AB 5 Exempts Physicians – but Proceed with Caution

Practice Management Advisory:

Employee v. Independent Contractor:

Continuing Issues and Practical Guidance

Introduction to Worker Classification

On September 18, 2019, Governor Newsom signed AB 5 (Gonzalez) instituting new rules on the classification of workers as employees or independent contractors.  This new law takes effect on January 1, 2020.  Although AB 5 (Gonzalez) creates an exemption for physicians from the more restrictive “ABC” test for worker classification established by the California Supreme Court in the Dynamex case in April of 2018, this does not mean that a medical practice can engage physicians as independent contractors without potential negative consequences.  It simply means the pre-Dynamex rules apply.

Importantly, the new law only applies to physicians.  Accordingly, anesthesia groups engaging CRNA’s as independent contractors will have that relationship scrutinized under the strict and rigid ABC test established in Dynamex.  Although there are three components to the ABC test, if you fail to meet any of the three then the worker is considered an employee. One of the components is that an independent contractor must be engaged “outside the usual course of the hiring entity’s business.” If the anesthesia group’s business is administering anesthesia to patients, this component will not be met and the CRNA will be considered an employee. Asserting and proving the other two components of the ABC test are satisfied (free from control of the business and CRNA engaged in an independent occupation) will not change the result.

If there was any benefit to the Dynamex decision it was the clarity it provided on the subject of worker classification.  An examination of the past and future rules established in the Borello decision demonstrates the ambiguous nature of the worker classification analysis after AB 5 (Gonzalez) takes effect.

A medical practice generally has two options for engaging physicians who are not general partners of the medical practice: employee or independent contractor. This “either or” choice extends to the shareholders of a medical corporation, as well.  Although share ownership is not a factor in worker classification, if a shareholder also serves as an officer of the medical corporation, this is indicative of an employment relationship.

Generally, there are fewer problems associated with misclassifying an independent contractor as an employee since most governmental agencies and third parties are more likely to assert that an independent contractor is truly an employee as opposed to the other way around. It is also possible for the worker to make a legal challenge to his or her classification. It is far more complicated to defend a claim by an independent contractor asserting he or she should have been treated as an employee than the converse. Nevertheless, there have been tax cases where an individual engaged as an employee successfully proved that he or she was more appropriately treated as an independent contractor.

It would be a simple enough matter if it were just between the practice and the physician, but this is not case. The correct classification is relevant for qualified retirement plan participation and other benefits, workers’ compensation insurance coverage requirements, unemployment insurance, disability insurance and accommodation, malpractice insurance coverage, third party liability and insurance, timing and amount of compensation, and leaves of absence, among other things. Even more problematically the classification of a worker as employee or independent contractor depends on the true nature of the parties’ relationship and not just the terms of their agreement.   Somewhat different rules and presumptions apply to worker classification for different purposes. For instance, the classification rules for federal income tax purposes are not the same as they are for unemployment insurance. The discussion below focuses on the classification analysis for purposes of the California Labor Code.

Control and other Relevant Factors

Ultimately, the most significant factor in determining whether someone should be engaged in one category or the other is control. To the extent the anesthesia group exercises greater control over the physician, he or she is more properly considered an employee. The significance of control in the classification of workers necessarily creates tension. The practice clearly wants to control those who are treating patients for convenience, quality, compensation, and other reasons. However, to the extent the practice is granted more control (or actually exercises more control regardless of the terms of the agreement) it runs a greater risk of a “reclassification” claim.

California courts generally presume a worker is an employee unless the putative employer affirmatively proves the worker is an independent contractor.  To determine a worker’s employee or independent contractor status, courts consider a host of factors that supplement and inform the California Labor Code provisions.

Courts have consistently emphasized that the most important “primary” factor is the putative employer’s right to control the work details.  The right of control need not extend to every detail of the work.  Rather, the relevant inquiry is whether the putative employer retains the right to “all necessary control” over the meaningful aspects of the worker’s performance. Courts have stressed that the strongest evidence of the right to control is whether the hirer can discharge the worker without cause, because the power to terminate the worker equates with the right and means of controlling the worker’s activities. At least one court has considered the hirer’s right to terminate the worker without cause to be conclusive evidence of the worker’s employee status.

Beyond control, there are several secondary factors in determining a worker’s employee or independent contractor status.  The secondary factors relevant to the determination are:

1. whether the one performing services is engaged in a distinct occupation or business;
2. the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
3. the skill required in the particular occupation;
4. whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
5. the length of time for which the services are to be performed;
6. the method of payment, whether by the time or by the job;
7. whether or not the work is a part of the regular business of the principal; and
8. whether or not the parties believe they are creating the relationship of employer-employee.

The nature of many of these factors is such that neither the putative employer nor the worker can influence them one way or the other.  Where the secondary factors can be influenced, it is important those details be memorialized in a written agreement.

The Independent Contractor Agreement

Given the presumption of employment status, control as the single most important factor, and the secondary factors, a written independent contractor agreement or “ICA” is absolutely essential.  An appropriate form of “ICA” should clarify and reinforce the status of the “Contractor” as an independent contractor of the “Client” and not as an employee of the employer.  The ICA should have all of the “bells and whistles” of an independent contractor relationship.

Of course, the most significant contract terms supporting the independent contractor relationship are those which relinquish the Client’s control and defer to the Contractor as regards details of performance.  Keep in mind the comments above about tension between the need for control as a practical matter and the need to relinquish control to reinforce the independent contractor relationship.

Relevant to the control factor in classifying workers it is helpful if the Contractor is only obligated to provide services when “scheduled by mutual agreement.”  The expectation is that a monthly or other periodic schedule will be prepared specifying the date, time and place the Contractor is to work.  Once the Contractor accepts the schedule there is agreement and the Contractor is bound to adhere to the schedule. These ICA provisions avoid the need to include a termination without cause provision or a specific term at all.  The Client can simply stop requesting the Contractor’s services and the Contractor can decline any proposed work assignments.

In support of the independent contractor relationship, the ICA should make clear that the Contractor is responsible for all costs and expenses which have not been approved.  The ICA should include a provision on the taxes and assessments which are the Contractor’s responsibility which should include a business license. Employees are not required to obtain business licenses but independent contractors are. This reinforces the independent occupation secondary factor above.

Always an issue in the ICA is the subject of malpractice insurance coverage. Both the independent contractor and the anesthesia group need to have defense and indemnity coverage for any claim arising out of the Contractor’s act or omission while providing services for the Client. Ideally, the ICA indicates the Contractor is providing coverage, but sometimes the Client provides the coverage for practical and financial reasons. In such case it is advisable to include an explanation in the ICA why this expense is assumed by the Client.

Since payment by the job rather than by time is a relevant factor, it is helpful if compensation is by shift. It is certainly possible to pay different amounts for a call shift and a day assigned to a particular anesthetizing location for scheduled cases.

If the Contractor has his or her own single shareholder medical corporation, that corporation rather than the physician individually should be the party to the ICA, and the sole shareholder should sign as the “Pres./Sec.” on the signature page. A practical reinforcement to the independent contractor status is to include provisions in the ICA that commit the corporate contractor to comply with all compensation, payroll, benefits, and other requirements imposed by California on employers and obligating the corporate contractor to indemnify the Client for any claims made by the corporate contractor’s employee against the Client.

Conclusion

Any anesthesia group contemplating hiring anesthesiologists as independent contractors needs to understand that the risk associated with that decision has not been eliminated by passage of AB 5 (Gonzalez).  As such, the independent contractor relationship should be the result of mutual agreement between the group and the worker.  A written ICA with appropriate terms is also essential.

Anesthesia groups also need to understand that AB 5 (Gonzalez) makes the former Borello rules applicable to physician independent contractors, but CRNA’s continue to be subject to the strict ABC test. One of the three ABC factors is that the Contractor’s services are “outside the usual course of the hiring entity’s business.” If that business is administering anesthesia to patients, the group cannot pass the test.