The impact of the Dynamex Ops West, Inc v Superior Ct. case
David Knittel | Director of Tax | PracticeCFO
On April 30, 2018 a very important case was decided by the CA Supreme Court. Dynamex v Superior Ct, instituted a brand-new threshold for determining whether a worker should be considered an employee or a contractor in the state of California. As a result, a quiet panic has ensued as attorneys and employers scramble to reclassify all of their workers. However, as was stated so eloquently by Inigo Montoya in the classic movie The Princess Bride, I want to step back and say, “I do not think it means what you think it means.” At least not particularly for the dental practice owners and their associate doctors.
The Dynamex case focuses on whether the drivers Dynamex hired as independent contractors should have been treated as employees for the purposes of California Wage Order requirements. Prior to 2004 Dynamex had classified all its delivery drivers as employees. In 2004 the company switched course and changed the classification of all drivers to independent contractors. In 2005 a lawsuit was brought claiming that this classification violated terms of the California Wage Orders and Labor Laws. For its purposes, the court rejected the prior classification standards and created a new test which has become known as the ABC test. Under this test a worker is considered an employee unless the employer can establish that each of the three following tests apply:
- That the worker is free from control and direction over performance of the work, both under the contract and in fact
- That the work provided is outside the usual course of the business for which the work is performed
- That the worker is customarily engaged in an independently established trade, occupation or business
Now, clearly under this standard most of the workers paid in a dental practice should be classified as employees. This includes front desk, assistants, hygienists and associates. The only workers this standard would not encompass would be those brought in for jobs outside of normal dental operations such as cleaners, repair men, IT specialists, etc. But, before we go willy nilly here and reclassify every contractor lets take a step back and analyze the purpose of the case.
Before we start I want to say that I think it is clear that all workers in your practice, other than associates, should be treated as employees. This was true prior to this case and is nailed down tight after. However, I’m not certain that the door has been shut on treating associate doctors as contractors rather than employees; here’s why. The text of the case is very clear that this ruling relates “to the resolution of the employee or independent contractor question in one specific context. …for purposes of California wage orders
.” The wage orders are meant to protect employees from being taken advantage of and impose obligations relating to minimum wages, maximum hours of work, overtime and other basic working conditions such as meal and rest breaks. When we look at independent contractors in the context of associate doctors we are looking at mostly payroll tax issues. Issues such as minimum wages and work breaks are not a concern. This ruling does not apply specifically to the common law test that the IRS uses to determine whether a worker should be considered an employee for purposes of payroll taxes. This ruling applies only to wages orders. It is also worth noting that dentists are included in the definition of “professionals” to whom the wages orders do not even apply. For these reasons, I’m not certain the Dynamex case moves the bar, yet, for the classification of associate doctors as contractors.
Right about now I think I need to make a disclaimer. I am not an attorney, and this is not legal advice. This new standard has now been accepted by a few states and, as with any standard, once precedence is set it is easier and easier to use again. I cannot say that at some point the IRS will not move to the same standard. But, currently I’m not as certain as others that in applies in our context.
There are tax savings to be had for both your practice and the associate doctor by claiming contractor status. You save in payroll taxes. They can save by using the new Qualified Business Deduction of 20% on their 1099 income. They can also save by controlling their own wages from their corporation and, therefore their own payroll taxes and retirement contributions. For these reasons it may be worth trying to bolster you case a bit by taking a couple of action steps. Number one, have a contract in place with your associate doctor identifying both your and their understanding of contractor status. This will not be determining but will at least set the stage that both of your expectations were the same. Number two, have any associate doctors you hire form an S-Corporation to receive their payments. By default, an S-Corporation cannot receive wages and can only be paid as an outside contractor.