The Unexpected Consequences of Hiring Healthcare Independent Contractors in New Jersey

Hiring licensed health professionals as independent contractors is a common practice for medical establishments looking to expand services and supplement overextended core staff when patient demand is high. The New Jersey Board of Medical Examiners permits this type of business relationship under NJAC 13:35-6.16 (f)(3) and it certainly has its advantages. However, not recognizing how other laws affect independent contractor arrangements can expose employers to unexpected consequences that far outweigh any benefits.

Generally, hiring independent contractors saves on certain administrative costs because employers do not have to contribute to Social Security, Medicare, state unemployment, and worker’s compensation plans. Additionally, employers do not have to provide independent contractors with employment benefits, such as paid time off, healthcare, or retirement packages. Finally, employers can terminate relationships under the independent contractor agreements once contractors’ services are no longer needed.

However, employers engaged in this practice need to be careful. New Jersey law prohibits worker misclassification, the practice of illegally classifying employees as independent contractors which deprives them of certain guaranteed rights and protections, such as minimum and overtime wages, disability benefits, family leave, sick leave, and much more. It is the employer’s responsibility to classify workers correctly to avoid misclassification and simply issuing a 1099 instead of a W2 does not suffice.

How New Jersey’s ABC Test Applies to Healthcare Independent Contractors

According to the New Jersey Unemployment Compensation Law N.J.S.A 43:21-19(i)6(A)B(C), a worker can be treated as an independent contractor only if they meet the three prongs of the “ABC test”:

A. The individual has been and will continue to be free from the employer’s control or direction over work performance, both under contract of service and in fact; and

B. The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and

C. The individual is customarily engaged in an independently established trade, occupation, profession, or business.

Even if the worker performs services under an LLC or has complete autonomy, the employer can fail the ABC test if the worker’s services are an integral part of the employer’s business or if the employer is the worker’s sole or substantial source of income and predominant work location. Other factors, such as who provides work tools and who pays work expenses, determine whether a worker is classified as an independent contractor. Unless all three prongs of the ABC test apply, an employer cannot treat a worker as an independent contractor and doing so would result in misclassification.

A recent administrative ruling highlights the risk of misclassifying professionals who provide clinical services for a medical practice. In Pennsauken Diagnostic Center, LLC v. NJ Department of Labor, Agency Dkt No. DOL 20-022 (Mar. 16, 2023), the Pennsauken Diagnostic Center imaging services group (PDC) hired a radiology practice to read images. PDC paid each radiologist directly and issued 1099s for their services. The New Jersey Department of Labor and Workforce Development (DOL) flagged the PDC for misclassifying the radiologists as independent contractors and assessed PDC for unpaid contributions to the unemployment compensation fund and the state disability benefits fund.

The administrative court used the ABC test and agreed with the DOL because:

A. PDC controlled the radiologists’ workflow. Workers logged into PDC’s system to obtain images assigned to them and had to prepare reports within 24 hours of doing so. PDC determined and paid compensation directly to the radiologists and bore the risks for their services; and

B. Radiology readings are “a necessary and integral part of the work” of an image servicing company and PDC’s internet portal was the radiologists’ work location; and,

C. The radiologists were not independently established business owners.

Misclassification Penalties Add Up Quickly

Legal penalties for misclassification can escalate quickly. Simply failing to post misclassification notifications at a work site can result in fines ranging from $100 to $1,000. The DOL can force employers to repay misclassified workers up to 5% of their gross earnings over the past 12 months. Employers can also be fined $250 per misclassified employee for the first violation and up to $1,000 per misclassified employee for each subsequent violation.

While investigating a misclassification claim, the DOL can shut down the employer’s business and issue civil penalties of at least $1,000 per day that the employer delays or otherwise hinders its investigation. This is in addition to penalties that might be assessed for employment or tax law violations. For example, under the New Jersey Insurance Fraud Prevention Act (NJIFPA), employers who misclassify employees may be fined $5,000 to $15,000 per violation.

Nevertheless, hiring licensed professional medical providers, when done correctly, can benefit an employer’s business model and provide relief to overloaded staff. As such, to avoid expensive pitfalls, we encourage healthcare employers to consult with experienced legal counsel before hiring independent contractors.

For additional information about healthcare independent contractor employment agreements, please contact Amrill Salcedo-Alonzo, the author of this post.

  • Posted on: Jul 12 2023