The Risky Business of Paying Physicians as Contractors

Jehan N. Jayakumar; Matthew M. Stokke


December 23, 2018

California Ruling Has Contract Consequences

Both small and large practices often hire physicians as independent contractors—sometimes to fill a temporary need, and sometimes to be able to have another physician in their practice without incurring all the expenses and commitments of having another full-time employee.

Earlier this year, the California employment law landscape shifted in a way that is sure to affect all California business owners. The California Supreme Court, in its Dynamex Operations West v. Superior Court decision, created a new legal test for determining whether your licensed providers should be paid as independent contractors or employees. Before writing this off as legal "pop culture," it is important to understand the direct consequences this ruling has for healthcare practices in particular.

How a principal company classifies and pays a service provider affects both employers and employees alike. The classification of a service provider as an independent contractor, generally seen as beneficial for the company's bottom line, strips the protections a service provider would otherwise enjoy if classified as an employee. For example, independent contractors are not eligible for such benefits as participation in retirement plans, paid time off, or health insurance, and they must pay their own expenses, such as malpractice insurance.

Given this push and pull between the service provider and principal company, it comes as no surprise that there have been a number of lawsuits over the years brought by independent contractors who claim they were misclassified as employees, resulting in substantial penalties against the company for failure to follow overtime and meal and rest-break laws, state and federal Social Security and payroll tax requirements, workers' compensation insurance requirements, and unemployment insurance requirements.

In addition to such lawsuits, companies face fines by the state of up to $25,000 per misclassification. Generally speaking, independent contractors cannot bring claims for discrimination or harassment and do not enjoy the protections afforded by leave laws, such as pregnancy disability leave and family and medical leave.

Applying the 'ABC' Test to Physicians

The Dynamex ruling makes these results even more likely. For the last 30 years or so, courts have used the Borello control test, a multifactor test applied on a more subjective, case-by-case basis to determine whether a service provider was properly classified.

In its recent ruling, the California Supreme Court adopted the new, more objective and simplified "ABC" test. There's now a legal presumption that all service providers are employees, and the burden of proof is on companies to establish that they have properly classified a service provider as an independent contractor. To meet this burden under the ABC test, the principal company must establish all of the following:

  1. The service provider is free from the control and direction of the company in the performance of his or her services, by the terms of a written contract and in actuality; and

  2. The service provider performs services that are outside the usual scope of the company's business; and

  3. The service provider is customarily engaged in an independently established trade, occupation, or business.


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