Therapy For Your Money

Episode 133: Contractor vs Employee: Understanding the new DOL rules

• Julie Herres • Season 4 • Episode 133

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Understanding the Implications of Hiring Contractors vs Employees in Therapy Practices

In this episode of 'Therapy for Your Money,' host Julie Herres discusses the implications of employing contractors versus employees in therapy practices. She unpacks a recent ruling from the Department of Labor and its six factors for determining employment relationships. She emphasizes that legislation is moving towards favoring employee relationships. While the immediate impact on therapy practices may be limited, it is prudent for owners to begin considering the transition from contractors to employees. Julie also shares useful resources to help small businesses stay compliant and highlights a webinar on clinician compensation for sustainable and profitable practices.


Episode Highlights

  • 00:00 Welcome to the Podcast
  • 00:49 The Age-Old Question: Contractors or Employees?
  • 01:49 Understanding Audits and Their Implications
  • 04:50 The New Department of Labor Ruling
  • 06:52 Breaking Down the Six Factors of the New Rule
  • 16:36 Potential Liabilities for Misclassification
  • 17:25 What Does This Mean for Your Practice?
  • 21:19 Final Thoughts and Resources
  • 24:02 Disclaimer


Links and Resources


Podcast Production and Show Notes by Course Creation Studio

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 Episode 133: Contractor vs employee: understanding the new DOL rules

Episode 133: Contractor vs employee: understanding the new DOL rules

[00:00:00] Julie Herres: You're listening to Therapy for Your Money, a podcast about all things, money and finance for therapy practice owners. If you want to feel confident and in control of your financial life, then you've come to the right spot. I'm your host, Julie Herres. I'm an accountant and the owner of Green Oak Accounting.

[00:00:20] Julie Herres: My firm specializes in working with private practices across the US and my team and I have worked with hundreds of private practice owners. I'm on a mission to share all the best practices I've learned along the way. Because I want you to have a profitable private practice.

[00:00:35] Julie Herres: My new book, profit First for Therapists is available at most online retailers. You can get it in paperback, audiobook, or ebook as well. Go check it out.

[00:00:45] Julie Herres: Hello, hello everyone. And welcome back to therapy for your money. Today we're chatting about what I consider to be the age old question of practice owners all across the U S should I hire contractors or employees? Um, so I understand that it does feel easier to hire contractors. Sometimes there are less rules, there's less requirements, less pressure, no.

[00:01:10] Julie Herres: Payroll. Um, and really the truth is some independent contractors are not entitled to the same legal protections as employees. So it just feels a lot easier. I guess it's just a little bit more the wild, wild West. But the reason I'm bringing up this topic now is that there are new restrictions that came out very recently from the department of labor or the DOL on the age old contractor versus employee decision.

[00:01:38] Julie Herres: So I want to approach that question Uh, and tell you about this new role, but just kind of revisit all the different pieces to this really important decision. So first things first, there are many different government entities that can audit your employment relationship. Uh, and anytime. You hear the word audit, you probably recoil in horror a little bit, right?

[00:02:02] Julie Herres: Just that the idea of an audit, like, Oh, that feels a little bit scary. But the reality is when it comes to employment practices, uh, audits can be expensive, just like in any other audit. If you think of a tax audit that can be expensive. If you think of an insurance audit that can be expensive with clawbacks and other things.

[00:02:20] Julie Herres: Um, and so an audit can be expensive here. Okay. So at the federal level, you could be audited by the IRS, which is kind of where most people's heads go first, and then the department of labor as well. And that's what we're talking about in more detail today. So if you are audited by the IRS and they decided that your employment relationship was actually not that of a contractor, and it should have been.

[00:02:44] Julie Herres: an employee relationship. In that case, you would owe the employer and employee portions of social security and Medicare that are also called FICA. So you would end up owing that. That is a really, really expensive audit, uh, but they are also very rare, right? So I'm not trying to scare you here. They are few and far between.

[00:03:04] Julie Herres: Um, and right now, just based on the current climate, we're not seeing a whole lot of audits there at the moment. As you may know, there is more money going towards the IRS for audits. Um, and so that may be coming in the next couple of years, but right now, right this moment. That's not what we're, we're seeing a whole lot of.

[00:03:24] Julie Herres: So it's definitely one thing to keep in consideration, right? I want you to consider all of these, uh, but this is probably not where you're most likely to get in trouble. Then, uh, on the state side, you might be audited by the state's unemployment agency, uh, by the state department of labor. So there's a couple of different ways that you can get audited there.

[00:03:46] Julie Herres: Uh, when it comes to state unemployment, those audits will most often come up. because someone who is a contractor filed for unemployment. We actually saw a lot of that, uh, in the, the period right around, uh, COVID in the couple of years, like 2020 to 2022, where a contractor had applied for unemployment.

[00:04:06] Julie Herres: And then the unemployment agency said, wait, hold on a second. This company has not been paying into unemployment for this social security number. What's going on? And so that would be the beginning of an unemployment audit. You might also have your insurance company like workers comp come in and say, Hey, we want to look at this relationship and see if you should be paying workers comp premiums on your contractors as well.

[00:04:28] Julie Herres: Are they truly independent contractors or, uh, really should you be paying premiums on, uh, these team members? So those are kind of some of the most common ways that you can, uh, be audited. So IRS department of labor, state unemployment, state department of labor, and then workers compensation. So I'm recording this episode in February, 2024.

[00:04:50] Julie Herres: Right now there's a lot of buzz online and in various therapy, Facebook groups about this new department of labor or DOL ruling that takes in, takes effect in March, 2024. So I'm going to use the word DOL often. Just know that that stands for Department of Labor. So what does the Department of Labor enforce?

[00:05:10] Julie Herres: They enforce the Fair Labor Standards Act, also called FLSA. So this is what covers workers when it comes to minimum wage, when it comes to overtime pay, record keeping, and child labor. And so if someone is a contractor, they are actually not covered by FLSA, they may not get overtime pay because you're not required to pay overtime pay.

[00:05:36] Julie Herres: So, for example, FLSA is generally going to require that covered employers pay any of their non exempt employees at least the federal minimum wage for all hours worked and then that they pay overtime pay of at least one and a half times the minimum wage. regular rate or the hourly rate for every hour worked above 40 hours, right?

[00:05:58] Julie Herres: So in this example, FLSA would enforce, you have to pay someone at least federal minimum wage. And if they work more than 40 hours, you have to pay them at time and a half for that time over 40 hours. Okay. So when it comes to the department of labor, uh, What are the new rules regarding whether someone is an employee or a contractor?

[00:06:20] Julie Herres: This new ruling, which I will link if you want to read the whole entire thing, knock yourself out. I will link that in the, in the show notes. But the rule basically provided six factors that businesses and workers will need to consider when they're looking at their employment relationship. So there isn't one of the six rules that trumps them all.

[00:06:41] Julie Herres: In an audit, the Department of Labor would look at all six of them and then determine is this relationship an employee employer relationship or is it really a contractor relationship? So rule number one is, is there opportunity for profit or loss depending on managerial skill? I'm going to give you those rules like line by line exactly.

[00:07:02] Julie Herres: What does that mean? Can a worker, uh, meaningfully negotiate the rate for the work that is done in the, in the case of therapy? Usually not right. You have a specific rates and the contractor does not have a say. So that would point towards an employee relationship. Another factor is whether the worker Uh, can accept or decline a specific client or a job, uh, whether they are engaged in marketing, advertising, or other efforts to promote, uh, the business and whether they're able to make decisions, uh, for hiring or purchasing or equipment or space, right?

[00:07:41] Julie Herres: All of those different things, because all of those have something to do with, can this worker. Uh, have a profit or loss in the business and you'll notice I'm using the T the term worker because a worker could be an employee or a contractor, right? So by using the term worker, I'm not, uh, sending you in one specific direction.

[00:07:59] Julie Herres: The worker is the worker. Factor number two is, is there an investment by the worker? And the potential employer. So let's look at an example. If there's a graphic designer providing graphic design services for a larger commercial firm, the firm provides software, a computer office space, and all the equipment and supplies for that worker.

[00:08:22] Julie Herres: In this case, the company's investing in marketing, they're investing in equipment. Uh, so even if the worker occasionally uses their own. tools or their own software for specific jobs, that investment is minor compared to the investment of the company and supplies. And so that would point towards an employee relationship more than a contractor relationship.

[00:08:48] Julie Herres: Factor number three in these six factors is the degree of permanence of the working relationship. So is the relationship indefinite in duration? Is it considered to be condit continuous? Is it exclusive? So those are all factors that you're going to look at. And if they are exclusive, if they are continuous, if there is no end in sight, that would definitely weigh in favor of the worker being an employee as well.

[00:09:15] Julie Herres: So again, if we think of a therapist contractor, that typically is not. A relationship that is meant for a specific duration. Uh, it is kind of indefinite. It is meant to go on and on until. Something changes, but there is a permanency to that relationship. So that would point towards an employee relationship.

[00:09:36] Julie Herres: Factor number four is the nature and degree of control. So some of the factors that are important here are, uh, does the worker set their own schedule or does the employer set the schedule? Who supervises the performance of the work or is there supervision of the, the work? Um, is there. an explicit limit to the worker's ability to work for someone else.

[00:09:59] Julie Herres: If you have an exclusivity contractor, uh, a non compete, that would definitely point towards a, uh, an employee relationship. Are there restrictions on timing of when they should be working? Are you using technology to supervise the performance of a worker? For example, through your EHR and monitoring, when are the notes done?

[00:10:20] Julie Herres: How many were done? Uh, do you. Does the employer reserve the right to supervise or discipline, uh, the workers and then who controls the economic aspects of the working relationship? Like who's billing every day, who is responsible for collecting accounts receivable, that type of thing. So you can see again here when we look at that fourth factor, the nature and degree of control.

[00:10:45] Julie Herres: This is one area where it really could go either way depending on, uh, you know, what is going on in your practice, but there's some practices where I would say, yeah, there's a lot of control. You probably are looking at. Uh, a relationship of an employee, whereas others are going to be much more hands off.

[00:11:00] Julie Herres: And if you may reasonably say for this one specific factor, that it does look like a contractor relationship. When we look at factor number five, we look at the extent to which the work performed is an integral part of the potential. Employer's business. Okay. If you've ever heard of the ABC rule, which we're not going to go into, into detail here, um, that would be the, the B portion, which is the business of the employer is the work of the worker, an integral part of the business in the case of a.

[00:11:32] Julie Herres: Clinical contractor, I would say yes. I would say if you're in the therapy of business and you have a contractor who is doing something that is the most important thing in your business, right? The providing of therapy, that is the service that you provide. That is the thing that your business does to bring in money.

[00:11:47] Julie Herres: Uh, that would tend to point towards an employee relationship. But if the work performed is not critical or necessary, then that would tend to point towards a contractor relationship. Um, so for this, I think of the example of If you are a practice owner and you are working with an accountant or a bookkeeper, uh, accounting or bookkeeping is important, but it is not the critical piece of your business.

[00:12:12] Julie Herres: Without accounting, you could theoretically, your business could survive for months or maybe even years without having anyone doing the accounting. But if no one is doing therapy in your business, it would not survive very long because no money would be, would be coming in. Right. So that's how I think of that.

[00:12:27] Julie Herres: Is it critical? Is it the main thing, the main bread and butter of your business? Or is it something that is important, but ancillary? And then the last factor number six is skill and initiative. And so to explain this one, I'm going to give you an example. And this example is directly from the, uh, the Q and a for the ruling.

[00:12:49] Julie Herres: So if you have a highly skilled welder, that's providing a specialty welding service, like a custom aluminum welding, uh, If this welder uses their skills for marketing purposes to generate new business, they're obtaining work from multiple companies. Um, they're not only technically skilled, but they're using their specific skills to market their own business.

[00:13:13] Julie Herres: So this would tend to point towards an. Independent contractor, because they have this skill and initiative. Uh, but if this person was only working for one specific company, there is no marketing. They don't have any kind of systems in their business to, uh, get additional business, or they don't know how to give a quote to someone that would tend to point towards an employee.

[00:13:36] Julie Herres: Relationship. All right. So those were the six factors, the opportunity for profit and loss, depending on managerial skill investment by the worker and the potential employer. That's number two. Number three is the degree of permanence of the relationship. Number four is the nature and degree of control.

[00:13:54] Julie Herres: Number five, the extent to which the work performed is an integral part of the employer's business. And number six is skill and initiative. Okay. So with that said, a couple of important FAQ, uh, from the DOL. The Department of Labor website, can an individual be an employee for FLSA or Department of Labor purposes, even if they are an independent contractor for tax purposes.

[00:14:21] Julie Herres: And I think this is where I'm seeing a whole lot of misinformation where people are, are saying online, Oh, well, this is a Department of Rule of Labor ruling. So it's also the IRS. No, those two are completely separate things. Um, so it is possible. for the IRS to apply its own test, which the IRS uses a version of the common law control test, which is less restrictive than the Department of Labor test that I just shared with you.

[00:14:51] Julie Herres: And so it is possible for a worker to be considered a contractor for IRS or federal tax purposes, while the Department of Labor could consider them To be an employee. So those two can coexist at the same time. And we also see the same situation at the state level. So it's, it's possible that for state unemployment, someone be considered an employee and they still be a contractor at the IRS level.

[00:15:19] Julie Herres: Uh, do know though, that when you are under audit. These agencies do have the ability to talk and they do share this information with each other. So it's not unusual for one audit to trigger a different type of audit, but in this case it is possible and it could be okay that from a federal IRS tax perspective, someone would be a contractor.

[00:15:42] Julie Herres: Uh, even if they do not pass the Department of Labor test, right? And I'm not using any absolutes here because it really is going to depend on your specific facts or circumstances, uh, you know, how this exactly goes. So while the Department of Labor considers lots of the same factors as the IRS, um, the economic reality tests for FLSA purposes is based on a specific definition of Employ in the FLSA, which says that employers employ workers if they quote unquote suffer or permit, uh, them to work.

[00:16:16] Julie Herres: So courts have interpreted that language to be broader than the common law control test. So that means that some workers who may be classified as independent contractors for tax purposes, maybe employees for FLSA purposes. And so you would be subject to the FLSA rules in that. Another FAQ I want to share with you is what is the employer's liability for misclassifying an employee as an independent contractor?

[00:16:44] Julie Herres: Again, this is with regards to the department of labor. So if that happens, if an employee is incorrectly classified as an independent contractor, the employer will be responsible for paying any unpaid wages owed to the employee under the FLSA. So minimum wage. Uh, overtime, all of those things.

[00:17:03] Julie Herres: Additionally, the employer may have to pay liquidated damages, uh, based on those back wages as a civil money penalty. Those are not deductible for tax purposes. So the Department of Labor could assess, uh, penalties based on that. You may also have to pay attorney fees associated with, uh, the audit and accountant's fees, all of that fun stuff.

[00:17:25] Julie Herres: So at this point, you may be wondering, that all sounds pretty scary, Julie, but what exactly does this mean for me and my practice? Okay. I've got you. So in essence, here's my, my perspective on it. Over the last several years, we have seen it get harder and harder to have contractor therapists. In some states, I would actually argue that it's almost impossible to legally have therapist contractors.

[00:17:49] Julie Herres: It doesn't mean that people don't do it. Uh, and they do, but that they really, really shouldn't. And under audit, they do not have a leg to stand on. Uh, so this new rule by the department of labor is just one more item or one more check in the, in the checklist of things that point towards that contractor relationships for Uh, clinicians specifically are becoming more difficult to justify.

[00:18:13] Julie Herres: So if you currently have contractors that you are treating as employees, so you are providing control, you're providing them a lot of equipment to do their work, it is probably time in 2024 to consider how you will make that switch at some point. It may or may not be an emergency depending on where you are specifically, but I do think it's time to start thinking of a plan.

[00:18:32] Julie Herres: Because we keep seeing the legislation go in that direction. So when we have some states where it's almost impossible to have contractors, typically we keep seeing more states year over year. So there are more states discussing it, more states thinking about it. So I do expect in the next couple of years, we will see even more legislation around this.

[00:18:54] Julie Herres: I think you'll always still be able to have some people as contractors, your marketing person, your website guy, Your accountant, your HR consultant, right? Those will still always be legitimate contractors, but the people who do the main work in your business, I do see that becoming harder and harder in the next couple of years.

[00:19:14] Julie Herres: So based on the four main items that the Department of Labor enforces, I do think that it is unlikely, not impossible, but unlikely that Um, therapy practices will get in lots of trouble because of this new rule. So I'm going to say that again. I do not think that most practices will get in trouble because of this new rule.

[00:19:34] Julie Herres: Because if we think of the four things that the Department of Labor enforces, minimum wage, which is at the federal level, 7. 25. I've been in this business for a long time and I have never seen a therapist get paid less than minimum wage. So I just don't think there's any enforcement needed when it comes to minimum wage.

[00:19:54] Julie Herres: When we think of item number two, which is overtime pay again, just we've worked my team and I with thousands of practices at this point, and most of them are really struggling to get their team members to see 25. clinical hours per week. We're seeing more and more practices reduce that number, whether it makes sense financially or not.

[00:20:15] Julie Herres: And so when a clinician is barely seeing 25 clinical hours per week, I really don't think that we're ending up in situations often where there is unpaid overtime. It's not impossible. But it's unlikely. I think there are very few situations where, uh, uh, a contractor could claim working significantly more than 40 hours per week.

[00:20:37] Julie Herres: The next item that the Department of Labor enforces is record keeping. It is possible that someone could get in trouble here. But it's not really about having an employee or a contractor. I think if they're just poor record keeping habits, you could get in trouble no matter what. So I don't think that's going to make a big difference with regards to this to this rule.

[00:21:02] Julie Herres: And then the 4th item that the Department of Labor. Uh, enforces is child labor. And again, because of this industry, I've never met a child therapist. Maybe there's a prodigy somewhere out there, uh, but that's really unlikely. So again, this is just not an area where I think practices are going to get into trouble.

[00:21:19] Julie Herres: So I think the good news here is, uh, there's not a whole lot of opportunity for, uh, things to go completely wrong. But again, it's one of those checks in the column of you really need to start thinking about. employees versus just contractors in the long run. I do hope this episode has eased your mind a little bit.

[00:21:43] Julie Herres: Um, I know there's a lot of, uh, scary thoughts about this out there, but it really doesn't need to be super scary. Uh, just think about. What makes sense for your practice in the long term? I want to mention in the next couple of weeks on the podcast, we have an episode all about department of labor audits.

[00:22:01] Julie Herres: So if that's something that you have been worried about listening, and I will give you. Uh, the nitty gritty details of behind the scenes of a department of labor audit. Uh, this is an episode that you may want to go check out the show links. Uh, I am going to give you the link to the specific new rule that takes into, takes an effect, uh, March 11th.

[00:22:23] Julie Herres: 2024. I will also link to this small entity compliance guide. This is a really nice guide that the department of labor put together that helps you think through like, okay, as a small business, how do I stay compliant? What are the things I need to think of? So I will link to both of those in the show notes, which you can always check out at therapy for your money.

[00:22:41] Julie Herres: com. If you are like many practice owners and you feel unsure about how you're paying your clinicians, or maybe you're thinking about hiring clinicians and you just happen to be listening to this episode. to get ready for it. I want to tell you about a free webinar I have available on cracking the clinician compensation code.

[00:22:59] Julie Herres: So it goes over common mistakes that we see when it comes to clinician compensation. You can find this free webinar at GreenOakAccounting. com slash webinar. Go listen in to that free webinar so you can avoid some of those really common mistakes and set up your clinician compensation for success for your practice so that your practice can be sustainable and profitable long term.

[00:23:23] Julie Herres: Because that definitely is possible whether you have contractors or employees, uh, you should set up a practice that can be sustainable for you no matter how many clinicians you have. All right, that's all for this week. See you next time.

 The information contained in this podcast represents the host and guest general opinions and should not be construed as personalized accounting and tax advice. Listeners should consider all facts and circumstances before applying this information and seek appropriate advice from an accountant, financial planner, lawyer, or other professional.

Any info provided does not constitute accounting, tax, or legal advice.