Employment Status 101

Anesthesiologists in California can be employed in multiple different ways. This document will attempt to simplify the different models into 3 categories.

Employee

Physicians can be employees in California if they join a medical group. These can be small anesthesia practices, functioning under a corporation, or large entities like the University of California or Kaiser Permanente. In this scenario, physicians receive a paycheck with the employer withholding 1/2 of Social Security and Medicare taxes. Employers typically provide malpractice insurance, health insurance and other benefits as part of the package.

California is unique in that physicians can only be employed by physicians. This is the prohibition of the corporate practice of medicine. (...neither non-physicians nor lay corporations (corporations that are not medical professional corporations) nor limited liability companies (LLC) may contract to provide medical services. Nor may they contract with a physician to have the physician provide medical services, either as an employee or an independent contractor.1) For this reason, you see the formation of physician groups that are linked to large organizations: Kaiser - Permanente Group, Sutter - Gould Foundation, Dignity Health - Mercy Foundation. Smaller hospitals are starting to follow this trend as well.

Although there is variation in the implementation of corporate benefits for employees, there is limited flexibility in what the employee can do on their own. If you have a Professional Corporation, and it is determined that you are an Affiliated Service Group (During the mid-1980s, Congress created a series of complex rules that require all companies in a related group to be combined when determining whether employee benefit plans are providing adequate benefits to enough of the employee population.3), you might be liable to contribute to everyone else's benefits. For this reason, most people in an employee model do not form their own corporation.

Employees receive a W-2 statement for filing income taxes.

Independent Contractor

An Independent Contractor is a person or entity contracted to perform work for—or provide services to—another entity as a nonemployee. As a result, independent contractors must pay their own Social Security and Medicare taxes. The payer must correctly classify each payee as either an independent contractor or employee. A large number of California Anesthesiologists currently practice in this mode.

The Dynamex Operations West v. Superior Court decision threatens to upend this form of employment. The decision was crafted with the advent of the "Gig Economy" with companies such as Uber. Under the new California Supreme Court analysis, all three of the following factors must be met for a worker to be properly classified as an independent contractor: 1) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact. 2) The worker performs tasks that are outside of the usual course of the hiring entity's business. 3) The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.4

AB5 (2019) (Gonzales) is a California law which limits the use of classifying workers as independent contractors rather than employees by companies in the state, codifying the Dynamex court decision. At the last minute, some professions were exempted from AB5, including doctors, dentists, psychologists, insurance agents, stockbrokers, lawyers, accountants, engineers, and real estate agents. Nurses and CRNAs were not exempt.

An Independent Contractor receives income, and is responsible for paying both the Employer and Employee portions of employment taxes. Independent Contractors can set up a PC to create pension plans, provide pre-tax benefits and function without some of the limits that employers might enforce. Tax Information comes in the form of a 1099 Form. Some Independent Contractors refer to themselves as 1099 employees.

Partnership

Under U.S. law a partnership is a business association of two or more individuals, through which partners share the profits and responsibility for the liabilities of their venture.5 Partnerships can function as a hybrid of the Employee and Independent Contractor models, or closely mimic one of the other.

There is concern with Joint and Several Liability in a Partnership6. Because of the shared liability, if one person gets sued, the award may need to dip into deeper pockets of partners for payment. For this reason, Partnerships need to prepare for litigation risk.

A Personal Corporation works well with a Partnership. In this case, the PC can hold a portion of the income distribution and funnel it to the individual. Only PC assets can be attached in a lawsuit, not individual assets.

At year end, partners receive a K-1 Partnership return.

Conclusion

There is no right or wrong employment method. To compare packages, you will need to do some math. Keep a look out for the CSA comparison calculator.

 

1. https://cohenhealthcarelaw.com/2014/07/corporate-practice-of-medicine-anti-kickback-fee-splitting-rules-deep-down-the-regulatory-rabbit-hole/

2. http://www.mbc.ca.gov/licensees/corporate_practice.aspx

3. https://www.dwc401k.com/knowledge-center/related-companies-affiliated-service-groups

4. https://www.laboremploymentlawblog.com/2018/05/articles/class-actions/dynamex-decision-independent-contractors/

5. https://en.wikipedia.org/wiki/Partnership

6. https://en.wikipedia.org/wiki/Joint_and_several_liability

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