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. 


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. 

Engage, Then Sell

By Tannus Quatre, PT, MBA

Though I was not standing beside you, I know something about the last time you bought something. You were engaged in the sale before you pulled the trigger.

You might have been engaged in the product itself and thought, “I really need a super-expensive name brand coffee right now,” and you might have been engaged by a convincing salesperson to whom you just could not say no: “I guess I really do need an extra set of knives right now.” Either way, you were engaged.

Let’s use the example of purchasing a car from a salesperson. Even the best salesperson cannot sell to you unless one of two things happen:

  1. The first is that you know what kind of car you want to buy and what you are willing to pay. You are engaged in the vehicle or product itself. Something, somewhere caught your attention and convinced you that this was the car for you. You are engaged, and now you will buy.
  2. The second is that you make a friend. Once you are a friend, anything can happen. A friend cares about you. They listen to you. And they can influence you. If I am a friend—even one you just met—my chances of selling you on an idea (“buy from me” included) is enhanced dramatically. If a friend engages you, you will also buy.

Now think of your marketing efforts—especially those that do not work. Do they not work because you do not offer value? Not a chance. Do they not work because you do not know how to sell yourself? I also doubt that. Do they not work because you are trying to sell before you have engaged your audience? Think about it and let me know.

Chances are good that when marketing is not going your way, you are not adequately engaging before trying to make the sale. And this can turn away even the most valuable of clients.


Tannus Quatre, PT, MBA, lives at the intersection of physical therapy and entrepreneurship, spending his time helping physical therapists build and operate successful practices through his company, Vantage Clinical Solutions. He specializes in marketing, finance, and business planning, and authors and speaks regularly for the APTA and PPS. He can be reached at

Past Robert G. Dicus Award recipient Ernie Burch, PT, FAPTA

As a Private Practice Section (PPS) Awards Committee member writing about past recipients of the APTA PPS Robert G. Dicus Award, I had the privilege of interviewing Ernie Burch, PT, FAPTA. Despite all of his significant accomplishments within the American Physical Therapy Association (APTA) and being an icon in physical therapy private practice, Burch remains a modest and gracious gentleman who is an absolute pleasure.

After serving in Korea as a U.S. Army infantry officer from 1951 to 1954, Burch graduated from physical therapy school in 1956 from the University of Pennsylvania. He had planned on attending dental school, though one of his friends and, 1955 graduate of the University of Pennsylvania, Bill Rhodes, talked him into instead pursuing physical therapy as a career. The physical therapy profession has certainly benefited from his decision.

After graduating from school, Burch worked at Union Memorial Hospital in Baltimore, Maryland, progressing from staff physical therapist to chief physical therapist before leaving in 1967 to join his long-time friend, Bill Rhodes, in private practice. They established Burch, Rhodes & Loomis in Baltimore.

Their practice was innovative and successful from the start. As far as Burch believes, they were the first private practice in the country to accept students for clinical affiliations. He has always been passionate about mentoring and trying to grow the next generation of private practitioners. After decades of success in private practice, he sold shares of the practice to his employed therapists at a discounted price to foster their engagement in private practice physical therapy. Mentoring and teaching was important to Burch, as he also served as a guest lecturer and clinical educator at the University of Maryland School of Medicine in the Department of Physical Therapy from 1967 to 1994.

Though Burch was quite successful in private practice and in his mentoring of upcoming physical therapists, he truly shined in the depth and breadth of service to the APTA. He has had a great impact on our profession as we know it today. His introduction to involvement in the professional association started with him serving as the secretary for the Maryland Chapter of APTA in 1959, where he recalls fondly his good fortune to be mentored by then Maryland Chapter president Florence Kendall. Burch’s professional activities and the awards he has received over the years are pages long. Here are a few highlights of his most significant activities and awards:

  • Maryland Chapter – President 1963-1965
  • APTA – Vice President 1985-1988
  • APTA Private Practice section – President 1988-1992
  • APTA Henry and Florence Kendall Award for Outstanding Achievement 1978
  • APTA Lucy Blair Memorial Service Award 1979
  • APTA Catherine Worthingham Fellow Award 1992
  • APTA PPS Robert G. Dicus Award 1994

Burch states that he has so many wonderful memories of serving in the physical therapy profession and has had the privilege to learn from some incredibly talented and inspiring colleagues. He says it is hard to pick what he is most proud of. While serving as APTA PPS president, he took PPS from debt to financial stability and achieved a healthy reserve by the end of his term.

During his 40-plus years of service to the physical therapy profession he impacted many key areas: lobbying for direct access by PTs, referral for profit issues, and many other areas affecting our profession. On the topic of reimbursement and referral for profit Burch was quoted as saying, “All of our reimbursement battles are about so much more than monetary compensation. We are fighting for the rights of our patients.”

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