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Chapter 32  Professional Practice Arrangements



Overview……… 32:3

Financial Advisors………….. 32:3

The Business Plan………….. 32:3

Sources of Capital………….. 32:4

Conclusion……. 32:6


Introduction…. 32:6

Finding the Practice Consultant………….. 32:7

Hiring the Practice Consultant………….. 32:8


Liability Concerns of Partnerships………… 32:11


Overview……. 32:11

Who May Participate in a Professional Association………… 32:12

Liability Issues for the Professional Association………… 32:12


Overview……. 32:13

The Medical Professional Corporation………… 32:13

“One Purpose” Rule of Professional Corporations………… 32:14

Who May Participate in a Professional Corporation………… 32:14

Liability Concerns of the Professional Corporation………… 32:16


Overview……. 32:16

Employee vs. Independent Contractor………… 32:16

IRS Safe Harbor Provision………… 32:18

Fraud and Abuse………… 32:20

Self-referral prohibitions………… 32:21

Pension plan issues………… 32:22

Malpractice coverage………… 32:23

Medicare assignment issues. 32:23

Anti-trust issues………… 32:23

Obligations of being self-employed………… 32:24


Overview……. 32:24

The Employer………… 32:25

The Employee………… 32:26

Negotiation… 32:26

Selected Contract Terminology………… 32:27


APPENDIX A – Model Contractual Arbitration Provision . . . . . . . . . . . . . . . . . . . . . . . .32:33

APPENDIX B – Model Consultancy Agreement………… 32:34



The practice of medicine has become increasingly more complex as it adapts to changing law and developing business structures. A physician is confronted with many options in establishing a professional practice arrangement ranging from the simple sole practitioner to more complex entities such as limited liability corporations, partnerships, and reciprocal practice groups.

Each practice entity offers its own advantages and liabilities, but they all share many common issues of concern such as capitalization, employment of staff, and conformity with local, state, and federal regulations. This chapter will discuss several forms of business arrangements and some of the primary issues of concern for professional practice arrangements.



Generating sufficient capital to develop and sustain a practice, in whatever business form chosen, presents an important challenge. Medicine is a profession and a business and, like most businesses, may require funding from external sources such as lending institutions or investing shareholders. Funds will be needed to lease or acquire office space, furnishings, administrative equipment such as computers, phone systems, fax machines, and diagnostic equipment and therapeutic tools. Capital may also be needed to pay staff if regular income from billing is insufficient. Before beginning any business venture, it is critical to set goals, analyze needs, identify sources of funding, and develop a coherent business plan.

Financial Advisors

Depending on the complexity of the business structure contemplated, and the concomitant capital needs, a professional certified financial consultant may be helpful in providing information regarding the various sources of capital available. Other professionals, such as attorneys or certified public accountants, offer a wealth of experience and expertise at identifying advantages of and disadvantages to the many choices facing a physician establishing some form of business. Consultation with these professionals will provide invaluable assistance in devising a comprehensive business plan likely to satisfy cautious lenders.

The Business Plan

Most, if not all, lenders, and particularly institutional lenders, will require a formal professional business plan in order to reasonably assess the prospective capital needs and risks associated with a new business or loan. The business plan begins with identifying financial requirements in annual increments calibrated to the duration of the loan. Depending on the amount of capital requested, a business plan generally includes a description of the business entity, a pro forma statement of earnings and liabilities anticipated, and some market evaluation such as management profiles, industry trends, and an assessment of the local market. It is advisable to consult with the lender first to inquire specifically what information is required.   Lenders are often helpful at evaluating the risk in a particular plan.

Sources of Capital

Banks and other Financial Institutions . The most common source of funding remains banks and other financial institutions, especially those familiar with servicing the needs of the medical field. Some institutions even specialize in serving physicians and can provide practical advice on the various forms of business organization. Such institutions or banks may be preferable for their experience with other medical ventures because they will not have to be convinced of the security of their loan.

Other financial institutions, such as savings and loans associations or thrift and loan companies (also known as institutional lenders) may provide funding. These institutions are subject to the same regulations and supervision of the Federal Depository Insurance Corporation (“FDIC”) as the full service banks. Both may offer a full array of collateral services and accounts, such as business accounts, cash management, or payroll services along with funding.

Non-depository lenders such as licensed commercial lenders typically do not offer the range and variety of services and options but may be more flexible in their lending posture. These lenders are not subject to the same FDIC regulations, but are regulated by other state and federal requirements.

Non-Institutional Sources . Many other sources of funding exist aside from banks and lending institutions that potentially could provide capital at better terms, in exchange for an equity interest, particularly where the risk is greater than an institution is willing to assume.

A practitioner may consider utilizing family resources if available and sufficient. In the alternative, family resources may be used as security for primary loans. It is important to be aware of IRS requirements for gifts and arm-lengths transactions in family lending situations. Funds transferred as a gift carry certain annual limitations, currently $10,000.00 maximum per annum, before incurring substantial gift taxes. Loans must be bona fide meaning that they carry an actual interest and repayment schedule that is commercially reasonable.

A physician may consider requesting funding from other interested parties, such as hospitals and established Independent Practice Associations. These parties are experienced and knowledgeable of the risks involved in the practice of medicine and may be more motivated to provide capital to physicians with whom they are familiar. When entering financial relationships with other interested parties, care must be taken to avoid violating fraud and abuse laws, antitrust regulation, or the more recent prohibitions against referrals between entities having a broadly defined financial arrangement.

A physician may consider assuming limited partners or other equity arrangements that offer an investment opportunity for non-physicians whose limited purpose is to provide capital in exchange for some regular return. Limited partnerships have prohibitive initial costs associated with conforming to Securities Exchange Commission (“SEC”) and Internal Revenue Service (“IRS”) code requirements. However, they may be preferable for long-term investment arrangements of considerable capital outlay, generally in excess of $10,000.

There may also be funds available from institutions established with the sole purpose of providing investment capital to professional ventures such as medical groups. For example, medical equipment companies have formed joint associations to provide loans to physicians and other practice groups.

A physician may also consider utilizing personal resources to secure financing or provide instant capital as needs arise. Funding may be acquired by pledging or liquidating a pension plan, home or other real estate equity, or savings or insurance funds. These resources should be expended judiciously because there may be limitations on the use and amounts available from each source.

There are various other types of innovative financing arrangements that are more common in other business and have recently been introduced to the medical field. One such device is called “accounts receiving financing.” This method has been successfully incorporated in other business contexts such as securitization of mortgages and other debt instruments. Simply put, this type of financing involves pledging to the lender the income stream from active accounts receivable. It is necessary then to demonstrate a reliable history of payment from a minimum number of accounts receivable in order to minimize the lender’s risk. This type of financing is attractive to lenders in a fairly limited environment and physicians should also be aware of limitations of assigning Medicare accounts.

There may also be financing available from small business investment companies. These are privately owned, for profit entities that are licensed by the Small Business Administration to make loans which may not be fully collateralized.

Other creative financing arrangements may be attractive depending on the particular circumstance for which a loan is required. For example, many vendors are willing to finance the purchase or lease of equipment at commercially competitive terms. In acquiring equipment such as computers and diagnostic or therapeutic devices, a physician should carefully consider the rate of obsolescence in evaluating whether purchase or lease of equipment is preferable. Should a physician wish funding for expansion or renovation of premises, the lessor may be inclined to finance such endeavors in return for increased rents or other benefits. The parties may find quite creative methods to accomplish these goals, such as reduced or waived rent in exchange for possession of fixtures and improvements at the termination of the lease.

Other more advanced and complicated techniques for capitalization, such as Real Estate Investment Trusts (“REITs”), off-balance-sheet financing or sale-leasebacks, or tax exempt funding, may be advantageous. Minority practitioners may be eligible for certain low or no interest funding from federal or state entities. However, these methods are beyond the scope of this chapter and should be carefully explored with the assistance of an experienced professional advisor.


Adequate financing provides the lifeblood of any successful business. The most critical initial step in any business endeavor is formulating an accurate and detailed business plan which identifies financial needs, locates sufficient investment capital, and evaluates sources of anticipated income. A comprehensive plan will guide appropriate financing choices between the various lending opportunities and determine precisely what expert assistance is needed. A valuable resource is the AMA’s Physician Capital Source (1-800-AMA-1066, ext. 2) which can assist with developing a business plan and providing access to potential financing sources.



Many physicians are finding that the services of a practice consultant are quite valuable in contending with the diverse and complex issues confronting the modern medical practitioner.   A practice consultant may be needed to determine what type of practice arrangement and business entity is most advantageous, or to navigate the fast-developing technology of automated billing and record keeping computer programs and associated network hardware.   It is important to clearly identify desired goals prior to hiring a practice consultant, and it is equally important to find a consultant with the experience and expertise to achieve those goals.

Finding the Practice Consultant

A practice consultant is hired whenever a physician or staff lack the knowledge or expertise to resolve an important practice issue.   Attorneys are appropriate to advise concerning various practice arrangements and business entities.   Other organizations exists for the specialized purpose of consulting and advising medical practitioners regarding more technical aspects of the field or, for example, specialized tax or investment planning.   It is critical that the physician first identify the goals desired and then set out to determine who or what entities are potential consultants.   Consultants can provide the most benefit if they are involved at the earliest stage of a project.

Consultants may be found in many different ways, but it may be easiest to inquire of other practice groups who may have used similar services.   At the same time, it will be possible to discuss that group’s experience and obtain a reference of the consultant’s contribution.   The local county medical society may also be able to provide referrals to specialized consultants.

When considering several different consultants, it is important to review the consultants prior experience, and education.   Ideally, a consultant will have advanced education in the specific field of expertise desired, but will also have either (or both) education or experience in the medical field. Most professional fields, like medicine, have become highly specialized and a competent tax attorney may have little or no experience to offer in forming a professional corporation.

Most consultants will agree to an informal consultation and interview prior to any formal engagement.   This provides an opportunity for each party to consider whether the other is right for the task.   The practitioner should be concerned about the consultant’s ability to formulate well-reasoned solutions to the practitioners problems or objectives.   For more complex endeavors, the practitioner may request a formal proposal from the consultant stating the consultant’s understanding of the task assigned and laying out in some detail possible options to accomplish the stated goals.   The proposal should also include a cost analysis for each option with allowances for price variances in materials or sub-contractors.   A practitioner may send out a “request for proposals” to several different qualified consultants and consider and compare their responses.   The request may be as simple as a letter stated the objectives and inviting submissions in response.

Hiring the Practice Consultant

Once a suitable practice consultant has been found, it is important to establish an employment relationship that protects the physician.   Consultants and the parties they consult often have interests at odds: the party paying the consultant’s hourly or daily fee wishes the job completed as quickly as possible while the consultant may be inclined to drag the task out by complicating the objectives or solutions.   On the other hand, a per-job fee may not accommodate the vagaries of certain tasks and contingencies that develop.   The per-job consultant may be constantly tacking on additions to the bill for unforseen events that develop.   Expenses should also be addressed in advance so that each party knows who is responsible for incidentals such as photocopying, telephone, travel, or other out-of-pocket expenses.

Compensation and all other parameters of the consultant’s employment should be addressed in a written contract of employment.   A sample consultancy agreement follows this chapter as Appendix B. Several relevant contract provisions are discussed later in this chapter under employment issues.

The physician employing a consultant may be required to withhold federal and state taxes and social security, and may be required to provide benefits, if the consultant qualifies as an employee rather than independent consultant.   For a more detailed discussion of persons or entities that qualify for independent contractor status, and for whom an employer is not required to make withholdings, see the section on independent contractors in this chapter.


Nevada has adopted the Uniform Partnership Act (“UPA”) which governs the formation and activities of partnerships in most states. The act applies to medical partnerships where those entities provide professional services, defined as any type of personal service which may legally be performed only pursuant to a license or certificate of registration. NRS 87.020(5).

As discussed earlier, a partnership, including registered limited liability partnerships, is an association of two or more persons to carry on as co‑owners a business for profit. NRS 87.060(1). Persons may be individuals, partnerships, corporations, and other associations. However, the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. An association is not a partnership under Nevada law, unless the association would have been a partnership according to the statutory definition before July 1, 1931. NRS 87.060(2).

The UPA does not require any particular formalities to establish a partnership, as compared to corporations, which are required to file articles and other recordings with the Secretary of State’s office. A partnership most commonly arises out of a declaration in writing describing the relationship between parties, their mutually respective rights and obligations. A partnership may be found where the parties evidence their intent to establish a partnership through their acts and words, even absent a written agreement. The UPA uses a process of elimination to rule out various other arrangements that are not partnerships. NRS 87.070. In determining whether a partnership exists, these rules apply:

  1. Persons who are not partners as to each other are not partners as to third persons.
  2. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co‑owners do or do not share any profits made by the use of the property.
  3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
  4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference may be drawn if such profits were received in payment:

(a)            As a debt by installments or otherwise;

(b)            As wages of an employee or rent to a landlord;

(c)            As an annuity to a surviving spouse or representative of a deceased partner;

(d)            As interest on a loan, though the amount of payment vary with the profits of the business; or

(e)            As the consideration for the sale of a good will of a business or other property by installments or otherwise.

Generally, it is most advisable for individuals desirous of forming a partnership agreement to obtain appropriate counsel and carefully document their intentions, including profit, loss, and expense sharing apportionment.

Should an agreement fail to adequately delineate the partners’ respective roles, or if the agreement is completely silent as to some important aspect, the UPA provides a number of “default” principles. NRS 87.180. These rules provide, for example, that no person may become a member of a partnership without the consent of all the partners. Each partner must be repaid his contributions, whether by way of capital or advances to the partnership property, and share equally in the profits and surplus remaining after all liabilities, including those owed to partners, are satisfied. Each partner shall contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits. The partnership shall indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property. A partner, who in aid of the partnership makes any payment or advance beyond the amount of capital which he agreed to contribute, must be paid interest from the date of the payment or advance. A partner may receive interest on the capital contributed by him only from the date when repayment should be made. All partners have equal rights in the management and conduct of the partnership business. No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. No act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.

Liability Concerns of Partnerships

Under Nevada law, every partner is considered an agent of the partnership, for the purposes of the partnership business. As such, the acts of every partner in apparent conduct of the partnership’s business is chargeable to the partnership, unless that partner in fact has no authority to do the act, and the person with whom the partner deals knows he lacks such authority. N.R.S. 87.090. All partners are jointly and severally liable for any act or omission chargeable to the partnership, and also for all other debts and obligations of the partnership. N.R.S. 87.150. This indicates that partners can be held personally liable for their partners’ wrongdoings.

There is a slight difference with regard to the liability of new, incoming partners.   Nevada law states that a person admitted as a partner into an existing partnership is liable for all obligations of the partnership that existed before his admission as though he had been a partner when such obligations were incurred.   However, the incoming partner’s liability for wrongful acts or omissions that occurred before his admission to the partnership shall be satisfied only out of her share of the partnership property, not personal assets.. N.R.S. 87.170.

The doctrine of “Partnership by Estoppel” also creates liability concerns. The effect of this doctrine is to create the legal fiction of a partnership where no formal partnership previously existed if individuals conduct themselves such that a reasonable observer would conclude a partnership existed. When a person represents to others that he is a member of a partnership, or consents to another representing him to others as a partner in an existing partnership, he is liable to the person who relies in good faith on that representation. N.R.S. 87.160.




A professional association is formed upon filing a certified copy of articles of association, and payment of appropriate fees, with the secretary of state’s office within 30 days of its organization. NRS 89.210.

Who May Participate in a Professional Association

As with a professional corporation, members who organize a professional association must all be natural persons licensed to render the same specific professional services as those for which the professional association is organized. A professional association may render professional service only through its members and employees, all of whom must be licensed to render the professional service. NRS 89.230.

In the event that any member of a professional association becomes ineligible to practice in the association’s service field, that member must sever within a reasonable time all professional services with, and financial interest in, the professional association. NRS 89.240. The professional association may by its articles provide for severance pay or for compensation for past services upon termination of a members association, whether by death or license revocation.

No membership interest in a professional association may be sold or transferred except to one who is eligible to be a member of the association or to the personal representative or estate of a deceased or legally incompetent member. The personal representative of such a member may continue to own such interest for a reasonable period, but may not participate in any decisions concerning the rendering of professional service. A member may transfer his interest in the association or any other interest in the assets of the association to a revocable trust if he acts as trustee of the revocable trust, and any person who acts as co-trustee and is not licensed to perform the services for which the association is organized does not participate in any decisions concerning the rendering of those professional services.

The articles of association may provide specifically for additional restrictions on the transfer of members interests and may provide for the redemption or purchase of such an interest by the association or its other members at prices and in a manner specifically set forth in the articles.


Liability Issues for the Professional Association

A professional association does not insulate a physician from liability for his own wrongful acts or omissions, but a member or employee of a professional association shall not be personally liable in tort for any act in which he has not personally participated. Therefore, Nevada law shields a member of a professional association from vicarious liability for another members negligent acts. Furthermore, a member or an employee of a professional association shall not be personally liable in contract for any contract which he executes on behalf of a professional association within the limits of his actual authority. NRS 89.060.





As in most states, a professional corporation in Nevada is legally formed upon satisfaction of certain statutory requirements and filing formalities common to corporations in general. For example, the entity must have a unique name that is followed by the designation “professional corporation” or its equivalent. The corporation must have by-laws that delineate the structure and administration of the business. The law requires that the board of directors of the corporation file with the secretary of state’s office, the articles of incorporation and various other documents along with a nominal filing fee. Corporations must hold regular meetings, and record and maintain the minutes of those meetings.

The Medical Professional Corporation

In Nevada, a corporation may lawfully engage in the practice of medicine only if one or more licensed physicians incorporate under, and strictly comply with, the provisions of the Professional Corporations and Associations Act.   NRS 89.010. The Nevada Attorney General has issued an opinion stating that no corporation organized under the state’s general corporation law may lawfully practice medicine, but one or more physicians may practice medicine in a corporate form if they are incorporated. AGO 219 (10-3-1977). A professional corporation is one that renders any type of personal service which may legally be performed only pursuant to a license, certificate of registration or other legal authorization. The effect of the Attorney General’s opinion is to require that a corporation engaged in the practice of medicine is organized for the purpose of practicing medicine and that such a corporation include at least one licensed practitioner.

“One Purpose” Rule of Professional Corporations

Nevada law governing professional corporations is nearly identical to statutory provisions for professional corporations in other states. A professional corporation, as compared to a private corporation, may be organized only for the purpose of rendering one specific type of professional service and may not engage in any business other than rendering the professional service for which it was organized and services reasonably related thereto. NRS 89.040. But, a professional corporation may own real and personal property appropriate to its business and may invest its funds in any form of real property, securities or any other type of investment.

Other important exceptions to the “one purpose” rule exist for medical professional corporations, including those engaged in homeopathy and osteopathy, and provide that such professional corporations may market and manage additional professional corporations which are organized to render a professional service relating to medicine, homeopathy and osteopathy. A professional corporation may render a professional service only through its officers and employees, all of whom must be authorized to render that professional service. NRS 89.050.

Who May Participate in a Professional Corporation

Since a professional corporation is, by its definition, one organized to provide certain professional services, Nevada law limits those eligible to own a professional corporation to those who are licensed to practice in the corporation’s purpose field.   NRS 89.070 The law restricts ownership and transfer of shares in the professional corporation in several important respects.

A professional corporation may not issue any of its stock to anyone other than a natural person who is licensed to render the same specific professional services as those for which the corporation was incorporated. No stockholder of a professional corporation may enter into a voting trust agreement or any other type of agreement vesting another person with the authority to exercise the voting power of any or all of his stock, unless the other person is licensed to render the same specific professional services as those for which the corporation was incorporated. No shares of a professional corporation may be sold or transferred except to a natural person who is eligible to be a stockholder of the corporation, or to the personal representative or estate of a deceased or legally incompetent stockholder. The personal

representative or estate of the deceased or incompetent stockholder may continue to own shares for a reasonable period, but may not participate in any decisions concerning the rendering of professional services.

In addition to the rather narrow restrictions on ownership and transfer of interests in a professional corporation, Nevada law further provides that the articles of incorporation or bylaws may include even more restrictions on the transfer of shares and may provide for the redemption or purchase of the shares by the corporation, its stockholders, or an eligible individual account plan at prices and in a manner specifically set forth in the articles of incorporation. A stockholder may transfer his shares in the corporation or any other interest in the assets of the corporation to a revocable trust if he acts as trustee of the revocable trust, and if any person who acts as co-trustee and is not licensed to perform the services for which the corporation was incorporated does not participate in any decisions concerning the rendering of those services.

But, a person not licensed to render the professional services for which the corporation was incorporated may own a beneficial interest in any of the assets, including corporate shares, held for his account by an eligible individual account plan sponsored by the professional corporation for the benefit of its employees, which is intended to qualify under section 401 of the Internal Revenue Code (26 U.S.C. 401). If the terms of the trust are such that the total number of shares which may be distributed for the benefit of persons not licensed to render the professional services for which the corporation was incorporated is less than a controlling interest and:

  1. The trustee of the trust is licensed to render the same specific professional services as those for which the corporation was incorporated; or
  2. The trustee is not permitted to participate in any corporate decisions concerning the rendering of professional services in his capacity as trustee.

A professional corporation in which all the stockholders are licensed to render the same specific professional service, may acquire and hold stock in another professional corporation, or in a similar corporation organized pursuant to the corresponding law of another state, if all the stockholders who are natural persons of the corporation whose stock is acquired are licensed in that corporations state of incorporation to render the same specific professional service as the stockholders who are natural persons of the professional corporation that acquires the stock. NRS 89.070.

If an officer, stockholder, director, or employee is disqualified professionally from the practice of medicine by the state board, he shall sever within a reasonable period all professional service with, and financial interest in, the corporation. But, a professional corporation may enter into a contract with an employee which provides for severance pay or for compensation for past services upon termination of professional service, whether by death or otherwise, including professional censure.

Liability Concerns for the Professional Corporation

A physician cannot insulate himself personally from liability by creating a professional corporation, but the business entity does offer some limitations on liability and recovery. For example, a physician stockholder in a professional corporation cannot be held liable for the wrongful acts or omissions of any other stockholder physician. However, each stockholder physician remains liable for their own wrongful acts or omissions.



The independent contractor arrangement is also becoming a common fixture in the practice of medicine. An independent contractor is a physician, partnership, association, or corporation that agrees to provide services for a medical group or other professional entity on a one-time or as-needed basis. The independent contractor relationship usually lacks a formal long-term contract between the parties and requires that each contracting party is responsible for the tax and liability consequences of his own acts. This section provides some information as to the issues involved in independent contractor practice arrangements. Physicians considering entering into an independent contractor practice arrangement should first consult with appropriate legal counsel to consider the tax and liability implications.

Employee vs. Independent Contractor

The independent contractor arrangement is preferable in many respects. For example, the medical group that engages a physician as an independent contractor bears no responsibility under the tax code to withhold federal or state taxes. There is no obligation to withhold social security contributions, maintain Worker’s Compensation Insurance, or provide holiday pay for those individuals employed as independent contractors. Finally, the individual employed as an independent contractor is not entitled to any benefits, health insurance, 401K participation, or overtime payment unless provided for by contract.

But the Internal Revenue Service has negated independent contractor agreements and inferred regular employment where the hired physician is in all critical respects treated as an employee. The IRS will not abide independent contractor arrangements that are constructed for ulterior purposes. Should an independent contractor employment arrangement be disallowed by the IRS, substantial penalties will be imposed on the hiring group by the IRS and the state franchise tax board. The group may be also liable for income tax withholding, Medicare and Social Security Tax (FICA), unemployment tax, and interest.

Disallowance of an independent contractor arrangement could also affect the groups benefits plans and cause a potential denial by the IRS of deduction of past contributions to the plan. Those amounts would then be taxed as retroactive income along with appropriate interest and penalties for non-payment. Also, those employees previously treated as independent contractors could be eligible for benefits and perquisites of employment that were previously denied to them as independent contractors.

In 1987 the IRS published guiding criteria to determine whether an independent contractor arrangement exists. IRS Revenue Ruling 87-41. The following criteria indicate a regular employment relationship:

Instructions. An individual required to comply with specific instructions is more likely to be considered an employee than an independent contractor. The more specific the instructions, the more likely the worker is an employee.

Training. If a worker is required to undergo training on the job, this is an indication of employee status.

Integration. If the services performed by the worker are an integral part of the business entity’s operations, the worker is more likely to be considered an employee.

Services Personally Rendered. If services must be personally rendered by the worker, as opposed to being rendered by an assistant, the worker is more likely to be considered an employee.

Hiring, Supervising, and Paying Assistants. Where the employer hires, supervises, and pays the workers assistants, the worker is more likely to be considered an employee.

Continuing Relationship. The longer and more continuous the professional relationship, the more likely a regular employment will be found.

Set Hours of Work. Where a worker has regular hours of work that are set by the employer, the more likely the worker is to be considered an employee.

Full Time Required. If the business entity requires the worker’s services on a full-time basis, this is an indication of regular employment.

Work on Employer’s Premises. Generally, working on the employer’s premises is an indication of regular employment, but it is not determinative. If the business entity requires that the worker’s services are preformed on premises owned or controlled by the employer, this is an indication of regular employment. But, if the services by their nature must be performed on premises owned or controlled by the employer, then this aspect has no weight toward finding regular employment.

Order of Sequence Set. If the employer determines the order or sequence of the services to be formed, this is an indication of regular employment.

Oral or Written Reports. Requiring regular reports of the worker is an indication of control and therefore an indication of regular employment.

Payment by the Hour, Week, or Month. Payment at regular intervals is an indication of regular employment, unless it is simply a convenient method of making periodic lump sum payments in response to regular billing by the worker.

Payment of Business or Travel Expenses. Payment of business or travel expenses by the employer is an indication of regular employment.

Furnishing Tools and Materials. Furnishing tools and materials by the employer is an indication of regular employment.

Significant Investment. If the worker has no significant investment in the facilities to be used in performing services, this is an indication of regular employment.

Realization of Profit or Loss. If the worker is not capable of, by the nature of the employment or payment, realizing a profit or loss from rendering the services, this is an indication of regular employment.

Working for More than One Firm. If the worker does not perform services for many unrelated employers, this is an indication of regular employment.

Making Services Available to the General Public. If the worker does not genuinely make his services available to the general public, this is an indication of regular employment.

Right to Discharge. If the employer has the sole right to discharge the worker, this is an indication of regular employment. A prematurely discharged bona fide independent contractor could bring suit for lost profits.

Right to Terminate. If the worker has the right to end the employment relationship at will, this is an indication of regular employment. The independent contractor is liable for damages for failure to fully perform on a contract.

IRS Safe Harbor Provision

In an audit for reclassification where the IRS seeks to disallow a claimed independent contractor arrangement, a “safe harbor” exists as a defense in the Internal Revenue Code. 26 U.S.C. 530. This section applies only to the federal Internal Revenue Service and may not provide a defense in reclassification sought by the Nevada franchise tax board.

Under this safe harbor exception, if certain conditions are met, the relationship will not be reclassified as regular employment for federal tax purposes. The employer must not have treated the worker as a regular employee at any time prior to 1980. The employer must have treated all other similarly situated workers consistently as independent contractors in all years after 1977. The employer must have filed returns after 1978 that consistently treated the worker as an independent contractor. Finally, the employer must have a reasonable basis for treating the worker as an independent contractor in consideration of the indicia demonstrative of regular employment listed above.

Furthermore, an employer will have reasonable basis for treating a worker as an independent contractor if the employer relied on judicial precedent or published IRS rulings, a letter ruling from the IRS, a determination letter or technical advice issued by the IRS to the employer, a previous IRS audit that resulted in no reclassification for a similarly situated worker, or a long-standing recognized practice of a significant segment of the relevant industry treating the worker as an independent contractor.

The IRS has become very strict of late in finding that various employment relationships qualify as regular employment and not independent contractor arrangements. Specifically, arrangements between hospitals and physicians and other health care providers that previously qualified as short-term independent contractor arrangements have been disallowed recently by the IRS and determined to be regular employment.

The IRS has recently ruled in separate cases that EKG panel members, the medical director of respiratory therapy, the physician in charge of employee physicals, and pulmonary function interpreters were all regular employees despite claimed independent contractor arrangements. The IRS reasoned that if the services were found to be integrated into the employer’s business, they were essential to the success of the employer’s business. Moreover, if the services were integrated, then the employer exerted control over the manner and conduct of the employee which is also characteristic of regular employment. IRS Private Letter Ruling Nos. 9535001 and 9535002.

An IRS audit is an expensive event and should be considered when deciding whether the enter an independent contractor employment arrangement.

Fraud and Abuse

Independent contractor arrangements may also implicate concerns for fraud and abuse where the relationship constitutes a referral for fee arrangement. Nevada law and Medicare anti-fraud and abuse law prohibit the payment or receipt of compensations for the referral of patients. NRS 439B.425; NRS 616D.390; 42 U.S.C. 1320a-7b(b). Independent contractor arrangements among physicians may be subject to scrutiny by the federal Office of the Inspector General (OIG), or by the office of the Nevada Attorney General. Prohibited acts in an independent contractor arrangement generally include a payment by the independent contractor in exchange for patient referrals. But, payment of a fee by the independent contractor for patient referrals is not considered an illegal “kick-back” where the fee represents the fair market value of the services provided by the referring group.

Nevada law clearly prohibits a practitioner from referring a patient for a service or for goods related to health care to a health facility, medical laboratory, diagnostic imaging or radiation oncology center or commercial establishment in which the practitioner has a

financial interest. But, if the service or goods required by the patient are not otherwise available within a 30 mile radius of the office of the practitioner, or if the service or goods are provided pursuant to a referral to a practitioner who is participating in the health care plan of a health

maintenance organization than the referral is permitted.

A practitioner may also refer a patient for services to an establishment in which the practitioner has a financial interest if the practitioner is a member of a group practice and the referral is made to that group practice or the referral is made to a surgical center for ambulatory patients.

Nevada law sets out similar prohibitions against referrals for fees and additional value. NRS 616D.390. For example, an individual acting on behalf of a health care provider may not accept gratuities in exchange for favorable treatment in the purchase or lease of goods, services, materials, or supplies. Similarly, a health care provider may not pay for referrals in excess of the additional value of the referral services.

Self-referral prohibitions

Federal Law (Stark II) . The Medicare referral prohibition applicable to clinical laboratories, known as the Stark law, has been extended effective as of January 1, 1995, to other specified goods or services. 42 U.S.C. 1395nn. The law now prohibits self-referral among many other medical specialities including laboratory, physical therapy, occupational therapy, radiation therapy and supplies, radiology, durable medical equipment and supplies, prosthetic, orthotics and prosthetic devices and supplies, parenteral and enteral nutrients, equipment and supplies, outpatient prescription drugs, home health services, and inpatient and outpatient services.

In essence, the federal law decrees that physicians or groups cannot refer to an entity or person for those enumerated goods or services, if the physician or group has a financial interest in the entity to which the referral is made. In particular, the law may prohibit referrals from medical groups to independent contractors if the group receives a fee for the referral or a percentage of the physician’s fee. Under these circumstances, the group may not make a referral to an independent contractor, and vice-versa, for services paid for by Medicare.

A referral is defined as any request by a physician for a prohibited item or service, any request by a physician for a consultation with another physician regarding a prohibited item or service (including any test or procedure ordered by or performed by or under the supervision of that other physician), or any request for, or establishment of, a plan of care which includes the provision of any of the services subject to the ban.

The law does not apply where a pathologist requests clinical laboratory tests and pathological examination services, where a radiologist requests diagnostic radiology services, or where a radiation oncologist requests radiation therapy so long as the service are furnished by or under the supervision off the pathologist, radiologist or radiation oncologist pursuant to a consultation requested by another physician.

The federal Health Care Financing Administration has also issued guidelines to determine whether independent contractors are considered members of a group practice. 42 C.F.R. 411.351. The Administration found that independent contractors are indeed members of a group practice and therefore two important exceptions to the prohibition against self-referral apply to independent contractors. First, the “physicians services exception” provides that services rendered personally by or under the supervision of another physician in the same group practice are not prohibited. Second, the “in-office ancillary” exception allows services rendered personally by the referring physician, a member of the same group practice, or by individuals who are supervised by another physician in the group practice, provided a number of detailed conditions are met.

Furthermore, the prohibition against self-referrals does not apply if the practitioner’s financial interest is so attenuated as to be relatively unaffected by the referral. In these instances, the interest is considered a personal service arrangement if:

  1. The arrangement is in writing, is signed by the parties, is specific as to the service included and covers all of the services to be provided by the physician (or immediate family member) to the entity;
  2. The services contracted for do not exceed those that are reasonable and necessary for the legitimate business purposes of the arrangement;
  3. The arrangement has a term of at least one year with compensation set in advance. A contractual provision allowing termination of the contract at will prior to the expiration of one year will likely fail to meet this requirement;
  4. The compensation is established at fair market value without regard to the volume or value of referrals or business generated, except in the case of a physician incentive plan;
  5. The arrangement does not involve any activity, including, but not limited to, the counseling or promotion of a business arrangement that violates any state or federal law; and
  6. The arrangement meets other requirements imposed by regulation.

Pension Plan Issues

Normally, an independent contractor is not entitled to participate in pension plans administered by the employer for the benefit of regular employees. But, if the independent contractor and hiring medical group are considered an affiliated service group, the independent contractor may be entitled to participate in the contracting entitys pension plan. By the same reasoning, part-time employees who work more than one thousand hours within a twelve-month period may not be excluded from participation in the pension plan. An experienced labor law attorney can assist in evaluating the effect of independent contractor arrang