Residents Are Workers, Not Students, for Tax Purposes, Says High Court

January 13, 2011

January 13, 2011 — The US Supreme Court yesterday ruled that teaching hospitals must pay Social Security and Medicare taxes for their medical residents because they are workers and not students, for tax purposes at least.

An attorney for a union called the Committee of Interns and Residents (CIR) told Medscape Medical News that the decision affirms past decisions by other government agencies that classify residents as employees. Those decisions make residents eligible, therefore, for a raft of benefits and protections such as Social Security disability and survivor benefits, the Family Medical Leave Act, unemployment insurance, and the right to collectively bargain.

"If the Supreme Court had gone the other way, employers would have used the decision to strip labor law protections from residents," said Ralph DeRosa, deputy general counsel for the CIR.

A consumer advocacy group called Public Citizen called today's ruling one more reason for the US Occupational Safety and Health Administration to regulate the working hours of bone-weary residents. Last year, Public Citizen, CIR, and the American Medical Student Association asked OSHA to limit work shifts for all residents to 16 hours to spare them the potential needle sticks, depression, pregnancy complications, car crashes, and medical errors that come with sleep deprivation. Right now, first-year residents are limited to 16-hour shifts, but those further along in their residencies can work up to 24 hours straight. OSHA is reviewing the petition.

Court Case Had Been Fought Since 2005

At issue in the Supreme Court case is the Federal Insurance Contributions Act (FICA) tax that funds Social Security and Medicare. Part is paid by employers, and part by employees. Congress had exempted students who work for their schools from this tax, but in December 2004, the US Treasury Department declared that medical residents did not qualify for this exemption but instead should be treated as employees for FICA purposes because they work more than 40 hours a week.

The Mayo Clinic in Rochester, Minnesota, and the University of Minnesota in Minneapolis, similar to other institutions with residency programs, began paying their share of the tax in 2005, but then separately sued the federal government to recover the money. They argued that residents are indeed students because their employment is educational in nature. The 2 institutions won their cases in a federal district court, but lost at the federal appellate level. The Mayo Clinic and the University of Minnesota then turned to the Supreme Court.

The high court unanimously upheld the appellate decision, with Justice Elena Kagan recusing herself because she had worked on the case while serving as President Barack Obama's solicitor general. Delivering the opinion on behalf of the court, Chief Justice John Roberts Jr wrote that the justices did not doubt that residents "are engaged in a valuable educational pursuit or that they are students of their craft." However, the Treasury Department "did not act irrationally" in concluding that such physicians, who work long hours and resemble career employees in other ways, are the kind of workers that Congress had in mind as participants in the Social Security system, Roberts noted.

In a written statement, attorneys for the Mayo Clinic and the University of Minnesota called the high court's decision disappointing, and they characterized the Treasury Department's rule on residents as rigid and flawed.

Another disappointed party is the Association of American Medical Colleges (AAMC), which includes teaching hospitals. "We believe residents are students," Ivy Baer, AAMC director and regulatory counsel, told Medscape Medical News.

The AAMC and other educational groups had filed a friend-of-the-court brief in the Supreme Court case, claiming that the Treasury Department's 40-hour rule unfairly withholds student status from residents because they receive "too much education." They also said that the rule costs teaching hospitals some $700 million a year in FICA taxes that would be better spent on medical education and patient care.

Ralph DeRosa, the attorney for the CIR, said that teaching hospital opposition to the Treasury Department rule was all about the money.

"There was a huge financial incentive for them to take the position that residents were not workers," DeRosa said.

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