LEEDer Group Inc.
8508 North West 66th St.
Miami, Florida 33166 USA

Phone: 305.436.5030
Fax: 305.436.0086
E-mail Address: info {at] LEEDerGroup [dot] com

2015-07 When an Employee is NOT an Employee

AMARILLO, TX – Most DME suppliers are aware that it is proper for them to pay commissions to marketing reps who are W2 full-time or part-time employees. Most suppliers are also aware that paying commissions to 1099 independent contractor marketing reps will likely violate the Medicare anti-kickback statute and some state anti-kickback statutes.

An interesting wrinkle to the W2 employee vs. 1099 independent contractor dichotomy pertains to “statutory employees.� The IRS recognizes “statutory employees� for tax purposes. The question is whether a “statutory employee� falls under the “employee� exception…..and the “employee� safe harbor…..to the anti-kickback statute. The short answer is “probably not.� Let me explain.

While the definition of the term “employee� under the employee exception to the anti-kickback statute (“AKS�) is not defined, the employee safe harbor defines the term pursuant to 26 U.S.C. 3121(d)(2). Under this statute, an employee is any worker that satisfies the common law rules for establishing an employer-employee relationship.

Factors for determining common law employees include employer control, supervision, and training of the employee. A “statutory employee� is an independent contractor that is considered an “employee by statute� for certain employment tax purposes. As such, “statutory employees� normally do not meet the common law rules for establishing an employer-employee relationship. Therefore, “statutory employees� are normally not considered “employees� under the employee exception to the AKS, nor under the employee safe harbor.

Applicable Laws
Improperly structured marketing relationships may violate federal laws relating to health care fraud and abuse. Following is a review of the AKS employee exception, the employee safe harbor, the personal services safe harbor, the meaning of “employee� under the IRC statutes and IRS regulations, and an example of state guidance regarding when a person is an “employee.�

A. Medicare Anti-Kickback Statute “employee� exception
The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive remuneration (monetary or anything of value) to induce, or in return for, referrals of health care services or items paid for by a federal health care program.1 The AKS provides penalties for individuals and/or entities on both sides of a prohibited transaction. Remuneration is interpreted broadly, and not only includes the typical kickback consisting of a cash payment, but can also include other arrangements in which only one purpose of the arrangement is to generate referrals.2 However, the AKS excepts from the meaning of remuneration, “any amount paid by an employer to an employee (who has a bona fide employment relationship with such employer) for employment in the provision of covered items or services.�3 The AKS does not, however, define “a bona fide employment relationship.� Further, the AKS does not have a similar exception for independent contractors.

B. OIG Safe Harbors
Due to the broad interpretation of the AKS, the OIG has promulgated several safe harbors for arrangements that would otherwise violate the AKS. Compliance with the applicable safe harbors generally provides immunity from prosecution. Based on the specific facts of the arrangement between the DME supplier and the sales rep, either the employee safe harbor or the personal services safe harbor (applicable to 1099 independent contractors) may be applicable.

i) Employee Safe Harbor
The employee safe harbor essentially mirrors the AKS statutory exception by removing from the meaning of remuneration, “any amount paid by an employer to an employee, who has a bona fide employment relationship with the employer.�4 However, unlike the exception, the safe harbor provides that the term “employee� has the same meaning as it does for purposes of 26 U.S.C. § 3121(d)(2). The OIG has also stated that the term “employee� is defined not only by the Internal Revenue Code (IRC) provision, but also in accordance with “[Internal Revenue Service] interpretations of that provision as codified in its regulations and other interpretive sources.�5

ii) Personal Services Safe Harbor
The personal services safe harbor, applicable to 1099 independent contractors, removes from the meaning of remuneration “any payment made by a principal to an agent as compensation for the services of the agent,� if all of the following are met: 1) The agency agreement is set out in writing and signed by the parties. 2) The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent. 3) If the agency agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a fulltime basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals. 4) The term of the agreement is for not less than one year. 5) The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms- length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs. 6) The services performed under the agreement do not involve the counseling or promotion of a business arrangement or other activity that violates any State or Federal law. 7) The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.6

The key here is that payment to an independent contractor sales rep under the personal services safe harbor cannot be in the form of a commission, since the total amount to be paid would not be set in advance and would take into consideration the volume of referrals. Independent contractor sales reps must be paid a flat fee for the period of time under the arrangement.

C. IRC and IRS interpretations of “employee�
The IRC, 26 U.S.C. § 3121(d)(2), states that the term “employee� means “any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.�7 The IRS has stated that the “substance of the relationship, not the label,� will determine whether a sales rep is an independent contractor or an employee.8 A common law employment relationship generally hinges on whether the company for which services are performed has the right to control the result of the work to be performed, as well as how it will be accomplished.9 Evidence of the degree of control an employer has over a sales rep may be shown by the extent of behavioral control, financial control, and the type of relationship between the parties.10

The less right to control the various aspects of the working relationship, the more likely it is that the sales rep will be considered an independent contractor. The general rule is that a sales rep is an independent contractor if the DME supplier for which the services are performed only has the right to control or direct the results, and not the means and methods of accomplishing the result.11 A sales rep who is categorized as an independent contractor may nevertheless be considered a “statutory employee� for certain employment tax purposes, although the relationship does not meet the common law rules for an employee.12 As such, most “statutory employees� are not found within the meaning of “employee� under 26 U.S.C. § 3121(d)(2).

D. Example of State Guidance
A New Jersey statute provides that any person that offers or receives “any kickback, rebate, or bribe� for items or services paid for in whole or in part by the New Jersey Medicaid program, “is guilty of a crime of the third degree.�13 However, the statute contains an exception for “any amount paid by an employer to an employee who has a bona fide employment relationship with such employer for employment in the provision of covered items or services.�14

While there is no clear reference in the New Jersey statute as to the definition of employee, the term appears to generally be defined to include all persons who perform service for an employer for financial consideration.15 It does not appear that the courts of New Jersey have adopted one dispositive test to determine if a sales rep is a traditional employee or an independent contractor. However, the right to control and direct the results and how a sales rep performs his services is a substantial factor in determining whether the sales rep will be considered an employee or independent contractor.16

Conclusion
For purposes of the AKS and most state anti-kickback statutes, a marketing rep who provides marketing services for a DME supplier is considered either an employee or an independent contractor. This determination is critical when deciding how the marketing rep will be compensated and whether that compensation will violate the AKS. The substance of the relationship, not the label, governs. To be an employee, the relationship between the marketing rep and the employer must meet the common law rules, which take into consideration the employer’s right to control, the amount of supervision, and the amount of training provided to the marketing rep. If the relationship does not meet the common law rules, the marketing rep will be considered an independent contractor.

It is not necessary for a marketing rep to be considered an employee under the common law rules in order to be considered a “statutory employee.â€? A “statutory employeeâ€? is only considered an employee by the IRS for certain tax purposes. In other words, a “statutory employeeâ€? is not a common law employee, but an employer must still withhold certain payroll taxes from the marketing rep’s pay and must issue the marketing rep a W-2. Because the marketing rep is not considered an “employeeâ€? under the common law rules, the rep does not meet the definition of “employeeâ€? under the employee safe harbor. As such, a “statutory employeeâ€? will normally be treated as an independent contractor for purposes of the AKS.

Because they are considered independent contractors, compensation arrangements between suppliers and “statutory employees� for marketing services must meet the personal services safe harbor to avoid prosecution under the AKS. This means that the arrangement for specific services must be in writing, for a term of not less than one year, and set in advance the aggregate amount of compensation to be paid. The amount paid must be the fair market value and not take into consideration the volume or value of referrals. In other words, a “statutory employee� must be paid a flat, fair market rate for his services and cannot be paid on commission.