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. 


Allen Ling, PT, OCS, CEO

Allen Ling, PT, OCS, CEO, is the owner of Physical Therapy Innovations, Inc., with four locations in California. He can be reached at

Practice, Location: Physical Therapy Innovations, Inc., has locations in El Cerrito, Albany, Orinda, and Oakland, California, employs 33 staff, and has been in operation for 25 years.

What is the most influential book/person/event that enhanced your professional career and brief description of why? My parents are the biggest influence, and I want them to be proud of me. I was not the smartest son, but I worked hard and got things done. I also worked at Pixar Animation Studios for Steve Jobs as an onsite physical therapist and that influenced me to become the best—and even better. My student physical therapists teach me how to enjoy patient care. I love their energy and enthusiasm. One student—Aaron Lebauer—is now a successful private practice cash-based physical therapist. He still amazes me, and I like his balanced lifestyle and practice philosophy.

Describe the flow of your average day. Last year I started treating part-time about three days a week and spend the rest of the time coaching staff and students, doing business-related duties, and trying to envision the future of our profession through networking and brainstorming with the smartest folks I know in the industry. I now work on my business and in my business.

Describe your essential business philosophy. It is important to be kind and fair to patients and employees. They are all my partners in their health and in my business. However, if they break the rules and do not behave properly, I should not have to suffer for their mistakes.

What are some of your best, worst, and toughest decisions? It is always tough to ask employees to resign or to terminate them for performance issues. And sometimes those are the best and toughest decisions. Also, using legal means to get money back from insurance companies that owe me money can be tough—it is like biting the hand that feeds you. The best decision that I ever made was to buy my own buildings for my clinics.


How do you motivate your employees? I offer fair and generous pay and benefits, a kind and reassuring word, and even a heartfelt hug when we both need it. I have a great family atmosphere, and I am very loyal to my staff.

How did you get your start in private practice? I do not know how to fail or quit. I worked 80- to 100-hour weeks for the first five years of my career in nursing homes and at my private practice, and then 70 hours a week for the next 10 years just doing my private practice, and then 60 hours a week for the next 10 years after that. Now I am at a 40-hour week. Anyone who wants to be successful in starting a business needs to put in the effort.

How do you stay ahead of the competition? I stay ahead by not competing but being collegial and collaborative. We all want to be successful but have different locations and different preferences. I have chosen to not move in on the territories of other private clinics simply because I would not want them to do that to me. Mutual respect keeps me in business.

What have been your best learning experiences since the inception of your practice? Expanding beyond one clinic is the hardest thing to do, and it is easy to overextend yourself. I make far less with four locations than I did with two. Now that I have done it, I am happy to have survived the expansion and am reaping the benefits with local Accountable Care Organizations. Many local clinics that did not expand are having trouble making it now.

What are the benefits of PPS membership to your practice? Knowing there are others like me out there.

What is your life’s motto? Live life to its fullest at work and at play. Work can be fun but always take it seriously. And even fun can be work!

What worries you about the future of private practice/what you are optimistic about? Private practice is brutal in California, and you have to be tough to be successful. I have seen clinics come and go in the past 25 years and very few open and stay open. One desperate decision can lead to the eventual demise of any practice in my geographic area. I am optimistic about some of the new doctors of physical therapy coming into practice and that their intelligence and their use of technology to communicate the worth of physical therapy services will prevail.


What are new opportunities you plan to pursue in the next year? I would like to regain the reputation our clinic had when we were just one location. It takes time to focus on the things that matter most: the overall patient experience and the happiness of employees working at my clinics. We just built a martial arts studio that adjoins our Oakland physical therapy clinic. It is the first of its kind to combine martial arts–based rehabilitation with physical therapy in such a big way.

Is there anything you would like to share with other PPS members that we missed? There are no competitors, only colleagues. The minute I became friendly with other physical therapists near or far, the world became a better place for me. The worst enemy is ourselves, so better to spend your energy improving yourself versus fretting over what other people are doing.

Medicare, the Budget, and Our Exec

By Jerome Connolly, PT, CAE

I was hoping to dedicate this column to a summary of the successful passage of Medicare legislation that would have fully repealed and reformed both the Medicare therapy cap and the sustainable growth rate (SGR) formula used to calculate our payments—but alas, as of this writing, Congress has not quite finished the job.

The House of Representatives did pass H.R. 2 on March 26 and the bill does include a repeal and replacement for the dysfunctional SGR formula. After transmitting the bill to the Senate, the House recessed for a two-week spring break. Meanwhile, the Senate was engaged in a marathon debate on a budget resolution (the first in years, but more on that later), and could not act on the SGR bill before it also recessed. Actually, there was time for a voice vote, but with three Republican senators objecting, the unanimous consent required for such a maneuver was not present.

So, the Senate left Washington despite the March 31 expiration date of the current SGR waiver and Medicare reimbursement level. Of course, the therapy caps exception process, which always travels with the SGR, also expired at the end of March, so our patients as well as our payments were jeopardized by this action (or lack thereof).

But the House did not include full repeal of the therapy cap in H.R. 2, opting instead to extend the exceptions process through 2017. The decision to separate these two policies that have traveled in tandem since their inception in the same law in 1997 was disappointing to say the least. It also was somewhat mystifying that the House would take care of a physician payment problem but neglect to ensure that patients most in need of rehabilitation therapy were not protected.

When Congress left the job unfinished, we worked aggressively during the recess to urge the Senate to fix the House mistake and include full repeal of the therapy cap in the SGR bill. Our message: Repealing the cap is a full solution that was vetted by and agreed to in the Senate last year. As stakeholders, we have also improved the exceptions process with manual medical review, agreed to report functional limitations, and by doing so lowered the budgetary cost of full repeal. We have acted in good faith, doing everything Congress asked of us. But the House turned its back on beneficiaries this year when they developed the package without Senate input and without including the therapy cap repeal.

Currently, we are activating grassroots and forging a comprehensive stakeholder assault on the Senate emphasizing the importance of therapy cap full repeal to our nation’s seniors. And to underscore the therapy cap as a beneficiary issue, we have been delighted to enlist the support of American Association of Retired Persons (AARP) and its 33 million member grassroots organization. Together we are calling on the Senate to amend H.R. 2 by repealing the beneficiary therapy cap along with the physician payment formula (SGR). It may turn out to be a futile attempt as the Senate may eschew amendments as it will have only about 36 hours to act after reconvening. Otherwise, Medicare claims processing and reimbursements will be severely disrupted. Nevertheless, we intend to make our position known and to advocate on behalf of our Medicare patients. And even if this is not the time the cap is fully repealed, we will not rest until it is.

Federal Budget
As mentioned above, the 114th Congress has decided to consider a nonbinding budget resolution, and separate bills were passed by each chamber before the spring recess. This is the first time in six years such a budget bill has been adopted by Congress and was made possible by the Republican takeover of the Senate in the November 2014 elections. Even though the measure does not carry the force of law nor require the president’s signature, it is an important statement for the Republican-controlled Congress and will be held up by the GOP as evidence they are capable of governing, an important demonstration in advance of the 2016 elections, which they hope will award them control of both the executive and legislative branches of government. The GOP’s first months in control of both chambers of Congress were marked by high-profile stumbles and a near-shutdown of the Homeland Security Department.

But translating a budget resolution into an actual budget is a much more difficult endeavor that requires the adoption of spending bills that do have the force of law, if and when they are signed by the president. Congress has until October 1 to accomplish this task, as that date marks the beginning of the 2016 fiscal year.

This budget resolution is merely a blueprint, but it can be enormously valuable in the Republican-controlled Senate where it can be used as framework for Budget Reconciliation, a process by which adoption of an actual budget that reduces the deficit can be approved with a simple majority, not the 60 votes required for most legislation.

This, of course, means the Republicans could avoid the leverage of the filibuster and push through the budget on a party-line vote without Democratic help. Readers may recall that this is the same parliamentary maneuver used by the Democrats in 2010 to push the Affordable Care Act (ACA) over the finish line. It could be considered ironic but fitting that the Republicans would use the same procedure to put repeal of Obamacare on the president’s desk, embedded in an overall deficit-reducing budget. It is difficult to envision any circumstance under which President Obama would sign such a bill into law, but it would doubtless put him in a difficult position, which, of course, is the object of the exercise for Republicans.

Farewell to PPS Executive Director
It has been a positive, productive process working with Laurie Kendall-Ellis over the past five years and I want to add my best wishes to the voices of many as she moves on to lead a larger health care organization in Washington.

In my view, Laurie’s unique background and skillset as a physical therapist, a private practice owner, a Private Practice Section (PPS) and American Physical Therapy Association (APTA) member, and a professional association executive, served the Section well at its stage of organizational development. Among her many notable achievements belong the three PPS Washington Advocacy Conferences—a new endeavor for the Section and a Laurie Kendall-Ellis brainchild—each more successful than the last.

Laurie’s presence, participation, and professionalism were of significant assistance to me as the PPS lobbyist and I know to the entire Section as well. To Laurie, I extend my gratitude and congratulations.


Jerome Connolly, PT, CAE, is a registered federal lobbyist whose firm, Connolly Strategies & Initiatives, has been retained by PPS. A physical therapist by training, he is a former private practitioner who throughout his career has served in leadership roles of PPS and APTA. Connolly also served as APTA’s Senior Vice President for Health Policy from 1995–2001.

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

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