Talking to Independent Contractors About Switching to Employee Model
Many group practice owners have asked me how to have the conversation with their independent contractors about the business decision to change their status from IC to employees (W-2). Group practice owners are fraught with thoughts of angry clinicians quitting, leaving your business understaffed and empty. I mean, don’t we all go to worst case scenario when it comes to business making decisions?!
So, reasonable as this fear based thought may be, fear not! Your business is important, and it should be structured and run according to your business plans and vision. Let’s talk about reasons that practice owners start thinking about switching their independent contractors’ status from that of an IC to employee model.
- They want a family style group practice, which affords them the ability to have staff meetings, celebrate birthdays, and have staff outings/celebrations
- They want to require things of them, like supervision, staff meetings, or trainings
- They want to offer incentives, like bonuses, time off, or retirement matching
- They want full time clinicians
- They want to be able to dictate certain things with their clinicians, like how much time off they can take, how they do their notes, when notes should be completed, or how much they should work
It may be surprising to hear that many group practice owners who have ICs operate their practices in a way that the IRS would deem as an employee model. Why would they do this?
- They don’t know what constitutes an employee and what constitutes an IC relationship
- They have a fear about hiring employees, for lack of knowledge on how to set that relationship up, fear of the financial load placed on their business, fear of higher liability, fear, fear, fear…
- They don’t think they will get caught (this is a small percentage of the group).
OK, so with that in mind, you are considering switching your ICs to an employee/employer relationship but are afraid of their reaction and how to communicate the change. No need to go into fear overload, I have done this and feel that I learned some things from past experiences as an IC myself as well as my own experience having to make that business shift with my own ICs. So without further ado, my recommendations…
- First sit down and write up why you are making the change. You need to be clear about your reasoning, otherwise you may get caught up during your conversation with your clinicians. You want to sound confident in your decision.
- Make sure you have an employment contract ready and approved by your attorney.
- Schedule a time to meet with each clinician individually. I find this to work better than doing it as a group, as groups can be intimidating and easily escalate. Plus, this gives your clinicians the safe space to ask you questions.
- Be as transparent as possible. Nothing smells fishier to an IC than when a business owner isn’t clear about their intentions. As we agreed upon earlier in this article, we tend to think worst case scenario-so they will do this. What does this mean? Tell them why you need to make this switch in your business model. Talk about what this means to them.
- Will anything new be enforced when they become an employee? Time off maximums, required hours to work, required staff meetings, etc.
- Did you notice that you are treating them more like employees and that you’d like to continue this?
- Often clinicians don’t understand what constitutes being an independent contractor. Some of the biggies to explain are:
- ICs must have their own business legally set up (like a sole prop or LLC) that your business pays their checks to. Most ICs I am betting are not set up as a business themselves and are getting checks written to them personally.
- The IRS states that ICs cannot make their main source of income from your business, as that establishes an employment relationship-that means no full time ICs, and even if they work 15 hours with you but don’t work anywhere else, then their main source of income is with your business.
- ICs cannot get benefits. This means no bonuses, no health insurance, no retirement matching, no paid time off, no continuing education stipends, etc.
- ICs should be paying for their own materials, like business cards, marketing materials, phone line, etc.
- ICs cannot be trained or required supervision if there are concerns or clinical issues. It is up to the IC to make sure they are receiving supervision or case consultation if needed.
- Explain to them any changes in payments. Most group practice owners must reduce the pay from IC to employee. That is because they absorb part of the taxes ICs pay on their previously had to pay for. Most group practice owners agree the average pickup tax, malpractice, FUTA (unemployment) and workers comp costs come to about 10%. So, if you want to compensate your new employees at a similar rate to when they were ICs, you’d want to reduce their rate by about 10%. This doesn’t take into account any incentives that you may choose to add later or employer taxes (thereby increasing their overall compensation even more).
- When switching to employment model, the employer withholds income taxes, Social Security and Medicare taxes, pays a portion of those, and pays unemployment tax on wages paid. As ICs, they are responsible for tracking and paying all those taxes on their own. This comes out to about 6.2% Social Security tax, 1.45% Medicare tax (the IC previously paid 12.4% in Social Security tax and 2.9% Medicare tax). In addition, group practice owners will have to pay unemployment tax-FUTA- (state and federal-federal unemployment tax is currently 6% of the first $7k each employee makes) and worker’s comp (typical average of .25-.35 cents to every dollar your employees make).
- You must pay for their malpractice insurance by adding them to your malpractice
- You must pay for materials, for example testing supplies, marketing materials
- You can now add incentives (or in the future), which is something nice to explain.
- Free supervision/case consultation
- Paid sick time
- Retirement matching
- Health insurance
- Paid marketing/blogging
- Education stipends
You catch my drift. There’s a lot of benefit to ICs becoming employees, many of which are hard to see without explanation. Some group practice owners find it beneficial to map out the differences visually for their staff. See below for a sample financial flowchart. One side is an IC yearly calculator based off of 60% and the other side is based off of employee 50% (10% difference). You will see that reducing by 10% yields almost the same yearly amount including costs to employer.
Hope this helps you have an effective conversation with your independent contractors about switching to employee model.
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