Independent Contractor vs. Employee: A Healthcare Guide

As a healthcare employer, you know the value of offering different types of employment statuses. Hiring a mix of full-time, part-time, and as-needed workers helps to meet the complex demands of healthcare staffing. It also allows healthcare providers, such as nurses or CNAs, to choose a schedule that best supports their lifestyle. If your organization is considering hiring an independent contractor vs. employee to support your nursing team, it helps to have a good understanding of the difference between the two.

Why is it important to distinguish between an employee and an independent contractor in healthcare? Knowing the differences helps you stay compliant with labor laws and decide which type is best suited for your facility’s needs.

Independent Contractors in Healthcare: Overview

When you think about hiring an independent contractor for a job, a service such as a home repair project may come to mind. A contractor is hired to complete a project and bills you for their services, completing the exchange. Is it possible for a similar type of exchange to occur in healthcare?

Yes, it is, but due to the dynamics of a healthcare setting, hiring contract workers is more complicated. Although contractors function independently from a healthcare organization, they may not be completely self-employed. For example, a contract nurse may also work for a nurse staffing agency that arranges details like the scope of work and the terms of their contract.

Additionally, the way a nursing professional operates within your organization as an independent contractor differs from that of an employee — which can create additional risks for healthcare employers. It’s important to understand the difference between an independent contractor vs. employee in the practice setting to protect yourself, your staff, and your patients.

Below is a look at how that difference plays out in key areas such as hiring, benefits, payment, taxes, and liability.

Hiring an Independent Contractor vs. Employee

The hiring practice for healthcare employees is typically straightforward. A job candidate submits an application to human resources and receives a job offer. Then, they provide personal information like their Social Security Number and work authorization status to the employer.

On the other hand, independent contractors work on a per-project basis, often negotiated through a staffing agency. For healthcare workers, this is usually set up as a contract with a statement of work for agreed-upon dates. When the contract is complete, a medical independent contractor isn’t obligated to provide additional services at the healthcare facility. A nursing contract can be as short as four weeks long, or even shorter for facilities that need per diem support.

Takeaways: Nurses can be hired in various ways. For example, they can work as:

• W2 employees (e.g., in-house employees on your team)
• W2 per diem staff (e.g., workers who are employed by the staffing company you’re using)
• 1099 per diem staff (e.g., workers who contract with the staffing company you’re using)

When hiring nurses through a third-party agency or staffing partner, facilities must verify an agency’s legitimacy and licensing status according to your state’s laws.

Benefits for Contractors vs. Employees

Job benefits can be a motivating factor for healthcare employees to join an organization. Full-time employees have access to benefits like health insurance and retirement plans that contractors usually have to obtain independently. Additionally, healthcare employees may be covered by worker’s compensation or malpractice insurance, depending on the organization.

In most cases, a medical independent contractor is responsible for purchasing their own benefits as well as professional insurance. If their coverage doesn’t line up with the potential liability that they bring with them, a healthcare facility may need to cover the difference.

Takeaways:

• Healthcare employers provide benefits for employees.
• Independent contractors are benefit-exempt.
• Hiring benefit-exempt nurses can be a cost-saving strategy for healthcare employers, but it comes with liability risks.

Training for an Independent Contractor vs. Employee

One advantage of hiring contract nursing staff is that it allows employers to supplement staffing shortages while preventing the over-hiring of employees. It also reduces the costs associated with onboarding and training. This is because independent contractors have shorter training periods, and fewer training resources (although they may get additional support through a staffing agency).

Training is one factor that’s used to indicate how a worker is “classified” for legal purposes. For example, even though a contract may be agreed upon, a healthcare contractor could still be determined to be an employee of the facility where they work (and entitled to employee benefits) based on how they perform their work. If a facility hires an independent contractor, medical personnel may still need to be trained like their employees, since this is often necessary in a healthcare setting. However, they then run the risk of being designated as the employer of record for those workers.

To avoid misclassification, employers should avoid giving contractors an employee handbook or name badge, and restrict them from attending staff meetings and performance evaluations, as these are all indicators of an employer-employee relationship. This helps to maintain the employee vs. independent contractor distinction as one of the factors on the IRS’s 20-point checklist for independent contractors, but it can also create disruptions in a healthcare facility.

Healthcare employees, on the other hand, must complete mandatory training and education required by the organization. This may include a fixed onboarding schedule and annual performance evaluation.

Takeaways:

• Nurses must meet the minimum licensing, education, and training required to practice at your facility.
• When deciding whether to hire nurses as contractors or employees, ask the staffing agencies about their training standards and vetting processes for their healthcare professionals.

Payments for Contractors vs. Employees

Another key difference between employees and independent contractors is the way they’re paid. Healthcare employees may be paid a set wage and hourly rate or salary. They’re protected by labor laws, which ensure they won’t miss payment for their work. According to state payday requirements, employees must be paid on a predictable and reliable schedule.

However, independent contractors are typically paid when a contract is complete, depending on the terms of their contract. They’re responsible for sending an invoice for their services and arranging when and how payment is collected. Independent contractors in healthcare, such as nurses or CNAs, may set up their terms of payment in a nursing contract. Because contractors may not be paid directly by an organization (again, this will depend on their affiliation with a given staffing agency), they must define terms of payment in a contract to avoid being underpaid.

In paying W2 employees, healthcare employers must follow the Fair Labor Standards Act (FLSA) and related state laws, which establish the standards for minimum wage, overtime rates, and recordkeeping.

Takeaways:

• It’s important to set up clear terms of payment for any 1099 nurses in your facility.

• Additional laws apply to pay for W2 nurses, but if you use a W2 staffing partner, they would be required to ensure FLSA compliance.

Taxes: W2 vs. 1099

It’s especially important to differentiate between an independent contractor vs. employee when it comes to employment taxes. The IRS uses a right-to-control test to distinguish between the two.

When employees are first hired, they provide their tax information including name, address, filing status, and tax exemptions on a W4 form. During tax season, they report all of their earnings on a W2 tax form. Healthcare employees may also report federal or state unemployment insurance and make payroll deductions.

Independent contractors don’t face payroll deductions for federal or state unemployment insurance, Social Security, or other taxes. When initially hiring an independent contractor, medical facilities must have them fill out a Form W-9, which includes a tax identification number (TIN). Contractors should report all earnings above $600 on a Form 1099 as contractors pay their taxes when they file. Employers should keep a record of the Form W-9 and send the contractor a Form 1099 NEC (nonemployee compensation) for all earnings over $600.

How you manage payroll and tax reporting can be an important factor in whether a nursing professional is deemed an employee or a contractor. Check out the Department of Labor’s independent contractor laws and regulations to avoid misclassifying employees as independent contractors. This risk can be mitigated by utilizing a W2 staffing partner as they would be responsible for employer reporting and payroll deductions for their nursing professionals.

Takeaways:

• There are important tax reporting requirements for W2 and 1099 nurses, but employers are only responsible for making payroll deductions for their employees.
• With a W2 staffing partner, you can still have the flexibility of per diem staffing but your staffing partner would handle any tax reporting and payroll requirements.

Liability: Independent Contractor vs. Employee

Most healthcare employers have malpractice insurance policies that cover their employees in the event of legal claims. Employers are not usually required to cover independent contractors in these policies. However, healthcare facilities can be found liable for the acts of their staff members — regardless of their employment type — in the event of negligence claims.

For example, if a contractor nurse makes a mistake while working at your organization, the facility can still be held partially, or even fully, liable. It’s the organization’s responsibility to properly vet and train all staff working in their facility. Doing so helps to protect the facility from negligent hiring claims and other malpractice suits.

However, to minimize negligence and accidental injuries, facilities may seek a greater degree of control and direction over their healthcare contractors — but that also comes with risk. As federal and state agencies and private litigants are enforcing laws against the misclassification of contractors, the more control a facility exerts over its contractors to ensure the proper care of its patients, the more likely it can be deemed an employer and subject to fines, penalties, and other damages.

One way to minimize this Catch-22 liability is by utilizing W2 staffing partners who hire their healthcare professionals as W2 employees. While not a complete protection against liability, with a W2 staffing partner, you have another company holding themselves out as the employer of record, responsible for training, supervising, and directing any of their employees who staff your facility.

Takeaways:

• Healthcare organizations must clearly define the employment relationship between the employer and healthcare provider, as this can impact their potential exposure to liability.
• Check with your state’s W2 vs. 1099 healthcare staffing laws regarding licensing and liability when deciding which route of employment is the best fit for your facility.

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Is your facility weighing the benefits of working with an independent contractor vs. employee classified team? Learn more about the advantages of each and get the latest free resources and insights from a staffing partner truly dedicated to your organization’s success.

Legal Disclaimer: This article contains general legal information, but it is not intended to constitute professional legal advice for any particular situation and should not be relied on as professional legal advice. Any references to the law may not be current, as laws regularly change through updates in legislation, regulation, and case law at the federal and state level. Nothing in this article should be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed to practice in your jurisdiction.