The Independent Contractor Trap

By John T. Whitney, DC




NOTE: The IRS can be very fussy, so please refer to their Independent Contractor page for the complete definition.


More and more new graduates find the cost of startup too steep and the whole prospect of starting from scratch too risky. The newbies usually end up as, "associates", (employees) and hate it. There is another way.

In chiropractic the term "independent contractor", means many things to many people, and that is unfortunate. What it is not, is an employee, who is obliged to follow the dictates of the host (owner) doctor.

Many field doctors seeking an associate (employee) use the term Independent Contractor (I.C.) . . . wrongly. The host doctor often presents a contract to the one seeking to be a true independent. Upon reading the contract one is quick to realize that the (well-meaning) host doctor is really requesting an associate (employee) and that the only reason the agreement is labeled Independent Contractor is in an effort to shirk the responsibility as employer (collect tax and provide benefits). The government is not amused by this thinly disguised deception and provides a hefty fine for those doctors caught using this ruse.

The key factors deciding what is an I.C. and what is an associate (employee) are quite simple. If the senior doctor appears to be dictating (hours, methods of care, holidays, days to be worked and items similar) the IRS will consider the new doctor an employee. If you are in any doubt call the IRS for a ruling.(IRS form SS-8)

Another big, big factor is who "owns" the patients. If the contract states that the patients (patient files) remain the property of the clinic, should the IC decide to move on, you can be sure there is nothing "independent" about the I.C. agreement.

The final tip-off is: is the associate being asked to sign a non-compete clause, e.g. 15 miles for 5 years? If one were to sign something like this, again, there is no "independent" in the Independent Contractor agreement.

To be blunt, most contracts labeled as IC. agreements are nothing more than a shallow attempt to hoodwink the new doctor into thinking the agreement is something it is not. Often the host doctor is not even aware of the deception since he likely got a copy of the document from a chiropractic friend who got it from another chiropractic friend who copied it from who knows where.

DEFINITION OF A TRUE INDEPENDENT CONTRACTOR:

One who leases space in another (already, up-and-running) office. The space may be fully serviced space (complete with telephones, adjusting tables, exam equipment, x-rays, stationery, postage, complete staff, etc.) or partially serviced (supplies some of the needed staff, equipment, supplies). One would be expected to pay commensurate with that which is supplied.
Everything is negotiable.

HOW MUCH?:

In years gone by it was common for an I.C. to simply pay only a percentage of collections. A typical starting lease-fee mightbe 40% of collections. Today that kind of arrangement would cause the IC to be categorized as an employee by the IRS (not Revenue Canada however).Do not use this method in the USA, it is not legal. The host doctor using this percentage method will be severely punished by the IRS and be forced to pay a fine, penalties, and the equivalent taxes levied on the IC.

The preferred method for an I.C. to pay for her space, is to have a set monthly base payment (e.g. $500). Five hundred dollars a month to lease space is certainly a small amount of money. But could be fair for a few months until the size of the practice increased. At some arbitrary time in the future the host doctor could impose what is known as, "additional rent". That arrangement is not only fair for the I.C. but satisfies the IRS.

Example:

* First 3 months lease fee could be $500.
* Fourth month lease fee could be $500 plus 25% of collections.

From that point until collections reach $20,000 per month, the fee could be $500 plus 30% of collections.

Once $20,000 per month is exceeded in collections, the amount between $20,000 and $25,000 could be at 35% of collections plus the $500 base rent.

Once $25,000 per month is exceeded in collections, the amount between $25,000 and $30,000 could drop back to 30% ( we are now getting into economies of scale) of collections plus the $500 base rent.

This could continue until the rent paid ($500) and % of collection reaches, say $4000 per month, (arbitrary) and level off there. All of this is negotiable, but the figures shown are fair guidelines.

One of the questions asked is "who gets the uncommitted call ins?" To be fair, there are two main considerations in applying the following formula; the length of time the senior doctor has been in the location and the effectiveness of the location for walk-ins.

One idea is that uncommitted call-ins & uncommitted walk-ins, go into rotation, perhaps giving the senior doctor 3:1 for the first three or four months, 2:1 for the next 6 months and do a 1:1 division at the end of one year.

This can be complicated if only one of the doctors is an aggressive promoter/marketer. Perhaps co-operative marketing could solve this problem (split costs 50/50).

When one covers for the other under a locum arrangement, it should be treated no differently than if a locum were hired for the task. That is to say; pay who ever looks after your patients 30 to 50% of services rendered.

The I.C. arrangement has many positive aspects to it for both parties. In an I.C. arrangement one achieves benefits of an employee practicing in a busy office with supportive professional associate, at a know address and yet is independent. Start-up cost are minimal compared to opening a solo practice.

The host doctor benefits in several ways also; built-in locums, possible built-in buyer, passive income (windfall), a close at-hand colleague, expands the service hours of his/her establishment.

The I.C. is truly a wonderful opportunity for both host and I.C. There is a flaw however; the human element. The host-I.C. arrangement requires two mature human beings who realize that there will always be differences of opinion with real or imagined,"slights". Conflict and compromise is the order of the day, and frequent, regular meetings are essential to keep the lines of communication open and to avoid little problems festering to big problems. That does not seem like much does it? The reality is that without maturity and frequent meetings the sleeve becomes unraveled.

In most cases the host provides everything necessary for the I.C.to conduct a practice except marketing dollars .The cost for an I.C. to set up would only be for any specialty items he or she requires, and a financial cushion for 3-6 months for living and business expenses

From the standpoint of a host, a little construction work may be necessary in the office to prepare an office for the I.C., the computer must be programmed for a second doctor, (another) color coded set of files ordered (important!), and an explanation and training given to the staff on office protocol changes. The I.C. must not be regarded as an extra burden, by the staff or treated like a second banana by the host doctor or staff, a common occurance.

In time, more staff will likely be needed. The host should not view this as a burden but as a sign of progress and also a promise of an increase in her passive income. If a host doctor has the space, several I.C.'s could eventually practice in the facility. This can represent a significant source of income for the host.

The I.C. should be rather picky about what office he/she joins. Number one is that it must be a busy office. If it is not, the I.C. will likely struggle along with the host. If one joins a busy office the IC practice can grow rather quickly from the spill-over of the hosts practice alone, - saving many marketing dollars and time.

The host should screen the I.C.'s who wish to practice in his office for personality, gender, techniques, and aggressiveness. It is well known that female practitioners are preferred by patients and grow their practices rather quickly. It is also well known that females spend more time with patients and see fewer patients on an average basis. Women practitioners are absent from the office more often then men. A female practitioner can add a sense of balance to a male dominated office.

An Independent Contractor does not sign a non-compete clause but should expect to sign a non-solicitation clause. A non-solicitation clause should be signed by a host and I.C. alike.

INDEPENDENT CONTRACTOR ARRANGEMENTS:
* Use a rotation system for uncommitted patients.
* The host has no control over the I.C.'s practice.
* IC. can move next door and take their practice with them when contract expires.
* Input must be graciously considered by both parties.
* The I.C. is a very valuable property.
* 30%-50% of gross business of the vacationing doctor is paid to the person who covers.


BENEFITS FOR INDEPENDENT CONTRACTOR

1. Proven location
2. Master of your own ship
3. Motivational due to empowerment
4. Lower risk than solo startup
5. Proven market
6. Affiliation without dependency
7. Lower start up costs
8. No restrictive covenants


FINANCIALS FOR IC

1. Up front marketing costs - Yellow Pages - Opening Announcement
Legal Fees - Accounting Fees - Malpractice Ins. - Disability Ins.

2. Any equipment or office supplies needed but not covered by the arrangement.

3. Living and business expenses for 3-6 months.

As a matter of form, it would be more appropriate to refer to this type of practice arrangement as a "Sub-Lessee", which is an accepted legal term, rather than an "Independent Contractor", which is a red flag to the IRS.

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