By CEDR HR Solutions

While attending the AmSpa conference this past February we noticed a trend rippling through the med spa industry that caused our resident HR nerds some anxiety.

As usual, the energy at that event was infectiously upbeat. The business owners we met were passionate, entrepreneurial, and ready to take the world by storm, which is a good sign for this industry that's growing at an unbelievable clip.

But the thing that made us nervous was this: many med spa owners, perhaps even a majority, shared that they didn't think they needed HR help because all of their employees were "1099s", or independent contractors (also known as ICs). That sent some pretty serious red flags flying from an HR perspective and suggested that there was the potential for huge liability for a large number of small business owners in the field.

In this article, we'll cover why the 1099 issue is such a problem and what some of the long term risks are to employers who misclassify employees. There are a lot of myths and misunderstandings in this area and we hope to clear those up for you here.

Independent Contractors Are the Exception – Not the Rule.

If you ever find yourself saying that any of your "employees" are 1099s, you should stop right there and think about what this means. There's a contradiction in this statement and, as an employer, it's important that you're aware of it.

Here's the problem: The very definition of a 1099 contractor is that they are not an employee!

Contractors are self-employed, which means they have to meet a series of very strict requirements to qualify as 1099s.

For someone to qualify as a 1099 rather than as an employee, it comes down to the level of control you as an employer have over their behavior and finances, as well as the type of relationship you'e established with that individual. The more control you have over what they do and how, when, and where they do it, the more likely they are to be correctly classified as an employee rather than a contractor.

If you're doing any of the following for someone you'e classified as an IC, odds are that they are misclassified:

• Supplying the equipment and/or consumables for procedures
  
• Setting their work schedule
  
• Telling them when to work and when not to work
  
• Holding them to a non-compete agreement
  
• Paying them an hourly rate or salary
  
• Providing them with any sort of time off or other benefits
  
• Having them perform side work between clients
  
• Having them provide services that are listed on your treatment menu
  

The last item on that list might surprise you, but here's what it means: ICs are typically contractors that provide a service that is outside the scope of your normal offerings.

So, if they're providing a service or treatment that is a standard offering on your med spa's treatment menu, odds are that they should be classified as an employee and not a 1099.

Your IT Provider Is a Good Point of Reference

In order for someone to meet the IRS and DOL criteria to qualify as a contractor, you as the business owner have to exercise precious little control over what that person does and how they do it.

We often use the example of your IT provider. They are almost always correctly classified as independent contractors. And, when you hold them up against the criteria listed in our Independent Contractor Self-Audit Cheat Sheet, it's much easier to understand why they are good candidates for 1099 classification, whereas your licensed injectors and aestheticians probably are not. For example, your IT provider:

• Provides a service that is not offered by your business
  
• Works for other companies
  
• Is not dependent on your business for all of their income
  
• Comes in to perform services when it is convenient for them (i.e., they set their own schedule)
  
• Collects payment "from" you rather than being paid "by" you
  
• Supplies their own equipment and software
  
• Can perform their work the way they best see fit (as opposed to being told how to go about achieving the end result)
  
• Works at your business on a limited timeframe rather than indefinitely (i.e., per their contract with your business)
  

If you can confidently say that all of the above criteria apply to all the individuals you'e classified as independent contractors, you may be on the right track. But, if even one of these items makes you think you may have issued those 1099s prematurely, it's definitely a good idea to take a look at your employee classifications again before it becomes a bigger problem.

Myth: The Employee and I Decide if They Are a 1099.

It's a common misunderstanding that an employee and their employer can mutually agree to an IC designation. This myth goes on to say, "as long as they agree and we are both OK with it, then issuing a 1099 is the best way to go."

If that was the case, all employers everywhere could avoid paying billions in matching social security, state, and federal taxes each year, along with all the other things that employers must withhold, simply by making all of their employees independent contractors!

Here is how it actually works:

When a worker shows up, you – not the employee – are required by federal and state laws to properly classify them as an employee. Once they are classified as employees there is another set of subclassifications that you need to know about, but we won't get into those here

Employers tend to like 1099s because they mean less paperwork, lower payroll costs, and a simpler (and cheaper) tax process than what is required for traditional employees. But the appeal of 1099s is misleading and often misplaced.

That's because the apparent simplicity and cost savings provided by 1099s will only hold up if that classification survives a set of nearly 30 IRS or Department of Labor parameters. And, in the case where medical spa workers are concerned, we can tell you that it almost certainly will not.

We know this is not great to hear. But, as with any industry, as med spas grow, so will the DOL's desire to audit and collect taxes owed from your misclassifications.

Question: Why Do the IRS, State Department of Revenue, and the DOL Care about Small Businesses now?

The problem is that it's extremely common for business owners to misclassify their employees as independent contractors. National studies have repeatedly shown that 30 percent of employers or more have employees misclassified as 1099s.

And, from what we'e gathered speaking face-to-face with hundreds of med spa owners, the industry is likely pushing well beyond that 30 percent threshold. These misclassifications are costing states billions in lost revenue.

Additionally, the IRS has identified the 1099 misclassification as the single largest problem when it comes to Social Security solvency.

But Everyone Else Is Doing It!

When you misclassify an employee as an IC, you are still on the hook for all the compliance issues you are trying to avoid.

The DOL and IRS will still see the worker as an employee and require you to go back and pay all the taxes, overtime, social security, and penalties. What's more, if the misclassified employee retains counsel and you lose the audit, you will also be required to pay for the plaintiff's attorney costs. So you will get to pay your own attorney fees and theirs!

We understand that the practice of misclassifying may be common, but the government does not care. Once they audit, "others are doing the same thing" is not a defense.

How Would Anyone Know?

Some of you reading this may be tempted to brush off the threat of real-world consequences for misclassifying your employees.

But the unfortunate reality is that, though you and other business owners you know may have gotten away with misclassifying your employees so far, that does not mean that these mistakes will continue to go unnoticed indefinitely.

The fact of the matter is that any number of minor issues could trigger a deeper investigation of your business practices by the IRS or DOL. These include:

• Random tax audits
  
• Unemployment claims made by former employees
  
• An employee filing a workers' comp or disability insurance claim
  
• An employee being reclassified from employee to 1099
  
• Wage and hour claims made by employees
  
• An employee reporting potential misclassification
  
• An anonymous tip to the IRS or DOL
  

By keeping misclassifications in place or ignoring the classification issue altogether, you're essentially rolling the dice and banking on the assumption that none of these things will ever come up at your business. But, if you stay open long enough, odds are that at least one of them will show up on your doorstep at one time or another.

One of the most common ways that employers get caught with misclassifications is that an employee catches an audit and, during that process, the IRS asks about where the employee's income comes from. They explain they work for you, and the audit then shifts from them to include your business.

Let us say this another way: When you misclassify an employee as an IC, you are relying on all the people you misclassify to not get in trouble and/or to not file a complaint when they learn they should have been paid as an employee and might be owed overtime and other benefits.

In short, the threat of misclassifications at your business being discovered is higher than you realize – we'e seen it happen to small businesses too many times to write it off. In fact, according to a study conducted by the DOL in 2000, 95 percent of employees who claimed they were misclassified as independent contractors were reclassified as employees following review.

What Are the Penalties for Getting It Wrong?

When you are caught misclassifying your employees as ICs you will be required to reclassify those employees for the past years and going forward. You will also be required to pay all the taxes for all of the misclassified employees for whom you failed to withhold and match going back up to seven years out of your own pocket!

The authorities don't care that you gave all the earnings to the employee and failed to do your part.

Additionally, there can be substantial penalties for failing to not track time, confirm I-9 status, withhold and match certain taxes, and more.

This is enough to take a seemingly innocent oversight into the realm of a six-figure whoopsie in one fell swoop.

But Hospitals…

Med spas are not hospitals and without drilling down, please trust us that you cannot apply the same logic or process that hospitals use for paying some doctors towards classifying your employees.

Is CEDR Trying to Scare You?

Yes!

We'e seen this play out before and it never works out well for employers. If you're one of those business owners or managers that is issuing 1099s to your team members as a standard operating procedure, download this Independent Contractor Cheat Sheet made by CEDR HR Solutions' in-house HR experts so you can self-audit the 1099s you'e got working for your business. Or reach out to us so we can help you perform a thorough audit of your employee classifications and correct this issue before it becomes a legal problem and a serious financial liability.

To Summarize…

Employees are frequently misclassified as 1099s and the problem seems to be running rampant in the growing med spa industry.

Though it might seem like the type of thing that will simply go unnoticed or be easily overlooked, there is a very good chance that misclassification at your med spa will be discovered one day. And, when that happens, it won't be pretty.

Your best course of action as an employer is to correct the issue now rather than waiting for it to take a six-figure bite out of your business all at once down the road. That means performing a self-audit (CEDR HR Solutions provides this handy free Independent Contractor Cheat Sheet to make this process as easy on you as possible).

Or, even better, work with a knowledgeable, qualified HR professional to identify classification errors at your business and correct them before they get out of hand.

Have questions about employee classification, employment law compliance, or anything else related to HR or team management? Reach out to CEDR HR Solutions for expert guidance.

CEDR HR Solutions believes that better workplaces make better lives. It supplies custom, legally compliant employee handbooks, expert human resources support and powerful team management software to owners of thousands of dental, medical and wellness businesses across all 50 states. CEDR provides "HR for Life" through expert advisors who work directly with business owners to find workable, compliant solutions to HR and team management issues.