Was Clinic Director an Employee or Independent Contractor?

“I’ve been asking for my pay for two months because I’m an employee and covered by wage-hour laws, and I should be paid for those months,” said Emily, a director at a plastic-surgery clinic.

“We didn’t have to pay you for the two months because your commission was based on revenue growth, and there was no growth,” said Sam, the owner of the clinic.

Facts: A Pennsylvania plastic-surgery clinic hired a director of business development to expand the practice’s business.

The director was expected to work full time, but she did not have a set schedule and she did not track the hours she worked. She worked from home, using her own phone, computer, and vehicle, and paid for all of her business expenses. However, she was given an email address from the clinic and access to its computer systems. The director was offered the same company fringe benefits as the clinic’s employees, but chose not to take advantage of them.

The clinic did not require the director to work exclusively for the clinic, but any other work the director took on could not interfere with her work for the clinic. The director and the clinic considered the director an employee at first, but eventually the structure of the director’s compensation was changed to 2 percent of the clinic’s gross monthly revenue, from the previous structure of a base salary plus a monthly bonus.

Together with the change in compensation, the director agreed that she would be considered an independent contractor so the clinic would not have to pay payroll taxes on her wages or pay for time off. The director’s job duties did not change.

The director was paid for two months under the new arrangement, but the clinic determined that the arrangement was unsustainable and based the director’s compensation on revenue growth instead of gross revenue.

The clinic’s owner claimed he told the director about the change, but the director said she was not informed.

The clinic did not pay the director at all for the following two months, claiming that she was not owed pay because there was no growth in revenue. During the two months, the director requested that the clinic continue to
pay her according to gross revenue.

The director then resigned and filed a lawsuit claiming that she was an employee and was owed compensation for the two months that she was not paid under the federal Fair Labor Standards Act and Pennsylvania’s Wage Payment and Collection Law.

Issue: Was the director an independent contractor or an employee?

Decision: The director was an independent contractor and was not covered by the FLSA or the Wage Payment and Collection Law, a federal district court said March 7.

The court used the FLSA economic-realities test to determine whether the director was an employee or an independent contractor.

Working in favor of considering the director an independent contractor was that the clinic did not establish a work schedule for her and did not require her to report hours worked, and that the director formulated her own work plan to meet the clinic’s goals, the court said.

The clinic’s goals were vague and the director was to use her skills and experience to determine how to properly fulfill them, which contributed to the consideration of the director as an independent contractor, the court said.

That the director paid for most of her own business expenses and was not provided with an office or computer further suggested that she was an independent contractor, the court said.

The director’s duties were not an integral part of the clinic’s business of providing medical services, another factor pointing towards independent contractor status, the court said.

The only test factor that suggested employee status was that the director’s position was permanent and was not associated with a fixed term or a specific project, the court said.

Whether the clinic properly notified the director of the change in her compensation from a percentage of gross revenue to a percentage of revenue growth was still to be determined, the court said.

The case is Green v. Golla Ctr. for Plastic Surgery, P.C., No. 2:18-cv-00034, W.D. Pa., 3/7/2019.

Pointers: The FLSA economic-realities test determines whether a worker is an employee or an independent contractor using six factors.

The test’s factors are the employer’s degree of control over the worker; the worker’s opportunity for profit or loss; the worker’s investment in required equipment or materials or the use of helpers; whether the position requires special skill; the permanence of the working relationship; and whether the work performed is an integral part of the employer’s business.

Employers or workers who wish to request a determination from the Internal Revenue Service regarding a worker’s classification may fill out and send to the IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

For more information, see Payroll Administration Guide’s “Employee vs. Independent Contractor” chapter.