Yes! They Can Audit Your Use of Employees vs. Contractors


Careful classification of workers as employees vs. contractors can protect you from surprising impacts on your tax and workers’ compensation insurance burdens.

By Clay Watson, MPT

Sometimes it seems auditors can fall from the sky, looking to take another bite out of your apple. Audits do not just come from payers—they come from diverse places and at unexpected times. In the spring of 2014 we were audited by our state Division of Workforce Services on the employment status of people who work for us. Things got worse in June when I was audited by my workers’ compensation carrier about the coverage of my staff. Both of these audits highlight potential pitfalls in how we use contractors versus employees in private practice physical therapy.

Employee vs. Contractor Rules

While employment law is a perennial issue within our world and has been written about extensively in Impact magazine, I missed a few things. In case you did too, here is a quick primer on this subject in the human resources section of the Private Practice Section website.1

The common law definition of a contractor states:

A. The worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact (essentially, this is the common law definition); and

B. The worker’s services must be performed either

  1. (1) Outside the usual course of the employer’s business, or
  2. (2) Outside all of the employer’s places of business; and

C. The worker must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service being provided.

I have a home health staffing service, providing physical therapy, occupational therapy, and speech and language pathology services across our region’s several counties. We supply labor to home health companies on a contract basis and use contractors for 80 percent of our work. These clinicians perform their labor in patients’ homes—far away from any “direction or control,” and mostly on a part-time basis. I felt like I was in the clear based on this definition alone.

When the audit began, I dug into the Impact archives and found an excellent 2009 article on this topic by Paul Welk, PT, JD.2 He goes much deeper into the rules, clarifying behavior that will place a clinician in one category or the other. In addition, he focuses on who pays which kind of tax, saying that, “Employers withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages that are paid to an employee.”2 Contractors pay their own versions of these taxes but have control over documenting their expenses as they formulate their tax burden. Still, I thought I was following the law.

Look up your state’s version of the rules

Both of these articles focus on the Internal Revenue Service (IRS) guidance on the matter. You would think IRS rules could be respected by all parties. I overlooked the fact that each state has to take their bite. In my case, this came from the Division of Workforce Services (DWS), whose auditors are charged with enforcing state employment law. In other words, collect more unemployment tax. Our auditors took issue with factors that were different from the IRS guidelines:3

  • Separate place of business: The worker has a place of business separate from that of the employer. To our auditor, this meant the worker must have their own clinic or another place where they work.
  • Other Clients. The worker regularly performs services of the same nature for other customers or clients and is not required to work exclusively for one employer. All of our clinicians worked for other companies, whether as employees or contractors. However, none of them had a separate “place of business” because we see our patients in their home and not in a clinic.
  • Licenses. The worker has obtained any required and customary business, trade, or professional licenses. This includes all of us, even the physical therapy assistants and COTAs (Certified Occupational Therapist Assistants).

In the end, we passed almost every issue they raised. This took careful interpretation and patient negotiation. The only workers our auditors would not concede were our physical therapist assistants (PTAs). They felt that since PTAs and COTAs must work under the supervision and direction of a physical therapist, they had to be employees. I had heard this interpretation in the past and preemptively hired any PTAs as part-time employees. Two hundred dollars later we were done.

Workers’ compensation

We thought we were out of the woods and done with audits in May. It turns out though, that DWS and workers’ compensation coordinate their audits. (This audit is different from the annual review with our insurance broker as we evaluate our yearly coverage needs.) And, unfortunately, our local college had a graduating class of accountants in June and our workers’ compensation carrier hired some fresh talent to audit their clients. We were the first audit for our inspector who rigidly set up audit dates that coincided with my family vacation.

In his efforts of severe diligence, the auditor aggressively examined the assigned period as well as the previous year’s data, issuing fines for both years. The findings were again based on our contractor classifications. In our state of Utah, self-employed individuals are not required to carry a workers’ compensation policy. However, if you hire a worker who is self-employed as a contractor, either you must provide workers’ compensation coverage or provide evidence that the worker opted out of coverage. This protects you from getting sued by your workers in either case.

Two days later we had 40 waivers from our contractors for the current year and a plan to require our contractors to pay the state $50 a year going forward to opt out. Unfortunately we only had three or four waivers from the previous year and were fined for the coverage of their payroll.

Who knew the carrier to whom we paid thousands in premiums could go back and fine us for past years’ data? As you can imagine, we had several long, serious conversations with our insurance broker, who was keen on appealing the decision.

Several weeks later we were informed that our carrier forgave the fines with the warning to be more diligent in the future. Diligent enough to not miss the family vacation at the beachside condo in La Jolla, California.

In closing, be sure to follow employment law in your state and with your workers’ compensation carrier—or you may have to face much more than a missed vacation. 


1. Independent Contractor or Employee? Resources for Physical Therapist Employers. Accessed May 2015.

2. Welk, Paul J, PT, JD, “Bringing on New Staff? Remember the Contractor versus Employee Analysis,” Impact, Feb, 2009, pg. 32, 38.

3. (behavioral, financial and type of relationship of a contractor). Accessed April 2015.


Clay Watson, MPT, is a PPS member and owner of Western Summit Rehab, LLC, in Salt Lake City, Utah. He is also on the PPS Membership Committee. He can be reached at

The Growing Mountain

By Terry C. Brown, PT, DPT

A concerted effort has been made in our profession to produce evidence that physical therapists are effective in the treatment of musculoskeletal (MSK) dysfunction. Fascinating studies clearly define the physical therapist as the best provider of choice in a number of these disorders. Data on acute low back pain clearly defines physical therapy as the low cost best first choice treatment. New data from research funded by the Private Practice Section (PPS) clearly shows evidence of decreased re-admission to hospitals when an individual has outpatient physical therapy following discharge.

The mountain of evidence continues to grow. However, the facts supporting physical therapy as a less costly and effective alternative to medicine, imagery, surgery, and other invasive procedures has not yet translated into improved payment and access. We are stuck with the question of how to get this information to our clients, legislators, payers, employers, and referral sources.

Aligning evidence to best practice takes time and effort. Educating primary care providers to make the “right choice” in referring patients is indeed necessary but not easily achieved. Educating the consumer that a physical therapist is their best choice requires changing their mind set so they accept the “less is more” philosophy and do not expect an MRI just because their deductible is paid. They need to know that they will feel better with physical therapy as their first choice. Employers and payers need to be educated on the evidence so they understand the cost-effective choice. Incentives affecting the consumer’s and provider’s pocket books will align us with those who pay the bills. We must reach out to the insurance industry, state and federal regulatory agencies, and employers—as well as consumers—to get the message out: Physical therapists are the best choice for cost-effective results in MSK disorders.

PPS is looking at all options to compile this mountain of data into a concise and marketable tool and exploring ways to reach out across the industry to affect change. Ideas and plans are emerging as we develop the Section’s strategic plan. I welcome your thoughts and ideas in helping drive this critical initiative. 


How Do You Decide?

By Kelly Sanders, PT, DPT, OCS, ATC

We make decisions in and for our practices every day, but what guides us in making them? Many people tend to think of a decision as a momentary occurrence rather than a process. Considering decision making is a process, one of the key aspects of this process is how a decision is made versus what decision is made. I have come to realize that as a clinician, I make decisions differently than I do as a business owner. As clinicians we are taught to constantly challenge our decision-making process. For example, as a physical therapist, we commonly look at an “asterisk sign” for a patient, then complete our intervention, then go back and re-test that asterisk sign. If the asterisk is improved with our intervention, we continue along that path of thought; if that asterisk sign did not improve with the chosen intervention, we ask ourselves was this the wrong intervention or did we complete the intervention incorrectly? In essence, we follow a test-retest approach to clinical intervention decisions. For the purposes of management, we will suggest a framework for decision making but the test-retest style will commonly fail. Management is truly the art of managing the “gray areas.” Many decisions will not be as black and white as the asterisk sign, they will be vague, which will require you to “make the call” and then in many cases commit to that decision to obtain buy-in from others.

Regardless of your position or title, those willing decision-makers (or those able to ask the right questions to facilitate the decision and stand by them) generally stand out as the leaders.

Here is one rendition of the decision-making process in its entirety.1

1. Identify the problem and/or articulate the question that must be answered to start the decision-making process. Commonly, the root of the problem is buried under many “symptoms.” These symptoms will alert you to an issue but will not assist in addressing the root of the problem.

2. Before alternatives are identified, take note of what resources you have available to solve the problem and what potential limiting factors may exist. These may include information, time, staff, and supplies. In reality, you are not always confronted with situations where you have the best scenario in terms of resources available—maybe you have a limited budget or staff. Regardless, you need to define the resources you do have and make the best decision given the information, resources, and time available to you.

3. In order to think through a situation and arrive at a firm solution, identify and investigate your alternatives. Depending on the situation, you may decide to involve a group to brainstorm and capture feedback, generate multiple ideas and solutions.

4. Evaluate each of your alternatives. There are many ways to do this but one way can be evaluating based on a pro/con list or cost/benefit analysis. Regardless of how you evaluate your alternatives, you want to look at the feasibility, effectiveness, and consequences of the decision.

5. This step in the process is where the results come in. In decision-making, you are not only charged with making the decision but also executing it. Those affected by this decision need to be told their role in it to ensure a positive outcome.

6. Once a decision is made and implemented it should be monitored. Ultimately, every decision is intended to solve a problem. So the final test is whether that problem was solved. Did this decision achieve the necessary/wanted result? What new problems did the solution create, if any? This is the step similar to the clinical decision process—when we reassess the asterisk. If the issue was not effectively solved with the decision, consider these questions:

  1. Was the wrong alternative selected?
  2. Was the correct alternative selected but improperly implemented?
  3. Was the original problem identified correctly?
  4. Has the implemented plan been given enough time to succeed?

As you go through the process of making decisions, keep these pitfalls in the back of your mind. As humans we tend to make some common mistakes when making decisions, known as cognitive biases. These biases exist because decisions are social, emotional, and oftentimes political processes which affect all of us regardless of experience, age, or position. We cannot review and assess every contributing factor when making decisions so we naturally take shortcuts and make assumptions but in some cases, these shortcuts lead to poor outcomes and decisions. Here are a few of the many biases in decision making to be mindful of:2

  • The overconfidence bias. As human beings we are systematically overconfident in our judgments, which can obviously affect our decisions.
  • The sunk-cost effect. The sunk-cost effect refers to the tendency for people to overcommit to a proposed solution in which they have made substantial prior investments of time, money, or other resources. In the face of high sunk costs, people can behave irrationally and become overly committed to certain actions even if the results are bad. We have all heard the term “throwing good money after bad,” which illustrates this bias.
  • The recency effect. The recency effect is one form of the “availability bias.” In this scenario, we tend to place too much emphasis on information or evidence that is most readily available to us.
  • The confirmation bias. This bias refers to our tendency to gather and rely on information that confirms our existing views and to discount information that disconfirms our preexisting hypotheses.

A good video course is available from Dr. Michael Roberts titled The Art of Critical Decision Making from the Teaching Company. It provides an excellent overview of decision making with multiple examples of where decision making went awry.

Bottom line, think through your decisions and be aware of your own biases. In important decisions, identify confidantes who are aware of your biases and will challenge and work through the steps of the decision thoughtfully with you.


1. Snowden J and Boone M. A Leader’s Framework for Decision Making. Harvard Business Review. November 2007. Accessed 2/25/2012.

2. Raxburgh C. Hidden Flaws in Strategy. McKinsey Quarterly. May 2003. Accessed 7/30/2012.


Kelly Sanders, PT, DPT, OCS, ATC is a member of the Impact editorial board. She also serves as president of Team Movement for Life, a 19-location outpatient physical therapy practice operating in California and Arizona. Kelly can be reached at

The Coach’s Eye


Discovering many opportunities through an app for athletes.

Deb Gulbrandson, PT, DPT

Coach’s Eye by TechSmith is a $4.99 app that runs on Apple, Android, and Windows 8.1; it was created for coaches to analyze and give video feedback to their athletes, making it a perfect match in the physical therapy world. It offers the following features:

  • Record HD videos with instant review
  • Slow Motion
  • Zoom feature
  • Split screen videos for comparison analysis
  • Draw lines, arrows, circles right on the screen
  • Frame-by-frame analysis
  • Create videos with audio commentary and annotation
  • Share videos through email, text, Facebook, Twitter

They say that one picture is worth a thousand words. Then one video must be worth a lot more than that. Imagine videotaping your patient’s gait on the initial visit and then again on the 5th or 6th? Imagine displaying those videos side-by-side on a split screen to show the patient how far he or she has come.

Slowing down movement is like putting a specimen under the microscope. We catch things that we would never see with the naked eye. Patients have an improved ability to make corrections when they can see what we are talking about.

How often has your patient gone for a follow-up appointment and the doctor never asks to see them move? Now you have the capability to email the video to your patient’s doctor complete with your commentary. What a great marketing (and physician education) opportunity.

While videotaping patients is nothing new, Coach’s Eye makes it unbelievably simple. The added ability to freeze frame, slow down, compare split screens, draw angles, and share the videos with others, makes this a real powerhouse.

On their website, Coach’s Eye says, “Vision is the art of seeing things invisible to others.” Sounds like what we do as therapists every day! Check it out at www.Coach’


Deb Gulbrandson, PT, DPT, Impact Editorial Board member, and owner of Cary Physical Therapy in Cary, Illinois. She can be reached at

When a Buyer Calls…Be Ready!

By Paul Martin, PT, MPT, CBI, M&AMI

If you are a formidable rehabilitation company, and in a good market, you can expect that you will receive calls from all or most of the acquirers in this industry. Whether or not you are considering a sale or partnership opportunity for your company, you must be ready for that inevitable call. As in life and business, you only have one chance to make a great first impression, so do not miss your chance! Here are some tips on how to best handle that call.

When You Are Ready to Sell
There is nothing more impressive than a business owner who really knows his/her company. Confidently responding to questions with general answers about your market and your company will impact an acquirer. While being careful not to reveal too much about your company, discuss some of your metrics and give the acquirer a general idea of your size and scope of coverage in your market if asked. At the same time, know who you are talking to and do not give information that will offer anyone a competitive advantage in your market, such as key referral sources, hospital relationships, payer contract information, and profit and loss. Talk to the buyer in generalities and keep key information close to your vest.

Know Your Plan
If your plan is to continue to grow (which makes a lot of sense in the current environment), talk to the acquirer generally of your growth plans. Buyers are seeking companies that have the ability to grow. Providing a general overview of your plan will further entice a buyer’s interest.

Be Professional
This may be a pet peeve of mine, but, whatever you do, do not tell the acquirer that “for the right price, anything is for sale!” Acquirers will immediately see those kinds of statements as unprofessional and uninformed. The acquirer should know that when you are ready to initiate the sale process, you will fully understand the value of your company and will run a professional process to make sure that you get the best available deal in the market.

Do Not Get Trapped
To execute a sale and/or partnership opportunity for your company, you must run a professional process. By doing so, you place all of the potential acquirers on the same starting line, at the same time, and they will all see the same information on a confidential basis. That is the only way to get your best deal. Be courteous and professional, but politely explain to an acquirer that you plan to run a professional process for your business. It is only then that they will see all of your important information under strict confidentiality. Do not make the mistake of going down the road with any acquirer until you are fully prepared with your team. You only have one chance to make a first impression.

Assemble Your Team
If you decide that you want to pursue an acquisition, assemble a professional team to guide you through the process. Your team will consist of a mergers and acquisitions advisor, an accountant, and an attorney. All of these professionals should have experience in mergers and acquisitions as well as the rehabilitation industry. The best acquirers appreciate a professional team sitting across from them as you both navigate through this process. 

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