When putting a policy handbook together, or editing an existing one, you are constantly going to be faced with looking at things through the eyes of your employee. What’s fair? What’s reasonable? How does all of this fit into what makes sense for the business as a whole?
W2 vs 1099
This arrangement is fundamental to the way you structure your team. 1099 employees (also known as independent contractors) are responsible for paying all of their FICA taxes (social security and Medicare), so the temptation on the employer’s part is to see this as an immediate 9.3% tax savings and use this type of arrangement. However, there are several obvious and serious problems with this approach which argue strongly against it.
- With a 1099 employee, you have little or no control over very basic employee duties and activities, such as what they wear, what they say to your patients, what their hours of operation are, their menu of services, even what they charge for services.
- You run afoul of fee splitting and kickback laws with a 1099 arrangement. If the employee is paid directly by the patient or an insurance carrier and they then pay you some portion of the amount back to you that is clearly a fee split. If you are collecting the amounts from the patient and and then pay some portion out to the employee, you are using your tax ID number to collect fees that your taxable entity did not provide.
- An employee must reasonably be able to work elsewhere in order to qualify as an independent contractor.
- You have a much harder time protecting your patient lists, as non-compete and non-solicit are not within the realm of a 1099 arrangement.
In case I’m not making it clear, it’s usually a poor choice for all involved to go with the 1099 route. There are certainly exceptions, but W2 is the rule.
Salary vs hourly
Salaried employees (also called exempt, meaning exempt from overtime) have several basic differences from hourly wage earning employees (also called non-exempt). Some employers will call employees salaried in an attempt to avoid paying overtime wages (1.5 times normal wage), but this is a clear labor law violation that should be avoided. Salaried employees:
- Have some sort of bottom line responsibility. This can be for an entire division, a work team, a budget, etc.
- Have at least one other individual who reports to him/her, and is responsible for the performance of that report.
- Have the majority of their responsibilities as managerial and not customer facing on a scheduled basis.
For small offices, an hourly wage employer is going to be the profile that you will follow. An office that is large enough to support an office manager or an admin manager, that role may qualify as a salaried, exempt employee. If this is the way you want to go, be sure you have an accurate and detailed job description in place, both for clarity and security. Neither of these pay set-ups preclude anything pertaining to bonuses, side benefits, etc.
Wage vs. commission
Flat salaries are typically paid to providers only in tax-supported facilities, or in established HMO groups. These entities are not entrepreneurial in nature, and the idea of incentives makes no sense. In a private professional practice, the pay scales are typically based on a commission structure, rather than a fixed structure. A commission is defined as payment to the licensed or certified provider as a percentage of the collections from that service. This can also be calculated as a pay rate per service hour or patient encounter, if that is easier to track. This is perfectly permissible in a W2 set-up, but not in a 1099 set-up as outlined above. As with any pay plan that is somewhat complicated and perhaps not immediately obvious to all involved, a written agreement is quite useful in preventing conflicts or misunderstandings.
- This set-up works well with providers such as massage therapists in a chiropractic office. The therapist can be paid the greater of: clock hours times local minimum wage, OR massage rate times the number of clock hours. This way, the employer is compliant with Federal minimum wage standards, but has a built in financial incentive for the therapist to be busy and productive.
- A modified version of this can work well with newly hired chiropractors, where the license is the same as the senior doctor, but the experience level and financial investment is not the same. The overall plan we have been working with lately in simplified form is as follows: the new doctor is guaranteed a minimum monthly compensation as defined by local labor market ranges. The pay can be substantially higher if the new doctor takes off in practice and gets busy to the point where a defined percentage of collections is larger than the minimum. This serves basically the same function in incentivizing the doctor to doo all the “little things” that result in a busy and successful practice.