Many telehealth companies, particularly those with multi-state footprints, look to an independent contractor model when developing their network of physician providers. An independent contractor model (using 1099 contractors) can offer lower overhead costs because the telehealth provider need not shoulder the same requirements of a W-2 employer model. It also provides scalability when the provider wants to move into new states with initially lower patient encounter volumes. We already know that physician contracts must comply with fraud and abuse laws, as reminded in the June 2015 OIG Fraud Alert on Physician Compensation Arrangements. But another question arises: could these independent contractors actually be considered employees?

The answer is not as simple as it may seem. Case in point: Teladoc’s S-1 filing issued in connection with its upcoming IPO. The filing describes how the Texas based company uses an independent contractor model with its healthcare providers in a manner Teladoc states results in an independent contractor relationship. The filing states:

“We structure our relationships with our Providers in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that our Providers are properly characterized as independent contractors, tax or other regulatory authorities may in the future challenge our characterization of these relationships.”

If the answer is not as simple as looking at the contract between the telemedicine provider and the physician, how does one determine whether the physician is an independent contractor or an employee? And how can telemedicine providers confirm their relationships with physicians are structured as independent contractors? The answer is found in the IRS’ 20-Factor Test.

In Revenue Ruling 87-41, 1987-1 CB 296, the IRS developed 20 factors used to determine whether a worker is properly characterized as an independent contractor or an employee. These factors are not 100% conclusive, but provide a general framework for examining both types of relationships. The central theme is the concept of direction and control of a worker.

1. Instructions. Does the principal provide instructions to the worker about when, where, and how he or she is to perform the work?

2. Training. Does the principal provide training to the worker?

3. Integration. Are the services provided by the worker integrated into the business operations?

4. Services Rendered Personally. Must the services be rendered personally by the worker?

5. Hiring, Supervising, and Paying Assistants. Does the principal hire, supervise, and pay assistants to the worker?

6. Continuing Relationship. Is there a continuing relationship between the principal and the worker?

7. Set Hours of Work. Does the principal set the work hours and schedule?

8. Full Time Required. Does the worker devote substantial full time to the business of the principal?

9. Doing Work on Employer’s Premises. Is the work performed on the principal’s premises?

10. Order of Sequence Set. Is the worker required to perform the services in an order or sequence set by the principal?

11. Oral or Written Reports. Is the worker required to submit oral or written reports to the principal?

12. Payment by Hour, Week, Month. Is the worker paid by the hour, week, or month?

13. Right to Discharge. Does the principal have the right to discharge the worker at will?

14. Right to Terminate. Can the worker terminate his or her relationship with the principal any time he or she wishes without incurring liability to the principal?

15. Payment of Business and/or Traveling Expenses. Does the principal pay the business or traveling expense of the worker?

If the answer to the above is ‘yes’, then the agreement may indicate an employer-employee relationship. Conversely, if any of the below criteria are answered in the affirmative, the arrangement may indicate an independent contractor relationship.

1. Furnishing of Tools and Materials. Does the worker furnish his or her own tools, materials, and equipment?

2. Significant Investment. Does the worker have a significant investment in the facilities?

3. Realization of Profit or Loss. Does the worker realize a profit or loss as a result of his or her services?

4. Working for More Than One Firm at a Time. Does the worker provide services for more than one firm at a time?

5. Making Service Available to General Public. Does the worker make his or her services available to the general public?

What happens if an independent contractor is deemed to be an employee? Financial tax liability for the employer is one unintended consequence. The S-1 filing describes the financial impact as follows:

“If such regulatory authorities or state, federal or foreign courts were to determine that our Providers are employees, and not independent contractors, we would be required to withhold income taxes, to withhold and pay social security, Medicare and similar taxes and to pay unemployment and other related payroll taxes. We would also be liable for unpaid past taxes and subject to penalties. As a result, any determination that our Providers are our employees could have a material adverse effect on our business, financial condition and results of operations.”

Telehealth providers already offer an incredible benefit to employers and patients in the form of increased access, care coordination and lower overhead compared to many traditional brick and mortar practices. Using an independent contractor model for physician network development further augments these savings and can be a cost-effective way to engage physician providers. That said, when preparing a standard physician telehealth agreement for an independent contractor arrangement, be certain the terms of that agreement actually reflect the characteristics of independent contractors. The IRS’ 20-Factor Test is a useful guide for this assessment.