uses to determine whether an employee or independent contractor relationship exists.

Primary Inquiry: Is the Worker an Independent Contractor or an Employee?

How the Service Defines Employee

For federal tax purposes, an "employee"9 is a person who performs services subject to control by an employer. Such control usually extends both to what services shall be performed and how they shall be performed.10 Even if an individual is permitted wide leeway and discretion in performing his or her assignments, he will be considered an employee11 as long as the employer

9 The Internal Revenue Code (IRC) exempts certain workers from classification as employees for federal income

and employment tax purposes. For example, IRC §3508 deems real estate agents and direct sellers, that is, persons engaged in the business of selling consumer products other than in a permanent retail establishment, to be self-employed. Also, §530 of the Revenue Act of 1978, as amended by the Tax Reform Act of 1986, §1706(a)-(d), specifically excludes certain technical personnel from being classified as statutory non-employees, namely, engineers, designers, drafters, computer programmers and system analysts. Internal Revenue Code §3121(d) also deems certain workers to be employees. For example, any officer of a corporation, or any individual who performs services for remuneration as an agent-driver or commission-driver engaged in distributing meat product, vegetable products bakery products, etc., or a full-time life insurance salesman.

10 IRS Pub. 539, Employment Taxes (Rev. Dec. 1988). 11 Several preliminary areas can be examined to determine if a worker classification is appropriate given the facts

of a given employment relationship. Initially the classification issue must start with an examination of how the worker has been treated if a current employment relationship exists or will be treated if a prospective relationship is contemplated. If the substance of the working relationship was such that the worker was in fact treated as an employee and not as an independent contractor, then no further inquiry will be made into the classification. See the discussion of the right to control test. Hal Infra, P.26. See U.S. v. Sierra Pacific Industries, 879 F. Supp. 2d 1117, 1125 (E.D. Cal. 2012). See Tieberg v. Unemployment Ins. Appeals Bd., 88 Cal. Rptr. 175, 2 Cal. 3d 943 , 471 P. 2d 975 (1970). In essence, if the person receiving the services of the worker has the right to control the manner and means of the result the worker is an employee. This is only one test, albeit a primary one, and the point is that if this test is not passed then no further inquiry is made into the relationship. Another preliminary area is to examine the course of conduct between the parties. This item can often

I



has the legal right to control both the method and the result of the services rendered, whether or not such right is actually exercised.12

How the Service Defines Independent Contractor

In contrast, an individual is considered an "independent contractor" if he or she is not subject to the control or direction of another as to the means and methods of accomplishing a particular work objective.13 The right to control and direct an individual with respect to the details and means by which a certain task is accomplished is the most important factor in determining whether an employment or independent contractor relationship exists.14

Common Law Definitions

The concept of an independent contractor arises out of tort law. An employer is not liable for tortious or negligent conduct of an independent contractor who is performing services for that employer, unlike an employee for whose actions the employer is responsible under the concept of “respondeat superior.”

Respondeat Superior and Agency are two distinct legal concepts that interact in independent contractor situations. Respondeat superior commonly applies to employee‐employer relationships, stating that the

immediately indicate that the classification was that of an employee and not an independent contractor. For example, the conduct of the employer when the employer does not issue IRS Form 1099. See IRS Form 1099. This item is so fundamental that when it is absent the strong conclusion, again often without further examination, is to conclude that the parties were in an employer-employee relationship. Still another area that immediately creates a suspect classification problem is when the practice owner provides fringe benefits to the worker. Where a worker clearly is an independent contractor normally fringe benefits are not provided. Medical policy coverage, continuing education course reimbursement, reimbursement for travel, and payment of professional negligence insurance are examples of fringe benefits normally offered by an employer to an employee. Such fringe benefits are excludable from an employee’s gross income under 26 U.S.C §132 and are conditioned upon employment. When benefits are offered to an independent contractor the line between whether the worker is employee or independent contractor is quickly blurred.

12 Priv. Ltr. Rul. 93-04-005 (Jan 29, 1993); See also Priv. Ltr. Rul. 83-23-003 (Feb. 18, 1983). Note, a letter ruling may not be used or cited as a precedent or relied upon by taxpayers other than the one to whom it was issued (or officers or employees of the Service). Rev. Proc. 89-1, 1989-1 C.B.740; Slatzman, IRS Practice and Procedure, para. 3.03(1),(6) and para. 3.04(2)(d) (1981); see also, I.R.C. §6110(j)(3) (West 1999). Individual taxpayers ask the IRS fact specific questions which the IRS may publish as private letter rulings. While these rulings only bind the individual taxpayer, and therefore do not set precedent, the rulings provide guidance as to how the IRS might rule in particular circumstances. The IRS may choose to redact the factual information of a private letter ruling and publish it as a Revenue Ruling. A revenue ruling is binding upon all taxpayers and sets precedent.

13 Priv. Ltr. Rul. 83-30-010 (Apr. 15, 1983). 14 See U.S. v. W.M. Webb, Inc. 397 U.S. 179 (1970), Clackama Gastroenterology Associates, P.C. v. Wells, 538

U.S. 440, 448 (2003), (stating in dicta that the common-law element of control is the principal guidepost).



employer is responsible for the actions of the employee conducted within the scope of the employment. However, this doctrine is also outside the scope of traditional employment through agency. The agency theory states that a principal is responsible for the actions of a designated agent, assuming the action is within the scope, nature, and timeframe of the agent’s duty.

The status of employee or independent contractor has historically been arrived at by applying the common law rules15 for determining whether there is an employer-employee relationship present.16

The common law factors17 have been used in the course of developing a number of authoritative sets of criteria to distinguish between employee and independent contractor status.18 However, no single factor is normally dispositive of the issue.19 These factors have sometimes been accorded the force of law. For instance, section 3121(d) of the Internal Revenue Code classifies an individual as an "employee" if such individual would be so deemed "under the usual common law rules applicable in determining the employer-employee relationship." In other venues, the common law factors are advisory only. Although only advisory they are nonetheless used by many state courts for guidance and also form the core of those sources that have the force of law. Restatement (Third) of Agency20, while removing prior “independent contractor”, and “servant” language, addresses employees acting within the scope of their employment:

1. An employer is subject to vicarious liability for a tort committed by its employee acting within the scope of employment.

2. An employee acts within the scope of employment when performing work assigned by the employer or engaging in a course of conduct subject to the employer's control. An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer.

3. For purposes of this section,

15 See The Ins and Outs of Hiring an Independent Contractor, The Wall Street Journal, September 17, 2009 16 Rev. Rul. 75-343, 1975-2 C.B. 402. 17 Common law factors can be thought of as a body of principles which has as its authority, usage, and custom. It

is to be distinguished from law created by legislatures. 18 Priv. Ltr. Rul. 87-03-071 (Oct. 23, 1986); Restatement (Second) of Agency §220 (1957); See generally,

France v. Southern Equipment Co., 689 S.E.2d 1, 8 (2010). http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Type-of-Relationship

19 Priv. Ltr. Rul. 87-03-071 (October 23, 1986). 20 Restatement (Third) of Agency §7.07 (2006).



a. an employee is an agent whose principal controls or has the right to control the manner and means of the agent's performance of work, and

b. the fact that work is performed gratuitously does not relieve a principal of liability.

Prior to the adoption of Restatement (Third) of Agency, Restatement (Second) of Agency specified common law factors adopted by several courts to determine the employer-employee relationship.21

Just having the list of common law factors is of limited value if the application of the list is not understood. It is therefore important to understand how to analyze and apply the factors. To use the factors think of them as weights on a scale. It is also important to emphasize that some factors weigh more than others and that each factor is not necessarily applicable to every case.

In cases where the employer-worker relationship is questionable, the common law factors are determined on a case-by-case basis.22

An expanded list tailored for dentistry can be seen to include other factors23 and still others appear in the form the Internal Revenue Service provides for determining if a worker is an employee for federal employment tax purposes.24 An addendum to this publication provides a review and application of the common law factors for dentists and their advisors.

Judicial application of the common law test indicates no single factor is determinative. All relevant facts and the circumstances of the parties are considered in making a determination of whether a person is an "employee". However, the paramount test seems to be the "right to control", which is ranked first by many courts. The right to control both the method and manner results in a determination that the relationship is one of employment of an employee, whereas the right to control only the outcome of the work results in a determination of independent contractor status.25 While the “right to control” test remains an important consideration, recent court decisions

21 Restatement (Second) of Agency §220 (1957). 22 Treas. Reg. §31.3121 (d)-3(c) which was promulgated on December 20, 1960, by T.D. 6516. 23 See generally, American Dental Association, Associateships: A Guide For Owner and Prospective Associates

(2001). 24 IRS Form SS-8. This IRS publication is designed to provide guidance to business employment classifications.

Either the business or worker may file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS for an official determination of the worker’s proper employment classification.

25 See generally, cases which have favored the common law right to control test. Kelley v. Southern Pacific Co, 419 U.S. 318 (1974); U.S. v. Silk, 331 U.S. 704 (1947); Khoury v. Edison Elect. Illuminating Co., 265 Mass. 236, 164 N.E. 77 (1928); Stokes v. Four-State Broadcasters, Inc., 300 S.W. 2d 426 (Mo. 1957); Albany College of Pharmacy v. Ross, 94 Misc. 2d 389, 404 N.Y.S. 2d 779 (Sup. Ct. 1978); Hollingbery v. Dunn, 68 Wash. 2d 75, 411 P.2d 431 (1966); Earthmovers, Inc. v. U.S., 199 B.R. 62 (1996).



demonstrate flexibility in this common law test. This trend considers various factors26 and the inability to satisfy the “right to control” test no longer exclusively determines the employer-worker relationship.

Contract Provisions are not Definitive

A common misconception among dentists is that a contract provision stating that the relationship is that of an independent contractor will insulate the relationship from being deemed to be an employer-employee relationship. This is not the case. The IRS is not obligated to honor a contract stating a worker is an independent contractor.27 A contract provision denying an employer-employee relationship is ineffective if such relationship in fact exists after applying the common law test.28 Although there is a presumption that individuals engaged in certain professions (law, medicine, dentistry, etc.), who maintain an independent private practice, are independent contractors and not employees of those for whom they perform services, it is not iron clad.29

Where the professionals are subject to the control and supervision by the parties for whom they perform services, they will be classified as employees and not independent contractors despite the presumption.30

Individuals Providing Technical Services

Impact of Revenue Ruling 87-41

The Internal Revenue Service issued Revenue Ruling 87-4131discusses whether certain individuals providing technical services are to be classified as employees or independent contractors for purposes of federal employment taxes. The ruling analyzes the status of the individuals under the common law rules discussed above and section 530 of the Revenue Act of 1978, as

26 See generally, In Re FedEx Ground Package System, Inc., Employment Practices Litigation, 273 F.R.D. 424

(2008) for a discussion of various state application of the common law “right to control” test. 27 http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Type-of-Relationship 28 Rev. Rul. 70-440, 1970-2 C.B. 209; See also, Rev. Rul. 70-309, 1970-1 C.N.S.B. 199. 29 Treas. Reg. §31.3401 (c)-l(c) which was promulgated on October 25, 1957, by T.D. 6259. It has remained in

effect without substantive change. The regulation creates the presumption that dentists are not employees. It provides in pertinent part:

"(C) Generally, physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business or profession in which they offer their services to the public, are not employees."

30 See Rev. Rul. 61-178, 1961-2 C.B. 153, where a physician with a private practice who worked part-time with a corporation was found to be an employee of the corporation. See also Rev. Rul. 70-629, 1970-2 C.B. 288; Priv. Ltr. Rul. 87-07-035 (Nov. 17, 1986) (workers were found to be employees and not independent contractors even when the agreements included much more than a provision delineating their status).

31 Rev. Rul. 87-41, 1987-1 C.B. 296.



amended by section 1706 of the Tax Reform Act of 1986 (Includes section 530(d) discussed below. Act Section 530 is pivotal to this area and will be discussed in detail below.) The ruling in this author's opinion has no direct impact on the classification of individuals performing services for dental practice owners insofar as Act Section 530(d) is concerned.

Act Section 530(d) works to deny the relief granted by Act Section 530(a) in certain situations, when those situations involve a technical service worker such as an "engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work." Since the normal dental practice would not have such individuals associated with it, it appears that Act Section 530(d) would not have any impact on those practices. Because of the language "similarly skilled worker engaged in a similar line of work," one can safely assume the amendment applies only to individuals performing services of a technical nature, such as those specifically mentioned.32

The Steps the Service Uses to Determine Whether an Employee or Independent Contractor Relationship Exists

‰Step 1: Is the relationship between the taxpayer and an individual an employer-employee relationship?

The taxpayer is to follow the guidelines in Treasury Regulations Sections 31.3121(d)-1(c); 31.3306(i)-1; and 31.3401(c)-1. The definition of an employer-employee relationship in the guidelines is generally the same as the common law definition, i.e., one in which the taxpayer for whom the services are performed has the right, whether or not exercised, to control and direct the individual who performs the services. This right extends not only to the result but also to the means. The guidelines further provide that an individual who follows an independent trade, business, or profession in which he or she offers the services to the public is generally not an employee. If, under the definition, an employer-employee relationship is found to exist, any other designation given the relationship by the parties is irrelevant.

To assist the taxpayer further in making the determination, the ruling gives twenty factors identified in past revenue rulings which indicate whether the control, or right of control, present in the relationship is sufficient to establish

32 Section 530 of the Revenue Act of 1978, Pub. L. 95-600, 1978-3 C.B. (Vol.1), 119, 120, as extended

indefinitely by sec. 269(c) of the Tax Equity and Fiscal Responsibility Act of 1982, and as amended by section 1706 of the Tax Reform Act of 1986. See also Rev. Proc. 85-18, 1985-1 C.B. 518, for instructions for implementing the provisions of Section 530; Notice 87-19, 1987-1 C.B. 455.



it as an employer-employee relationship. The list closely follows the common law rules.33

Revenue Ruling Factors

Common Law Factors

1. Instructions; 2. Training; 3. Integration; 4. Services rendered personally; 5. Hiring, supervising, and paying

assistants; 6. Continuing relationship; 7. Set hours of work; 8. Full‐time required; 9. Doing work on employer's

premises; 10. Order or sequence set; 11. Oral or written reports; 12. Payment by hour, week,

month; 13. Payment of business and/or

traveling expenses; 14. Furnishing of tools and

materials; 15. Significant investment; 16. Realization of profit or loss; 17. Working for more than one

firm at a time; 18. Making service available to

general public; 19. Right to discharge; and 20. Right to terminate

1. Control of Worker; 2. Additional workers hired by

worker 3. Providing instruments, materials

and supplies; 4. Worker part of the practice 5. Skill, nature of occupation and

personal service 6. Worker in or out of practice 7. Scheduling 8. Discharge of worker and term of

employment 9. Compensation 10. Fringe benefits 11. Competition with practice 12. Miscellaneous factors

If it is determined that no employer-employee relationship exists, i.e., the individual is an independent contractor, the analysis stops. However, if an

33 See a bankruptcy case that has indicated the twenty factor test is not all inclusive and considered four

additional factors: 1) industry practice or custom in the area 2) intent of the parties, 3) whether written, signed independent contractor agreements were executed and 4) whether employee type benefits are provided. Rasbury, Billie Bktcy Ct. AL, 71A AFTR 2nd 93-4539, 1991.



employer-employee relationship is established, the taxpayer then looks to Act Section 530 to determine whether that section grants relief.

Specifically, Act Section 530(a)(2) creates three conclusive presumptions. The presence of any one of the enumerated presumptions constitutes "reasonable basis" within the meaning of the statute as will be discussed in detail below. The statute provides in pertinent part:

Act Section 530(a) Termination of Certain Employment Tax Liability.

(2) Statutory Standards Providing One Method of Satisfying the Requirements of Paragraph (1).—For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer's treatment of such individual for such period was in reasonable reliance on any of the following:

a. judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;

b. a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or

c. long-standing recognized practice of a significant segment of the industry in which such individual was engaged.

‰Step 2: Is the taxpayer entitled to relief under Act Section530(a)?

Act Section 530(a) provides that, if a taxpayer did not treat an individual as an employee for any period, the individual shall not be deemed an employee unless the taxpayer did not have a reasonable basis for not treating the individual as an employee. Additionally, for any period after December 31, 1978, this relief applies only if 1) all federal tax returns (including information returns) required to be filed by the taxpayer with regard to the individual for the period are filed on a basis consistent with the taxpayer's treatment of the individual as not being an employee, and 2) the treatment is consistent with the treatment by the taxpayer of any individual holding a substantially similar position for any period beginning after December 31, 1977.

If the taxpayer is not entitled to relief under Act Section 530(a), the analysis ends here. If, however, the taxpayer is entitled to Act Section 530(a) relief,



the analysis continues to determine whether Act Section 530(d) denies this relief because the individual is a technical service worker.

‰Step 3: Is Section 530(a) relief denied by Section 530(d)?

Act Section 530(d), which applies to remuneration paid and services rendered after December 31, 1986, provides:

(d) EXCEPTION—This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

Revenue Ruling 87-41 states:

Section 530(d) … does not affect the determination of whether such workers are employees under the common law rules. Rather, it merely eliminates the employment tax relief under Section 530(a) … that would otherwise be available to a taxpayer with respect to those workers who are determined to be employees of the taxpayer under the usual common law rules.34

Section 530: Truly Safe Haven Legislation?

For federal purposes, pursuant to Section 530(a), of the Revenue Act of 1978, as amended by Section 1706 of the Tax Reform Act of 1986, an employer can continue to treat a worker as a non-employee if the following circumstances exist:

1. There is a "reasonable basis" for not classifying an individual as an employee;

2. The employer has not previously treated, nor currently does treat, an individual as an employee; and

3. The employer files all tax returns required, including information returns, on the basis that an individual is not an employee.35

34 Rev. Rul. 87-41, 1987-1 C.B. 296, 300. 35 For further discussion of Section 530 safe haven legislation See Queensgate Dental Family Practice, Inc. v.

U.S., 91-2 U.S. Tax Cas. (CCH) P50, 536 (M.D. Pa. 1991); U.S. v. MacKenzie, 777 F.2d 811 (2d. Cir. 1985) cert. denied, MacKenzie v. U.S. 476 U.S. 1169 (1986); Donovan v. Tastee Freez (Puerto Rico), Inc., 520 F.



The "reasonable basis" factor mentioned above can be satisfied in various ways. For example, in Act Section 530(a)(2)(A), above, the ways are judicial precedent, published IRS rulings, including technical advice memoranda or letter rulings, wherein an individual has been held to be an independent contractor.36 Such precedent or rulings can be utilized whether or not they involve the dental industry or business itself. A past IRS audit in which no employment tax deficiencies were assessed on moneys paid to an individual holding a position substantially similar to one held by an individual in question will also fulfill the "reasonable basis" requirement.37

More attainable, perhaps, is that in Act Section 530(a)(2)(C), a long-standing recognized practice of a significant segment of the industry, in which an individual in question will satisfy the "reasonable basis" test. In general, though, any evidence that a particular individual functioned as an independent contractor rather than an employee should suffice for this purpose at the federal level.38 The foregoing, particularly the question of whether independent contractor status is a long standing practice in the dental industry, may have significant impact on dentists who desire to establish independent contractor worker relationships with confidence. However, it is important to emphasize that the above applies only at the federal level and does not bind the states. Some states, such as California, elect not to follow Section 530 and vigorously pursue reclassification of independent contractors as employees

Section 530: Legislative History and IRS Developments

Because Act Section 530 is pivotal to this area of the law it is valuable to examine Congressional intent behind the enactment of the Section and to compare that history with current Service developments.39

Congress enacted Act Section 530 as remedial legislation to relieve employers of the burden of surprise or uncertain imposition of retroactive tax liability resulting from an increase in IRS employment status audits. The

Supp. 899 (D.P.R. 1981); Ren-Lyn Corp. v. U.S., 968 F. Supp. 363 (N.D. Oh. 1997); and Price Cable, Inc. v. U.S., 1998 WL 419979 (D. Del. 1998).

36 See for example, Tech. Adv. Memo., Priv. Ltr. Rul. 93-21-001 (Feb. 1, 1993). 37 See, Rev. Rul. 83-152, 1983-2 C.B. 172, where "reasonable basis" is liberally applied to allow a new

corporation to rely on the previous audit of the old corporation, since the new corporation is a continuation of the old corporation's proprietorship and continues to treat individuals in the same manner.

38 Id. 39 The author would like to acknowledge Eugene O. Duffy, Attorney At Law, O'Neil Cannon & Hollman, S.C.,

of Milwaukee, Wisconsin for select materials provided for this section and collegial discussion related to the legislative history of §530.



Senate Report is beneficial; see S. Rep. No. 1263, 95th Cong., 2d Sess. 209-210, reprinted in 1978 U.S. Code Cong. & Ad. News 6761,6972-73.40

The legislative history specifically indicates that the legislation was intended to "grant[s] relief if a taxpayer had any reasonable basis for treating workers as other than employees"41 and that "reasonable basis" is to be "construed liberally in favor of taxpayers."42 This aspect of the legislative history regarding "reasonable basis" has been commented on in a case involving a mining company that hired workers as independent contractors to work a gold and silver mine in Gila County, Arizona.43 The mining company submitted evidence in General Investment Corp. v. United States, that virtually all mines of a similar nature in a local area of 4,400 miles hired their workers as contract labor, and that the workers would not have worked for the mining company if they were hired as employees because their wages would lower due to deduction of taxes paid.44 The court accepted on review that the district court had not erred in finding the above as meeting the "reasonable standard" of Section 530.45 The case illustrates that the element "reasonable basis" is to be construed liberally in favor of taxpayers and cites generously from the Congressional Record relating to Section 530 for support in the proposition.46

Congressional intent with regard to the industry practice "safe haven" element seems clear. The history indicates that the "test does not require that a practice be uniform throughout an entire industry."47 In view of the above, it seems certain, as discussed in General Inv. Corp., that "Congress intended to protect employers who exercised good faith in determining whether or not their workers were employees or independent contractors."48 Moreover, it seems clear that a taxpayer need only make a minimal showing to establish "reasonable basis", for the Service to require more would frustrate Congressional intent.49

Current developments seem to be at odds with the legislative history. The Service's recent position in Technical Advice Memorandum 8733004 seems

40 This aspect of the legislative history has been commented on in General Inv. Corp. v. United States, 823 F 2d

337, 339 (9th Cir. 1987). 41 H.R. Rep. No. 1748, (1978) (emphasis added). 42 Id. 43 Gen. Inv. Corp. v. U.S., 823 F. 2d. 337 (9th Cir. 1987). 44 See id. at 340-41. 45 See id. at 341. 46 See id. at 340. 47 H.R. Rep. No. 1748, supra note 34. 48 Gen. Inv. Corp. v. U.S., 823 F.2d. at 340. 49 Id.



to take direct issue with Congressional intent and judicial interpretation. Inthat Memorandum, the apparently misleading suggestion is made that in order to establish the "industry practice" safe haven, it must be shown that "nearly all of the employers in the segment should be found to be participating." As authority for the proposition, it relies on the legislative history of the House Committee. A careful reading of the above cited legislative history establishes that no such suggestion is made. The memorandum concludes that sixty percent of the relevant industry does not represent a "significant" segment of the industry.

The burden is on the Commissioner to establish by unequivocal evidence, that Congress intended "significant" to mean "nearly all of the employers in the segment should be found to be participating." The legislative history, as noted above, seems to establish the opposite. The position of the Service in Technical Advice Memorandum 8733004 simply seems untenable in view of the legislative history and the plain use of the language chosen by Congress.

For instance, it is generally accepted that statutory words are presumed to be used in their ordinary and usual sense, with the meaning commonly attributed to them.50

It is also well settled that when it is asserted that the purpose for the legislation is plainly at odds with the meaning of the relevant statutory language, the courts have required unequivocal evidence of legislative purpose before construing the statute so as to override the plain meaning of the words used therein.51 In the present context, the relevant inquiry is whether there is unequivocal evidence that Congress intended that Section 530 would, by that section's own terms, and without any regulatory requirement, require that "nearly all of the employers in the segment should be found to be participating" in order to establish a "significant" segment.

The law requires that "significant" be accorded its common meaning. Therefore, "significant" should be construed to mean any degree of presence which has "meaning" within the relevant industry segment. In this regard, it is pertinent to note that research, albeit not exhaustive research, indicates that Congress has used the term significant as a modifier in one instance, in Code Section 613A(d)(3), and the Commissioner has construed the term once at Treas. Reg. Section 1.103-10(f)(2). In each instance, "5 percent or more" has been defined to mean significant. It seems plain in this context that the Service should apply a similar interpretation and not apply a wildly higher level.

50 U.S. v. Am. Trucking Assoc., 310 U.S. 534, 543 (1940); Caminetti v. U.S., 242 U.S. 470, 485-86 (1917);

Atchison, Topeka and Santa Fe Ry. Co. v. United States, 628 F. Supp. 1431, 1437 (D. Kan. 1986). 51 Zinniel v. Commissioner., 89 T.C. 357, 364 (1987); Huntsberry v. Commissioner, 83 T.C. 742, 747-48 (1984).



Microsoft III

A case52 involving a class of Microsoft workers has added to the questions surrounding misclassification. The case involved a large number of “contingent workers”, treated as independent contractors but fully integrated in to the Microsoft workforce. The IRS audited Microsoft, and Microsoft conceded, preparing W-2s and paying FICA taxes. These workers had independent contractor agreements stating that they were not to receive benefits, so Microsoft maintained that they were not obligated to offer certain benefits to the workers. The workers sued for the benefits, and the court of appeals forced the 9th Circuit Court to apply what are called the “Darden factors”.53 These factors are: 1) the worker’s expectations, 2) his/her reliance on expected payment, and 3) his/her bargaining power in drafting the controlling employment agreement. The case went to the Supreme Court, which did not adopt the IRS’ 20 factors, but instead listed the 12 most significant:

1. Skill required

2. Source of tools and instruments

3. Location where work is performed

4. Duration of relationship of the parties

5. Hiring party’s right to assign additional projects

6. Hired party’s discretion over when and how long to work

7. Method of payment

8. Hired party’s role in hiring and paying assistants

9. Whether work is part of hiring party’s regular business

10. Whether the hired party is in business

11. Whether “employee benefits” are provided

12. Tax treatment of the hired party

ERISA is administered by the Department of Labor, which applies a general rule that an employer may exclude any employee which works less than 1000 hours in a 12 month period. This rule is not automatic. An employer’s benefit plan must provide benefits to temporary or part-time employees or Independent contractors who are common law employees. Furthermore, courts struggle to distinguish independent contractors from the definition of “employee” provided under ERISA.54 Instead, the Supreme Court in Darden

52 Vizcaino v. Microsoft Corp. No. C93-178D, 1998 U.S. Dist, Lexis 11282; 120 F.3d C. 1006. 53 Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992). 54 29 U.S.C. § 1002(6) (defining employee as “any individual employed by an employer”)



chose to enumerate factors to consider in making this determination, labeling the statutory definition as “completely circular and explains nothing”.55

Other Sources

Three publishers have published general guides on the independent contractor and employee relationship issue. They are The Employee's Handbook: Independent Contractor and Employee published by the Thompson Publishing Group, Independent Contractor Status: Legal Guide to Independent Contractor Status by Robert W. Wood, Esq. published by Wiley Law Publications, and IRS Publication 15-A (Rev. January 2013) available via the internet at www.IRS.gov .

Tax Penalties on Finding Improper Classification

A full understanding of the area of worker classification can only be achieved by a doctor or a doctor's advisors if there is an appreciation of the tax implications of improper classification. The tax area is both federal and state. At the federal level the classification issue affects income tax, employer FICA, employee FICA, and FUTA (unemployment tax), with the wrong classification resulting in interest and penalties. At the state level, income tax is affected if the state has an income tax, disability insurance, if the state has a disability insurance program, unemployment insurance (related to FUTA) payments due and potentially other state payroll taxes. Again, as at the federal level, the wrong classification can result in interest and penalties.

A worker is found to have been treated as an independent contractor when the regulatory authority finds the proper classification to be employee, when there is a is a failure to withhold at 1.5% of wages, 20% FICA.56 Where no information returns are filed, both amounts double, i.e., 3% of wages and 40% of FICA.57

Tax assessments that are levied as a result of the improper classification do not fall under the general statute of limitations, which is three years from the date of filing.58 Rather, when no return is filed there is no definite period for

55 Nationwide Mutual Insuarance Co. v. Darden, 503 U.S. 318 (1992). 56 I.R.C. §3509(a) (West 1999). 57 I.R.C. §3509(a),(b) (West 1999). 58 I.R.C. §6501(a) (West 1999).



the statute.59 When there is a "false or fraudulent return with the intent to evade tax" there is also an indefinite period for the statute.60

The Service will, in the above two situations, assess the "amount of the tax evaded, or not collected, or not accounted for and paid over." Also there are additional amounts due for the employer contributions and the interest and penalties.

It often comes as a surprise to doctors that the employer dentist is liable even though the worker that was treated as an independent contractor-employee fully paid the appropriate tax. The appropriate rules in this area apply "unless such failure is due to reasonable cause and not willful neglect" in which case the 1.5% and 20% rates would again seem to apply.61

A related area to the tax area above is that of workers' compensation. Generally, the percentage of workers' compensation can run from 1% to 45% of an employer's payroll depending on job classification. There are, of course, significant reasons to have proper classification including the worker's compensation liability exposure. There are significant differences between exposure for the employee's acts and for the acts of the independent contractor.

59 I.R.C. §6501(c)(3) (West 1999). 60 I.R.C. §6501(c)(1) (West 1999). 61 I.R.C. §3509(b)(1) (West 1999).



Related Legal Areas

ther laws that can be affected by improper classification of a worker are the following: The Fair Labor Standards Act (FLSA) which involves minimum wage, overtime, and other related items, the

National Labor Relations Act (NLRA) which involves union activities, unfair labor practices, and other related items, the Employee Retirement Income Security Act (ERISA) which involves pension and profit sharing plans, health and medical plans, and other aspects of employee retirement, Title VII of the Civil Rights Act, and the Fair Employment and Housing Act.

A brief discussion of the impact of improper worker classification on FLSA, NLRA, ERISA and Title VII of the Civil Rights Act will be the focus of the following material.

The reader should note in reviewing the material below that the IRS has stated that a determination by a federal agency that an individual performing services is not an "employee" for Social Security Tax and unemployment tax purposes is not determinative of status for withholding tax purposes.62 In addition, a holding by the National Labor Relations Board for labor relations purposes, that an individual is or is not an "employee", is not binding on the IRS for tax purposes.63

Fair Labor Standards Act 29 U.S.C.S. §§201 et. seq.64

The term "employee" is defined in 29 U.S.C.S. §203(e). The definition is not one providing a well circumscribed area of the law. It merely says that except as otherwise provided in that paragraph "the term `employee' means any individual employed by an employer." However, courts have pointed out that the statutory definitions under FLSA are broad and comprehensive to accomplish the remedial purposes of the Act.65

The determination of "employee" status under FLSA does not depend on isolated factors, but as noted in Rutherford Food Corp. v. McComb, a long

62 Rev. Rul. 75-343, 1975-2 C.B. 402. 63 Rev. Rul. 78-54, 1978-1 C.B. 36. 64 Fair Labor Standards Act of 1938, 29 U.S.C.S. §§201 et seq. (Law. Co-op. 1975 & Supp. 1989). 65 Secretary of Labor v. Lauritzen, 835 F.2d 1529, 1534 (7th Cir. 1987) cert. denied Lauritzen v. McLaughlin, 488

U.S. 898 (1988), reh. denied Lauritzen v. McLaughlin, 488 U.S. 987 (1988); See U.S. v. Silk, 331 U.S. 704, 711-12 (1947); See Baystate Alternative Staffing, Inc. v. Hermann, 163 F.3d 668 (1st Cir. 1998).

O



standing case in the area, on circumstances of the whole activity.66Courts generally employ the "economic realities" test under which the following criteria are mentioned as being considered, though none is controlling:

1. The extent to which the services in question are an integral part of the "employer's" business.67

2. The amount of the "employee's" investment in facilities and equipment.68

3. The nature and degree of control retained or exercised by the "employer" (though there is authority that says this factor is controlling).69

4. "Employee's" opportunity for profit or loss depending on managerial skill.70

5. The amount of initiative, skill, judgment, or foresight required for success of the claimed independent enterprise.71

6. Permanency and duration of the relationship.72

The economic realities test separates independent contractors from employees by determining whether or not an employee is actually dependent upon the business rendered.73 The enumerate factors listed above, known as the “Silk Factors” assist the court in determining the economic reality of the employment relationship.74

66 Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947); Layton v. DHL Exp. (USA), Inc., 686 F.3d 1172,

1177 (11th Cir. 2012). 67 Donovan v. DialAmerica Marketing, Inc., 757 F.2d 1376 (3d Cir), cert. denied, 474 U.S. 919 (1985);

Cherichetti v. PJ Endicott, Co., 2012 WL 5354308, at *3 (D. De Oct. 26, 2012). 68 Donovan v. Sureway Cleaners, 656 F.2d 1368, 1370 (9th Cir. 1981); Real v. Driscoll Strawberry Assoc., Inc.,

603 F.2d 748 (9th Cir. 1979). Usery v. Pilgrim Equipment Co., 527 F.2d 1308 (5th Cir.), cert. denied, 429 U.S. 826 (1976); See also, Donovan v. DialAmerica Marketing, Inc., 757 F.2d 1376 (3d Cir.), cert. denied, 474 U.S. 919 (1985); Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 666 (5th Cir. 1983).

69 See, Velez v. Sanchez, 693 F.3d. 308, 330 (2nd Cir. 2012); Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir. 1984); Goldberg v. Warren Brothers Roads Co., 207 F. Supp. 99 (D. Me. 1962); Cf., Blankenship v. Western Union Telegraph Co., 161 F.2d 168 (4th Cir. 1947); aff'd 161 F.2d 168 (1947) (where the Court finds the right to control manner of doing work is principal consideration in determining whether one is employed).

70 Real v. Driscoll Strawberry Assoc., 603 F.2d 748 (9th Cir. 1979). 71 Real v. Driscoll Strawberry Assoc., 603 F.2d 748 (9th Cir. 1979); Usery v. Pilgrim Equipment Co., 527 F.2d

1308 (5th Cir.), cert. denied, 429 U.S. 826 (1976). 72 Zavala v. Wal-Mart Stores, Inc., 393 F. Supp. 2d 295, 328 (D. N.J. 2005); Donovan v. DialAmerica

Marketing, Inc., 757 F.2d 1376, 1385 (3d Cir.), cert. denied, 474 U.S. 919 (1985); Usery v. Pilgrim Equipment Co., 527 F.2d 1308 (5th Cir.),cert. denied, 429 U.S. 826 (1976); Haywood v. Barnes, 109 F.R.D. 568, 587 (E.D.N.C. 1986).

73 Solis v. Intern. Detective & Protective Service, Ltd., 819 F. Supp. 2d 740, 749 (E.D. Ill. 2011). 74 Id.



Economic Realities Test:

The economic realities test applies the Silk Factors to determine whether employees are actually dependent upon the business to which they render service. The Silk Factors are as follows:

1) The degree and nature of control that the employer has over the manner in which the alleged employee performs the work;

2) The chance that the alleged employee has for profit or loss depending on his or her skill;

3) The alleged employee's own investment in the equipment or materials needed to complete the work;

4) Whether the service at issue requires special skill; 5) Whether the employment relationship is permanent; and 6) The extent to which the alleged employee's service is an “integral part” of the

employer's business.

For purposes of the FLSA, the following have been specifically mentioned by courts as not controlling:

1. contractual designations,75 and

2. intent of the parties.76

Courts have also turned to similar cases for guidance in making a determination of an employment relationship for FLSA purposes.77 However, one court has said that determinations under other statutes are not controlling.78

The common law test of an employment relationship has also been held to be not determinative for FLSA purposes.79

75 See, Rutherford Food Corp. v. McComb, 331 U.S. 729-30; Robicheaux v. Radcliff Material, Inc., 697 F.2d at

667; Walling v. McKay, 70 F. Supp. 160, 172 (D. Neb.), aff'd, 164 F.2d 40 (8th Cir. 1946); Nunneley v. Farmers Ins. Exchange, 564 P.2d 231, 233 (Okla. 1977).

76 Rutherford Food Corp. v. McComb, 331 U.S. 728-29; Brennan v. Partida, 492 F.2d 707, 709 (5th Cir.), later appeal on other grounds, 613 F.2d 1360 (5th Cir. 1974).

77 See, Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947); U.S. v. Silk, 331 U.S. 704 (1947); Dunlop v. Carriage Carpet Co., 548 F2d 139 (6th Cir. 1977).

78 Walling v. Portland Terminal Co., 330 U.S. 148, 150 (1947). 79 Bartels v. Birmingham, 332 U.S. 126 (1947); Beliz v. W.H. McLeod & Sons Packing Co., 765 F.2d 1317 (5th

Cir. 1985); Dunlop v. Dr. Pepper-Pepsi Cola Bottling Co., 529 F.2d 298 (6th Cir. 1976);Mednick v. Albert Enterprises, Inc., 508 F.2d 297 (5th Cir. 1975); Maldonado v. Lucca, 629 F. Supp. 483 (D.N.J. 1986).



National Labor Relations Act 29 U.S.C.S. §151 et. seq. 80

The stated purpose of this law is to eliminate the causes of certain substantial obstructions to the free flow of commerce and to mitigate and eliminate these obstructions when they have occurred by the practice and procedure of collective bargaining.81

The Act is interpreted in the following ways:

1. in light of its purposes,82

2. by resorting to legislative history when provisions are ambiguous,83

3. as a whole84,

4. liberally and broadly,85 and

5. regardless of state law.86

There are several requirements for the NLRB's assertion of jurisdiction, all of which must be met, and even if these are met, the NLRB may still decline jurisdiction. The basic jurisdictional requirements87 are:

1. The existence of a labor dispute, that is, any controversy over either conditions of employment or the association or representation of persons in negotiating, arranging, or maintaining such conditions.

2. Which affects commerce, that is, all trade, transportation, or communication (except that conducted in one state) which is in commerce or burdens or obstructs commerce, or tends to lead to a labor dispute.

80 See generally, Bartels v. Birmingham, 332 U.S. 126 (1947); Beliz v. W.H. McLeod & Sons Packing Co., 765

F.2d 1317 (5th Cir. 1985); Dunlop v. Dr. Pepper-Pepsi Cola Bottling Co., 529 F.2d 298 (6th Cir. 1976); Mednick v. Albert Enter., Inc., 508 F.2d 297 (5th Cir. 1975); Maldonado v. Lucca, 629 F. Supp. 483 (D.N.J. 1986).

81 29 U.S.C.S. §151 (1999). 82 NLRB v. Hearst Publications, 322 U.S. 111 (1944). 83 See, NLRB v. Lion Oil Co., 352 U.S. 282 (1957). 84 See, NLRB v. Lion Oil Co., 352 U.S. 282 (1957). 85 Dept. and Specialty Store Employees' Union Local 1265 v. Brown, 284 F.2d 619, 626 (9th Cir.), cert. denied,

366 U.S. 934 (1961). 86 NLRB v. Hearst Publications, 322 U.S. at 123-24. 87 JURISDICTIONAL STANDARDS, NATIONAL LABOR RELATIONS BOARD, available at http://www.nlrb.gov/rights-

we-protect/jurisdictional-standards.



3. Involving employers, that is, any person acting as an employer or agent of same, unless specifically excluded from the Act. "Employer" necessitates control of the means and end of the work performed.88

4. Involving employees, that is, individuals whose work is controlled by the employer both as to the results of the work and the means by which it is performed. Note: a person is not necessarily an employee just because s/he meets the test. The job held and other factual circumstances are also considered.

Persons who are independent contractors are expressly excluded from the coverage of the NLRA, by 29 U.S.C.S. §152(3). The test to determine status is the employing entity's right to control the individual's work.89 The right, not its exercise, is controlling.90 The test is a balancing test wherein status is determined from the totality of the circumstances and no single factor controls.91 “An employer-employee relationship exists when the employer reserves the right to control not only the ends to be achieved, but also the means to be used in achieving such ends. On the other hand, where control is reserved only as to the result sought, an independent contractor relationship exists. Note, however, that a person determined not to be an independent contractor is not automatically classified as an "employee" in the statutory sense. For example, a supervisor is an employee, but is not considered an employee for purposes of the NLRA.

Courts have commented on the impact of other laws on the interpretation and application of the NLRA:

1. Common Law—the NLRA was enacted to enforce a public policy unknown to the common law. Therefore, its applicability must be determined from the purposes of Congress, not common law rules.92

2. FLSA—the NLRA and the FLSA do not conflict and are controlling in their respective spheres.93 The FLSA establishes certain rules governing wages, minimum age requirements and other working conditions. The

88 See, Williams v. U.S., 126 F.2d 129 (7th Cir.), cert. denied, 317 U.S. 655 (1942); (Federation rules precluded

establishments from having the right to control orchestra members, so orchestra leader, who, among other things, made bookings and collected and distributed pay, was found to be members employer and therefore liable for social security taxes and subject to loss of membership in the music Federation.).

89 NLRB v. United Ins. Co. of Am., 390 U.S. 254, 256 (1968); Herald Co. v. NLRB, 444 F.2d 430, 432-33 (2nd Cir.), cert. denied, 404 U.S. 990 (1971); NLRB v. Silver King Broad. of S.Cal., 85 F.3d 637 (9th Cir. 1996).

90 See, SIDA of Hawaii, Inc. v. NLRB, 512 F.2d 354 (9th Cir. 1975); Brown v. NLRB, 462 F.2d 699, 702 (9th Cir.), cert. denied, 409 U.S. 1008 (1972).

91 NLRB v. A.S. Abell Co., 327 F.2d 1, 4-5 (4th Cir. 1964) (stating that the common law test should be used to determine whether a worker is an independent contractor or an employee).

92 Northern Pacific RR Co. v. Reynolds, 68 F. Supp. 492 (D. Minn. 1946), aff'd, 168 F.2d 934 (8th Cir.), cert. denied, 335 U.S. 828 (1946).

93 Gatliff Coal Co. v. Cox, 152 F.2d 52 (6th Cir. 1945).



NLRA establishes rights and obligations of parties to collective bargaining relationships and the process by which agreements are negotiated. The substance of those agreements must conform with the FLSA.

3. ERISA—ERISA preempts the field of pension funding, vesting, and administration. However it does not dictate the substance of pension benefits, which are often the result of collective bargaining performed in accord with the NLRA. ERISA protects the benefits negotiated under NLRA.94

4. Civil Rights Laws—Title VII of the Civil Rights Act of 1964 and the NLRA do not conflict with or preempt each other.95 The Civil Rights Act protects individuals from racial and sexual discrimination. NLRA protects against discrimination on the basis of labor union activities. Racial and sexual discrimination and antiunion discrimination can appear in the same set of facts but are separate violations of different statutes, reflecting distinct rights and remedies from different sources.

An aggrieved party may seek relief simultaneously under the Civil Rights Act and the NLRA; but, the fact that certain employment practices are violative of Title VII does not necessarily mean that such conduct violates the NLRA.96

Employee Retirement Income Security Act (ERISA) 29 U.S.C.S. §§1001-1462 97

Two of the primary purposes of ERISA are to expand the coverage of private pension plans and to promote solvency of plans to assure payment of benefits.

ERISA is best studied by comparing it to the Fair Labor Standards Act (FLSA) discussed above. Both are remedial statutes designed to protect employee compensation. FLSA requires the payment of minimum and overtime wages98 while ERISA attempts to protect the expectations of employees and their beneficiaries in anticipated benefits.99 ERISA and FLSA appear interrelated because they share similar language, purposes, and goals. A number of jurisdictions hold that an independent contractor can be considered an ERISA beneficiary though not a participant.

94 Malone v. White Motor Corp., 435 U.S. 497 (1978). 95 DeMalherbe v. Int'l Union of Elevator Constructors, 438 F.Supp. 1121, 1129 (N.D. Cal. 1977); See, Marshall

v. Western Grain Co., 838 F.2d 1165 (11th Cir. 1988). 96 Chrapliwy v. Uniroyal, Inc., 458 F.Supp. 252 (N.D. Ind. 1977). 97 Employee Retirement Income Security Act of 1974, 29 U.S.C.S. §§1001-1462 (Law Co-op. 1982 & Supp.

1989). 98 29 U.S.C.S. §§206, 207 (West 1999). 99 29 U.S.C.S. §1001(b) (West 1999); Hollis v. Provident Life and Accident Ins. Co., 259 F.3d 410 (5th Cir 2001).



The definitions of "employer" under ERISA and FLSA are as follows. ERISA defines employer, in pertinent part, as meaning "any person acting directly as an employer, or indirectly in the interest of an employer, in relation to an employee benefit plan."100 Whereas FLSA defines an employer as "includ[ing] any person acting directly or indirectly in the interest of an employer in relation to an employee." 101

An accepted principle of statutory construction is that Congress is cognizant of other federal legislation when it enacts a specific Act.102 The legislative history of ERISA sheds little light on the development of definitions under ERISA. Thus it is necessary to resort to interpretation of similar terms in the federal statutes in the area of employer-employee relations.103 Because FLSA and ERISA are similar in many respects, the meaning of terms under FLSA can be considered when determining the meanings for ERISA.

The language, legislative history, and case law of the NLRA is less helpful because the definition of "employer" in NLRA is dissimilar to that of ERISA and the purposes of the Acts are different. "Employer" in NLRA is defined to include "any person acting as an agent of an employer, directly or indirectly" (emphasis added).104 NLRA and the broader LMRA (Labor Management Relations Act, 1947, 29 U.S.C.S. §§141-197) were enacted to regulate the relationship of unions and employees. In contrast, ERISA and FLSA are designed to protect employee compensation.

If ERISA provisions are construed in a fashion similar to FLSA provisions, then the "economic realities" test would apply. As already reviewed under the FLSA section of this publication, this test rejects conventional limitations on such concepts as "employee" and "employer" and focuses instead upon the underlying economic facts,105 and on the legislative purposes of the law under which the scope of the employer-employee relationship is in question.106

Some minor modification to the "economic realities" analysis is appropriate in ERISA cases. Under FLSA the focus of the test is the control exercised by the person to be charged over the employees of the company.107 This focus probably stems from the definition of employer under FLSA which states "any person acting directly as an employer, or indirectly in the interest of an

100 29 U.S.C.S. §1002(5) (West 1999) 101 29 U.S.C.S. §203(d) (West 1999). 102 See, Cannon v. Univ. of Chicago, 441 U.S. 677 (1979). 103 Rutherford Food Corp. v. McComb, 331 U.S. at 723. 104 29 U.S.C.S. §152 (West 1999). 105 See, e.g., U.S. v. Silk, 331 U.S. 704 (1947). 106 Donovan v. Sabine Irrigation, 695 F.2d 190 (5th Cir.), cert. denied, 463 U.S. 1207, reh. denied, 463 U.S. 129

(1983), abrogated by, 23 F.3d 110 (1994). 107 See, Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947).



employer, in relation to an employee bereft plan...."108 (emphasis added). The factor of operational control may focus more appropriately upon operational authority in relation to the employees benefit plan rather than operational control of employees. In practice this may mean that an individual who has the authority, or has asserted the authority to decide to pay contributions due, may be liable even if s/he exercises little authority over employees. If the analysis is to be used in ERISA cases, the term "employer" must be construed to accomplish the purpose of the legislation.109

Title VII of the Civil Rights Act of 1964 42 U.S.C.S. §§2000e - 2000e-17 110

Title VII was designed to alleviate discriminatory practices in the public sector. It created the Equal Employment Opportunity Commission (EEOC)111 to enforce its proscriptions against discrimination in the work place.

Generally, standing to sue under Title VII is given to the EEOC Commissioner, the Attorney General, and persons aggrieved by violations of the Act (including "employees").112 In addition, because some provisions are designed specifically to prevent discrimination against "employees," one must know the meaning of the word under the Act.

"Employee" is defined in 42 U.S.C.S. §2000e(f) as "an individual employed by an employer." An "employer" is defined in §2000e(b) as "a person engaged in an industry affecting commerce who has fifteen or more employees." As one can see from those definitions, the Act gives little guidance in defining the real meaning of the words. The legislative history is no more helpful.113 The continuous use of this vague definition causes difficulty when deciding whether or not an employee-employer relationship exists.

The most argued point is whether a person is an "employee" or an "independent contractor." There must be some employment relationship between the parties to establish a right of action. A true independent contractor would not be covered.114

108 29 U.S.C.S. §1002(5) (West 1999). 109 See generally, Marc E. LeBlanc, ERISA's Definition of "Employer" and the Collection of Delinquent

Multiemployer Benefit Plan Contributions From Corporate Officers, 1987 Det C.L. Rev. 1 (1987). 110 Title VII of the Civil Rights Act of 1964, 42 U.S.C.S. §§2000e et seq. (Law. Co-op. & Supp. 1989). 111 42 U.S.C.S. §2000e-4(a) (West 1999). 112 42 U.S.C.S. §2000e-5(f) (West 1999). 113 See, Hishon v. King & Spalding, 678 F.2d 1022, 1027 (11th Cir. 1982) (Dictum), rev'd, 467 U.S. 69 (1984). 114 See generally, Adcock v. Chrysler Corp., 166 F.3d 1290 (9th Cir. 1999); Mathis v. Standard Brands Chemical

Industries, 10 Fair Empl. Prac. Case. (BNA) 295, 10 Empl. Prac. Dec. (CCH) 5245 (N.D. Ga. 1976); Hannon v. Avis Rent a Car System Inc., 107 F. Supp. 2d 1256 (D. Mont., 2000).



However, the Dunn v. Washington County Hospital case notes an important distinction regarding employer liability.115 In this 7th circuit case, the court stated “it makes no difference . . . whether the person whose acts are complained of is an employee, an independent contractor, or for that matter a customer.” The court held that a hospital’s employment of an independent contractor did not relieve hospital of its own obligation to provide employees with a nondiscriminatory workplace.116

Courts are virtually unanimous in agreeing that the "economic realities" of a relationship must be viewed in determining whether the contract of employment, written or not, shows an independent relationship, rather than an employment relationship (exonerating the defendant from Title VII jurisdiction for alleged discriminatory practices). Recall that the "economic realities" test emerged from the Supreme Court in a series of decisions interpreting the meaning of "employee" in the context of social welfare legislation.117

The approach used by courts in defining "employee" for Title VII purposes is a "hybrid" test which combines both the "economic realities" test and the common law "right of control" test. The "hybrid" approach was first enunciated in Spirides v. Reinhardt,118 and has since been approved as an approach for Title VII cases by U.S. Courts of Appeal in the third, ninth, and eleventh circuits.119 The Spirides court stated that the most important factor to review under Title VII, as at common law, was the extent of the employer's right to control the means and manner of the worker's performance. It further stated that, in addition to the right of control, various other factors should be considered.

Summary of Appropriate Tests

FLSA NLRA ERISA Civil Rights Act

Economic Realities Test

Right to Control/Totality of Circumstances

Modified Economic Realities Test

“Hybrid” of Economic Realities Test and Right to Control Test

115 See, Allison Fetter-Harrott, How to Avoid Liability Under Federal Civil Rights Laws for Third-Party

Harassment, AMERICAN BAR ASSOCIATION, (2007), available at https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/howtoavoidliability.html.

116 Dunn v. Washington County Hosp., 429 F.3d 689 (7th Cir., 2005). 117 See, Bartels v. Birmingham, 332 U.S. 126 (1947) (construing the Social Security Act); Rutherford Food

Corp. v. McComb, 331 U.S. 722 (1947) (construing the FLSA); U.S. v. Silk, 331 U.S. 704 (1947) (construing the Social Security Act); NLRB v. Hearst Publications, 322 U.S. 111 (1944) (construing the NLRA).

118 Spirides v. Reinhardt, 613 F.2d 826 (D.C. Cir. 1979). 119 Adcock v. Chrysler Corp., 166 F.3d 1290 (9th Cir. 1999); EEOC v. Zippo Mfg., 713 F.2d 32 (3d Cir. 1983);

Cobb v. Sun Papers, Inc., 673 F.2d 337 (11th Cir. 1982); Lutcher v. Musicians Union Local 47, 633 F.2d 880 (9th Cir. 1980).



Summary Observations

he implications and risks of misclassifying a worker are far-reaching, including not only employment and income tax consequences, but also pension, compensation, and labor relations repercussions.

Decisions, however, seem to be made on a case by case basis, and various agencies and courts may reach different conclusions on the status of a worker. In general, the tests followed are: a taxing agency will probably apply the common law "right-to-control" test; a labor agency might apply either the "economic realities" test or the "hybrid" test. However, it seems that the right to control remains the single most important factor in any analysis.

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Addendum: Detailed Review of Common Law Factors

he following discussion will elaborate on selected common law factors and will discuss the factors in the context of the dental practice.

Control of Worker

An important, if not the most important item is: who controls the work of the worker? If the employer can control the means of producing the work and monitor the ends of the workers efforts then the worker can, on this point, be seen to be an employee. If on the other hand the worker is only told what ends are to be achieved then, on this factor, the worker can be seen to be an independent contractor. One example might be the house painter hired to paint a house. In most cases the painter is simply told the color. The painter is judged on the end work. The painter is responsible for the means, the scraping, surface preparation, undercoat, drying time and final coat application. From an analysis of the "ends versus means" test the painter is probably an independent contractor. A key aspect is who has the right to control the worker. If in a dental clinic the clinic owner has the right to control what patients are seen, what procedures are performed, the instruments, the equipment, the treatment planning and the delivery of care, then, that level of control indicates the dentist is an employee and not an independent contractor even if the written agreement between the two states differently. Part of the control inquiry, although a discrete item, is to determine if the employer gives suggestions on how the work should be accomplished or orders how it should be done. If orders govern how the work will be done then it is an indication of a employee.120

Additional Workers Hired By Worker

A factor that can be helpful in determining the classification is whether additional workers that assist the primary worker in question are hired by the employer or worker. In the case of the associate dentist the inquiry would be

120 Priv. Ltr. Rul. 89-09-011, Dec. 1, 1988. Although it may not be cited as precedent, this case provides a useful

sample analysis of the employment tax status of workers who provide dental services for a dental firm.

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whether chairside assistants are hired by the associate or provided by the practice. If provided by the practice it is an indication, although not determinative, that the associate is not self-employed since usually workers will hire their own assistants (workers) to assist them. Helping to clarify further would be to examine whether the assistants are paid by the practice or worker. Additionally, even if the associate is allegedly hiring assistants it would be appropriate to inquire whether the associate is filing FICA and withholding income tax.

Providing Instruments, Materials and Supplies

A factor that can have significant importance in the context of the dental practice is who is supplying instruments, materials and supplies. If supplied by the associate or hygienist, it is consistent with an independent contractor who comes prepared with everything needed to deliver care and provide the contracted for service. If supplied by the employer it gives an indication that the worker is not in business independently but is an employee. It can be examined in relation to this factor whether the value of the instruments or materials is great or insignificant.

Worker Part of the Practice

On occasion even when the factors above are understood clearly by dentists they will hold out the independent contractor as a part of their practice to patients. This is a disadvantageous position for the practice/ employer to take. The reason is that patients then assume that the associate is an employee of the practice. If the common perception of the worker is as an employee it is very difficult for the practice owner to assert at a later junction that the worker is really an independent contractor. Hand in hand with this factor is the matter of ensuring that the workers who are in business for themselves as independent contractors have the hallmarks of being in their own business. Usually, people in their own businesses have distinct letterhead and business cards. If a practice puts an independent contractor's name on the practice letterhead and practice cards it again will appear more likely than not that the real relationship is that of employee and not independent contractor. Related to the above is that, assuming the worker is held by the parties involved to be an independent contractor, it will be instructive to see if the independent party, running their own business, does any separate marketing to build their own patient flow. If s/he does not, and all new patients come to the worker via the practice, then the analysis tends to find, unless contrary indication is present, that the parties have an employee relationship. Helpful for close cases, when a worker states that he or she is an independent contractor, is to see if the worker has a city or county business license or permit. Most business owners will have their own permit. Related to permits is to see if the individual has an employer



identification number. Again, if the worker is an independent contractor he or she usually would have an employer identification number.121

Skill, Nature of Occupation and Personal Service

Two related areas are on occasion overlooked in determining worker classification status. The first is determining if a worker's position requires a level of skill to perform the particular work that is not available without advanced education and training. Certainly both advanced education and training are required for the practice of dentistry and can be argued to be even more applicable in the case of orthodontics, pediatric dentists and other recognized practice specialty areas. Second, if the work requires a high degree of personal service, that factor will be taken into account in a close classification case. Where the skill, occupation and personal service elements are significantly advanced, then it argues in favor of a worker being properly classed as an independent contractor, other factors being appropriately in place.

Worker In or Out of Practice

On occasion the facts of a particular case will show that a worker meets many of the criteria of an independent contractor status. Yet, given the theory that an independent contractor is in business for him or herself the worker is presented to the patients and to the world as an employee. This is done by the worker performing work under the practice name, being listed on the practice business card and never giving any indication that the worker is practicing as an independent business person. The analysis is that if the worker were really in business for him or herself then s/he would want to hold themselves out as self-employed and would have their own cards and stationary and be like any other business person promoting their practice. By the same analysis it can be assumed, that when a person performs their work at their own business premises versus the premises of an employer, that s/he is clearly in business for him or herself. The line is blurred a bit when the worker performs work at the premises of the practice.

Scheduling

Another area that tends to show employee status is when the employer schedules when the worker will be present for work, leave work, and in the case of dentistry provide care. Although it can be argued that in dentistry a worker must be scheduled to deliver care when the patients are willing to come in, it is a matter that is open as to whether the practice owner should do

121 Application for Employer Identification Number, IRS Form SS-4.



the scheduling or the independently employed worker should be the one scheduling the work.

Discharge of Worker and Term of Employment

One factor that can indicate employee status is whether the employer has the right to discharge the worker at will and at any time without liability. If the employer has retained the right to discharge without prior notice it is difficult to argue that the one being discharged is an independent business person. In contrast, usually the independent contractor is given notice of termination and occasionally the right to correct the reason for the discharge. Related to the discharge right is whether the worker is hired for a set length of employment or is hired indefinitely. If the worker is hired indefinitely it is an indication that s/he is an employee whose employment continues, usually, until one party or the other gives notice. Generally, an independent contractor is hired for a set length of time.

Compensation

A factor that is confusing for some is that of compensation. If the worker is paid a guaranteed minimum or the worker is paid by a unit of time (hour, week, month, year) it appears to match the profile of an employee. In contrast, if the worker is hired for a particular job to be done then the worker can more clearly be seen to be an independent contractor. In the compensation area a variety of sub-issues are present that can give an indication of the relationship the parties have in fact. One is whether there is a draw account or advances provided. If present it can indicate an employee. However, under close review the way in which a worker repays the account can tip the balance back to an independent contractor. Also related is whether the worker is looking solely to the employer for the total source of income or whether there is more than one source of income from multiple employers of the worker. Relevant in this area is an examination of the percentage of time the worker is employed by each firm.

Fringe Benefits

An indication of employee status can be given by the providing of a spectrum of fringe benefits. These include, pension participation, medical plan participation, paid vacations and sick pay.

Competition with Practice

Another factor that can indicate that a worker is an employee, is if the parties agree that the worker cannot compete upon leaving employment. This is a



difficult factor to apply since, in some situations, it is arguable that a dentist would agree to the restriction even being in his or her own business (i.e., an independent contractor) to have the immediate prospect of employment. This is the case in some very competitive areas of the country as younger doctors look for employment positions. Nonetheless, the general view is that it is an indication of an independent contractor when the party can look for and compete for business anywhere as any business person would.

Despite this view, non-Compete clauses are a common method used by employers in an attempt to restrict an employees’ movement post-employment. However, employers must be ready to defend such provisions, particularly in light of the decision in Reliable Fire.122 Prior to this court decision, a restrictive covenant was subjected to a two part test to determine the fairness of the provision. However, this Illinois Supreme Court case replaced the traditional two part test with a mandate requiring the totality of circumstances to be examined on a case by case basis. Reliable Fire promoted public policy and positive interests of the parties instead of following the stricter two prong test.123

Upholding Non‐Complete Clauses – Traditional Test: Restrictive covenants were traditionally only upheld if they satisfied the following:

1) if they are supported by adequate consideration 2) are ancillary to a valid employment contract or relationship, 3) protect a legitimate business interest, 4) and impose reasonable restrictions on the employee's subsequent employment After Reliable Fire, the Illinois Supreme Court recognized a three part test to determine the vailidy of restrictive covenants, keeping the legitimate business interest prong. Under this test, a covenant is valid if:

1) is no greater than required to protect a legitimate business interest of the employer‐promisee,

2) is not an undue hardship on the employee‐promisor, and 3) does not injure the public

In regard to the legitimate business interest prong, Reliable Fire removed the former two‐part test set forth in Polar to determine whether or not such an interest exists. Instead, Reliable Fire based this prong on the totality of circumstances and facts for each case. The factors set out by Kolar are now merely considerations and not alone determinative.

122 Reliable Fire Equipment Co. vs. Arredondo, 2011 Ill. 111871 (2011). 123 See, Kelly M. Greco et al., Enforcing Non-Compete Clauses in Illinois After Reliable Fire, 100 ILL. B.J. 196

(2012).



Tips for Navigating Non‐Compete Clauses: Consult an attorney Beware overbroad provisions – Non‐compete clauses that attempt to span an unreasonable distance or timeframe may not hold up in court.

Provide consideration – Adequately compensate the party restricted by the non‐compete clause.

Consider third‐party claims Read the contract!

Other Factors

A variety of other factors can assist in the review of the worker's classification. Doctors should review the items and apply them as appropriate to their situation or prospective situation. The items are phrased as questions to prompt the readers to begin the analysis with their professional advisors.

1. If a worker is claimed to be an independent contractor and that worker has workers working for him/her ask: Does that alleged independent contractor pay workers' compensation insurance on other workers?

2. Does the independent contractor bear any risk of loss in being in business or, if s/he shows up, delivers care and stays with the practice, will a payment for services be made for as long as he or she is working at the practice?

3. If a worker is claimed to be an independent contractor does the practice owner deduct social security tax and federal income taxes from the compensation of the worker?

4. If a worker is claimed to be an independent contractor does the worker have any investment in the business? In other words, does the worker have a business like any other that would require an investment—or is this business so unusual that no investment is required?

5. Where do patients assigned to a doctor come from? Are they assigned from the new patient source of the practice? Or does the worker go and secure all his/her own patients? Independent contractors, except perhaps specialists hired by general dentists for the general dentist's practice, should in most cases be seen to secure their own patients.

6. How are practice fees set? Are all workers to use the fee schedule of the practice? Or are the workers that are allegedly independent contractors free to set their own fees for their practice?



7. Who does the patient pay for services rendered? If the payment is to the worker it can be seen that as to this factor the worker may be in his or her own business and be an independent contractor. On the other hand that may not be the case if the worker gives 100% to the practice and does not deduct the portion due the worker.

8. Is there a written independent contractor agreement between the employer and the worker? If so, does it specify the understanding of the parties as to what the nature of the employment relationship is? What factors of the relationship give weight to supporting the agreement and the parties belief that the agreement is reflective of the actual relationship?124

124 Tieberg v. Unemployment Ins. Appeals Bd., 88 Cal. Rptr. 175, 2 Cal. 3d 943, 471 P. 2d 975 (1970).



The Job's Not Done

hether you are a practice owner or an associate there are several things to keep in mind in either reviewing a current associateship or planning one.

First, don't try to evaluate the situation alone. The topic is broad, encompassing both legal issues and practice issues, and does not lend itself well to a single party developing an objective analysis of a current or prospective employment situation. Therefore, you should consider contacting professionals to assist you with the review or planning of the relationship.

Second, if you are in a current independent contractor associateship and you do not have a written agreement, or if you do and the agreement does not reflect exactly how you and the practice interact or if the agreement was signed by you without review by counsel, in all cases consider a re-evaluation. Discuss your reading of this publication with the practice owner and your concerns if you have them.

If you are a practice owner with an independent contractor associate, and have no written agreement, have one prepared. And in the process have a thorough review of the relationship by your legal counsel to ensure, to the degree possible, that the relationship supports an independent contractor classification. Or, even if you have a written agreement, if the agreement has not been reviewed for several years, have counsel review it for validity. In both cases make sure the agreement reflects the manner in which you both interact in the practice.

Consider the following professionals to assist you.

x Your accountant with a thorough review of your working status.

x An attorney with experience in employment law and expertise in taxation and business contracts.

You can also contact your professional association and other dentists whose opinions you respect to learn of their experience in this matter. But be guided by sound professional advice and not by offhand comments from fellow practitioners.

Discuss with these professionals your employment relationship and the status of the agreement you have with, as the case may be, the practice or the associate.

Continue to read articles and books related to employment law, and tax issues in The Expert Series for Dentists™.

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Suggested References

Publications:

American Dental Association, The ADA Practical Guide to Associateships: Success Strategies for Dentist-owners and Prospective Associates (2013) [Updated from: American Dental Association, Associateships: A Guide for Owners and Prospective Associates (2005)].

American Dental Association, Valuing a Practice: A Guide for Dentists (2006) (new edition due out 2013).

Randall K. Berning, Solo Group Formation: Practical and Legal Aspects, The Expert Series For Dentists™, Berning & Affiliates, Inc. (2013).

James A. Haverkamp, Checklists for Review of Purchase and Sale Agreements, The Expert Series For Dentists™, Berning & Affiliates, Inc. (2013).

William P. Prescott, MBA, JD, Joining And Leaving the Dental Practice (second edition), The Expert Series For Dentists™, Berning & Affiliates, Inc. (2013).

Allen M. Schiff, CPA, CFE, Tax Ramifications of Selling A Dental Practice Sole Proprietorship, Partnership or Corporation, The Expert Series For Dentists™, Berning & Affiliates, Inc. (2013).

Kurt S. Skarin, Practical and Legal Aspects in Selecting and Using a Practice Broker, The Expert Series For Dentists™, Berning & Affiliates (2004).

Shannon P. Pratt, Valuing A Business, The Analysis And Appraisal of Closely Held Companies, Fifth Edition, McGraw-Hill (2007).

Resources

The publications above from The Expert Series for Dentists™, as well as the ADA publications noted, along with a select reading list of reviewed books, Special Reports, on-line seminars, and short subject videos are all available through our website based store at www.BerningAffiliates.biz We invite you to — Visit Us!

Documents

Independent Contractor or Employee?co-author of The ADA Practical Guide to Associateships: Success Strategies for Dentist-owners and Prospective Associates (previously titled: Associateships: