This guest post is brought to you by HR for Health, a DirectDental partner. HR for Health makes dental practice HR easy, affordable, automatic, and legally compliant, and is your partner in navigating the complexities of independent contractors versus employees. Their consultants can walk you through independent contractor requirements to determine if you have your team classified correctly.
Staffing a dental practice is hard work. You need to find the right people, work out the best way to bring them onboard, and do a whole lot of paperwork the right way.
From independent contractors, to full-time employees, to per diem employees, it can seem like there are as many types of employees as there are types of jobs. And if you misclassify someone, the penalties can be severe, including lawsuits, back payments, and punitive judgements.
DirectDental and HR for Health are here to help you stay compliant and stay in business. To make that happen, here’s our guide to independent contractors and employee classification.
How is an independent contractor different from an employee?
An independent contractor is someone who provides services to your practice, but isn’t considered an employee. They operate their own business, set their own hours, and have control over their work methods. Think freelancers, consultants, and gig workers.
In the dental industry, independent contractors are often dentists brought on to provide specialized skills that current team members can’t provide, like advanced diagnostic procedures or specific technical tasks. They can also cover during peak times or staff absences. They offer flexibility to scale a practice up and down quickly, without many of the administrative burdens of employees. They may run their own practice or see patients on a contract basis.
The Fair Labor Standards Act (FLSA) sets federal minimum wage, overtime, and recordkeeping rules, but it only applies to “employees” and not to independent contractors. The correct classification of workers plays a critical role in determining coverage and compliance with federal wage-and-hour law.
How can I decide if a worker is an independent contractor?
The first and most important step in hiring an outside contractor is to look at the difference between independent contractors and employees. This isn’t simply a matter of how you choose to classify them. There are detailed guidelines that define who qualifies. So, what is an independent contractor?
The IRS defines independent contractors this way:
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
Conversely, employees are defined as follows:
Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done.
In other words, independent contractors typically make their own rules — they decide whether, when, and how they work once you hire them for a project. That’s a hard standard to meet if you are talking about technicians and assistants who must abide by the rules of your practice.
When the Department of Labor makes a decision on whether a worker is an independent contractor, they use a six factor test finalized in January 2024, considering:
- The worker’s opportunity for profit or loss
- Investments made by the worker and potential employer
- The degree of permanence of the relationship
- The nature and degree of the potential employer’s control over the work
- The extent to which the work is integral to the potential employer’s business
- The worker’s skill or initiative
- The rule uses a “totality of the circumstances” approach, acknowledging that other factors may be relevant in specific cases.
So if you bring in an associate dentist, the regulations look at whether and how you control their work. Are they able to make independent decisions on how to work on patients? Can they set their own schedule? If so, they may qualify as independent contractors — but there is still some risk in classifying them that way.
You can drill down to determine whether your team members qualify as independent contractors by reviewing IRS and Department of Labor (DOL) guidelines. Each looks at unique factors in categorizing team members, and each imposes consequences when employees are misclassified.
If the individual meets the requirements for classification as an independent contractor under one agency but not the other, the safest choice is to classify that team member as an employee. Remember, the costs of misclassifying an employee are quite high. You could be liable for back pay on taxes, worker’s compensation, and wages — including vacation, PTO, sick leave, and overtime.
How should I correctly classify my employees?
If you’ve decided to classify a worker as an employee, you’re not done yet. Is that employee exempt or non-exempt from the FLSA regulations on minimum wage and overtime pay?
- Exempt employees are required to earn a minimum of $844 per week starting July 1, 2024. They are paid the same amount of money regardless of the hours worked, and they generally perform administrative, professional, or executive duties.
- Non-exempt employees generally have no limitations or requirements on the number of hours they can work every week, but if they work more than 40 hours in a week, they are required to receive overtime pay.
Keep in mind, these are federal requirements and some states have their own unique regulations. Contact HR for Health if you need help identifying rules in your state.
How can you tell if an employee is exempt or non-exempt? There are three tests to follow:
- Salary Level Test: The first option is to perform something called a salary level test. As of July 1st, 2024, if an employee is earning more than $43,888 per year, which is the equivalent of $844 per week, they are qualified as exempt but are not required or guaranteed to be exempt.
- Salary Basis Test: Another option is the salary basis test. If an employee receives a guaranteed minimum compensation, regardless of the number of hours he or she actually works, that employee could qualify to be exempt, but is not guaranteed or required to be exempt.
- Duties Test: Finally, if an employee meets the two tests above, the employee must also follow the duties test. If the employee supervises two or more other employees as a part of his or her regular job, the employee performs duties that require specialized education, and the employee performs support operations for matters that require a significant amount of judgment and discretion, then the employee may pass the duties test.
If the employee meets all of the standards above, the employee could be classified as exempt. It is still important for the business to clearly specify whether an employee is exempt or non-exempt.
What is a per diem employee?
Within the boundaries of non-exempt employees, there is a unique subset called per diem employees. That means they receive a flat rate of pay for the entire day, regardless of how many hours they work.
The per diem rate does not cover any overtime. If your dental practice is in a state like California, Alaska, Colorado, and Nevada, which have daily overtime requirements, you pay your employees for the overtime incurred on top of the flat daily rate. A comprehensive HR & timekeeping solution, such as HR for Health, has an Overtime Tracking feature that can help.
You may consider the per diem employee classification a benefit, because it’s an easy way to compensate your front-line employees. It may also appear relatively uncomplicated. That may be because your dental practice, like so many others, probably does not handle per diem correctly. Schedule a consultation to find out if you need to reassess your nonexempt employees.
That’s where the disadvantage comes in. We don’t recommend using per diem, because it’s only beneficial to your dental practice if your nonexempt (per diem) team members can fill up their day with a constant flow of patients. If it’s slow, you might send your employee(s) home, but they still get paid the daily rate. Even if you keep the employee all day and give them “busy” work, you still must monitor their meal and rest breaks while tracking their overtime as a nonexempt employee.
Most of your employees will not qualify as independent contractors (ICs) per federal requirements, according to the Borello factors. There are also states, like California, that have their own method for assessing the classification status of an IC. Per diem employees (e.g., hygienists, dental assistants) are NOT ICs, because they are under your control and direction.
What happens if I misclassify an employee?
As a small business owner, you are required to clearly specify whether employees fall into the exempt or non-exempt category. The easiest way to do this is through job descriptions. The financial and legal ramifications of misclassifying employees can be costly, and the penalties can be retroactive, going all the way back to the original date that the employee was hired.
If you misclassify your employees as non-exempt, there are several examples of penalties you could face. They include:
- Individual lawsuits or class action lawsuits brought against the company.
- IRS audits and paying back overtime and wages.
- Lost employee benefit compensation
- Interest on any penalties, fines, or extra compensation that is owed to the employee.
- Punitive damages.
How can I stay compliant?
Employers should review rules and evaluate their classification policies and practices accordingly. When in doubt, they should consult experienced legal counsel.
To comply with regulations, dental practices should:
- Conduct a thorough review of their workforce: Analyze the nature of work performed by independent contractors under the six-factor test.
- Seek legal counsel: Consult with employment law experts to understand the specific implications of the regulations for their business.
- Implement clear work agreements: Clearly define the scope of work, payment terms, and level of control in contracts with independent contractors.
- Stay informed: Keep abreast of any future updates or clarifications to the regulations by the DOL.
Another great idea: getting an HR solution that’s built to help keep dental practices efficient and compliant. That’s where HR for Health comes in. HR is complex, but HR for Health makes it simple.
It’s easy to use, and keeps all of your paperwork and records right where they need to be. And its continuous legal updates and support keep you up to speed on the latest federal, state, and local laws.
That’s why it’s a DirectDental partner. Because when we connect you to talent, we want to make hiring, onboarding, and managing that talent as seamless as possible. So get in touch today.
Additional Resources:
- U.S. Department of Labor: https://www.dol.gov/agencies/whd
- Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA): https://www.dol.gov/agencies/whd/fact-sheets/13-flsa-employment-relationship
- Final Rule: Employee or Independent Contractor Classification Under the Fair Labor Standards Act: https://www.dol.gov/agencies/whd/flsa/misclassification/rulemaking