Vol. 15 •Issue 10 • Page 20
Home-Based MTs: Employee or Independent Contractor?
For MTs and other home-based workers, the designation of employee or independent contractor status may not be so clear cut.
So you’re an MT. You work from home, use your own equipment and have a subcontractor agreement with a medical transcription service organization (MTSO) that pays you to transcribe reports. You’re an independent contractor (IC), right? Maybe. Ever since a December 2002 case in Missouri in which 15 MTs in a similar situation with a service were deemed employees based on the Internal Revenue Service (IRS) top-20 checklist, questions have emerged, leaving home-based workers across the country asking: Am I an IC or an employee?
1099s and W-2s
According to IRS Publication 15-A, anyone who performs services is an employee if an employer can control what will be done and how it will be done. Furthermore, the employer pays income and withholds social security and Medicare taxes on wages. At the end of the year, the employee is furnished with a Form W-2 indicating what was paid/withheld.
But independent contractors who did work for entities and were paid $600 or more receive form 1099-MISC reflecting the amount paid to the IC. It’s the IC’s responsibility to pay taxes on such amounts (see www.irs.gov/businesses/small/article/0,,id=99921,00.html).
In the past, the IRS used the “20-factor test,” a checklist that looks at various facets of the employer/employee vs. company/IC relationship. “They’ve worked at clarifying these points, but essentially we still go back to that checklist,” said Gary L. McKinsey, EA, Grimbleby Coleman CPAs Inc., Modesto, CA. “Although it’s not definitive,” he cautioned. “If a person went down the list of 20 questions and said, ‘Based on the answers, I’m an independent contractor,’ that doesn’t necessarily mean he/she is. It’s just a frame of reference.”
Whittled down to three bulleted points (see IRS Publication 1779), the test evaluates:
• Behavioral Control—a worker is an employee when the business provides specific instructions to the worker on how to do the job, requires the worker to attend all business meetings, and the worker does not have the right to hire (subcontract) others for assistance.
• Financial Control—a worker is an IC if he/she uses his/her own tools and supplies, has a significant investment in the work, the worker isn’t reimbursed for some or all business expenses, can incur a financial loss and isn’t covered under the employer’s worker’s compensation insurance.
• Relationship of the Parties—workers are employees if both parties intend for the relationship to be long term, they receive insurance benefits, pension or paid leave; but ICs if a contract specifies otherwise.
A Contract Is a Contract, Right?
But a contract comes with a caveat. Take Quality Medical Transcription (QMT) for example. According to court documents, prior to 1992, the MTSO’s MTs worked at QMT’s central office. But as technology allowed, the company changed its operational procedures, requiring MTs to work from home using their own equipment. The MTs agreed and signed “subcontractor agreements” with QMT.
But after MT Dorothy Woods was “discharged” in January 2001, she filed for unemployment—a challenge to her IC status, as only employees are entitled to unemployment benefits.
“When it comes to workers being misclassified, one of the biggest flags occurs either when they’re terminated and they attempt to collect unemployment or they’re injured and attempt to file a worker’s compensation claim,” according to Ronald E. Wainrib, Esq. of Franklin, MA, editor and publisher of Temp Law On Line and legal consultant to businesses and workers in temporary and contractor work relationships on avoiding worker misclassification and related legal risks. “They’re told, ‘You’re not eligible because you’re not an employee, you’re a self-employed independent contractor.’”
In fact, Woods’ claim flagged an investigation of QMT’s business practices. Despite her IC agreement with QMT, the Labor and Industrial Relations commission used the IRS 20-factor test and determined she and other MTs were indeed employees. The Missouri Court of Appeals denied QMT’s appeal, upholding the ruling (see www.osca.state.mo.us/courts/pubopinions.nsf, click on Western District, 12/17/02).
Misclassification Faux Pas?
“If an employer presents you with a document and says, ‘Here are the terms and conditions, here’s what we’ll pay you and we’ll send you a weekly or bi-weekly check, it sounds more like an employer/employee relationship,” commented McKinsey. In terms of the contractual agreement, “Part of being an IC is the negotiation side of it.”
“I think the confusion about IC vs. employee often arises because some employers as well as a few MTs, particularly those new to the profession, equate working at home with independent contracting,” said Diane Heath, CMT, MT research coordinator for the American Association for Medical Transcription (AAMT). She would like to believe the mistake is an honest one on the part of MTSOs or hospitals.
“The work-from-home issue has two parts to it,” clarified Wainrib. “You’re either talking about somebody who has an opportunity to work from home such as a telecommuter, or you’re talking about somebody who is self-employed, operates his/her own business and does it out of the home.”
And yet, confusion still exists.
“Recently an MT called me and said she had been told she was going to go home and work as an independent contractor,” recalled Heath. “[The hospital] sent her a 15-page contract with all of these stipulations: you will do this, you will do that, you will come in when we need you, we will pay you so much a line, etc.”
Specifications on format and turnaround time are one thing, considered McKinsey, “But if in any way the company you’re working for is unilaterally setting the fee and you don’t have any negotiations on it, it sounds more like they are your employer.”
“Independent contractors are really business owners themselves, and as a business owner you have to set your own fee. You’re not paid [as an employee] when you’re an IC, you bill for your services rendered at the rate you negotiated,” clarified Pat Forbis, CMT, president-elect for the California Association for Medical Transcription and owner of Pat Forbis & Co., a consulting business.
Furthermore, Wainrib added, “ICs have the ability to control their time. They can do what they want, when they want to.”
When the IRS is making this determination, said McKinsey, “What they would tend to look at is one: is the person free to do transcription for other doctors, hospitals, etc., and two: how are they billing? Are they sending an invoice to their client based on time span or lines transcribed? Ultimately, who is in control?”
IC, This Is Your Business!
For starters, ICs should be able to work for anyone and hire assistants if necessary. But in the Missouri case, for example, the 15 MTs had non-compete clauses in their contracts. The court paper stated: “While QMT never told [MTs] they could not hire assistants, Woods and one other [MT] believed the confidentiality clause required that they personally complete all of the work assigned to them.”
Forbis has heard of such cases. “I had a recent call from an MT who had a contract with a non-compete clause in it,” she recalled. “Why do people sign those? An independent contractor is essentially a business owner,” she clarified. “No one can keep you from earning a living in your own profession.”
Wainrib would agree. “You get into a lot of legal issues with the non-compete clause,” he said. “In some states, such as California, these clauses are totally invalid as they apply to independent contractors.”
But Heath can see why MTs feel compelled to agree to such terms, especially if a current employer sends them home to work. “The sad thing is that some MTs may be afraid of losing their jobs if they don’t agree to an IC arrangement.”
“I think the problem with medical transcription is that it’s still a renegade profession in that there are not a lot of laws governing what it is that MTs do,” volunteered Forbis, who compared transcription’s vagaries with the highly defined status of real estate agents who often rent office space from a broker and are classified as ICs.
ICs Have a Lot to Weigh
“Clearly it’s a benefit to the employer to be able to classify people as an IC, because whatever benefits the company is providing, the IC will be excluded from those,” McKinsey pointed out.
“While the hospital or service is getting rid of their overhead, MTs must factor in their loss of benefits, vacation time, unemployment benefits, workers compensation, even meal discounts if applicable,” Forbis stressed.
Wainrib would add to that list the payment of federal income tax and health insurance, not to mention the fact that unlike employees, ICs are not protected by the various federal labor laws on discrimination or disability, for example.
Forbis’ advice is not to get broadsided.
“If I were working for a hospital or a service and they came to me and said, ‘We need to make you an independent contractor,’ my response to them would be, ‘I will look your contract over and see what I would need to charge you to maintain my benefits for myself and I’ll get back to you.’” She added, “To jump up and say, ‘Sure, I’ll work from home and everything will be rosy,’ is a misconception.” She tells MTs, “If you want to be a business owner then be an IC, but develop a business plan, get your business cards, market yourself and get more than one client.”
Finally, protect your investment, she advised. “There are three people an IC needs in his/her life: an attorney, an accountant and a banker. I hear people say they can’t afford these services and I tell them they can’t afford not to have these people around. They are the ones who are going to keep you out of hot water.”
Linda Gross is an associate editor at ADVANCE.
Back Taxes, Fines and OT? Oh My!
“One of the auditing priorities of the IRS involves employers who layoff or terminate workers and either take them back and convert their status to independent contractors or replace them with other workers as ICs,” noted Ronald E. Wainrib, Esq. of Franklin, MA, editor and publisher of Temp Law On Line, a legal consultant to business and workers on worker misclassification and related contractor workforce issues. “As the IRS sees it, for every worker converted from employee to IC status, they lose 40 percent of income tax/employment tax revenue.”
As an employer, “If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty,” according to the IRS (see www.irs.gov/businesses/small/article/0,,id=99921,00.html).
But it might not stop there.
“The Wage and Hour Division of the Department of Labor can also audit,” said Pat Forbis, CMT, president-elect for the California Association for Medical Transcription and owner of Pat Forbis & Co., a consulting business. “And from what I hear, it’s an ugly audit. Essentially, they want to know how much overtime your misclassified employees have put in. They don’t care how much the worker earns per line, they want to know how much the MT earned per hour. They need to make sure the worker earns minimum wage—that the person is paid appropriately and paid for any overtime.”
Employers and employees alike can ask the IRS to determine a worker’s status, said Wainrib. In addition to Publication 15-A, which provides the basics for employers, there is Form SS-8. “For tax purposes, the SS-8 is the best source of information. IRS auditors use it to make their determination on workers’ status, but they encourage employers and workers to do self-assessments.” Furthermore, Wainrib added that this form is a better test than the old 20-common law factors test.
The SS-8 and other forms are available on Wainrib’s Web site at www.contingentlaw.com. All forms and publications are available at www.irs.gov.
–Linda Gross
