As an associate, you have several ways to structure the relationship between you and your employer. The terms and overall structure will primarily depend on each party’s expectations of the position’s nature and duration. Regardless of which arrangement you choose, it is vital that you memorialize the terms in a written agreement.

For more information:

Sample Associate Agreement

A dental practice might choose to pay you as an employee or as an independent contractor for providing clinical dental services to patients, but there are vital differences between the two that should not be ignored, as they have legal consequences. For example, as an employee, the dental practice will withhold income tax, Social Security and Medicare from your wages. On the other hand, as an independent contractor, the dental practice will not withhold taxes and most wage and hour labor laws do not apply.

In determining whether you qualify as an employee or independent contractor, your employer must weigh some very important factors, which we detail below.

Employee vs. independent contractor

Many associates who are hired by an established dental practice start as an employee who must abide by the practice owner’s policies and philosophies, qualify for employer benefits and typically have no financial or managerial responsibilities. An employee includes anyone under the direction and control of an employer as defined by statute, regardless of whether the employment relationship is based on an oral or written appointment, contract or apprenticeship. The employer provides professional and general liability insurance as well as workers’ compensation coverage as required by law. They also withhold and pay payroll taxes required by law.

An employee typically:

• Utilizes the office’s materials, tools and equipment.
• Abides by office policies, rules and safety regulations.
• Produces according to the practice owner’s plans and requests.
• Works in tandem with the practice owner, shares patients and philosophies.
• Receives benefits including unemployment insurance and workers’ compensation.
• Works with office staff but not in a managerial position.
• Gets paid per time in the office and possibly a production commission on top of salary.

Independent contractor

An independent contractor is not an employee. You enter into a contract to provide specified goods or services but retain the right to control the way in which the goods or services are provided. In the context of professional services, an independent contractor is not bound to work indefinitely and exclusively for one practice. They are paid based on their production (sales, commissions, agreed upon amounts or other criteria) or on a flat rate per service. They also must pay their own income taxes and are not subject to control by the owner; they can come and go as they please.

Typically, an independent contractor:

• Sets work schedule.
• Furnishes tools and equipment.
• Is compensated on production, not on time spent in the office.
• Does not receive employer benefits.
• Enters into a contract requiring both parties to terminate the agreement when the relationship dissolves.
• Is obligated to reimburse the practice owner for any losses (e.g., retreatment cases) and damages (e.g., property, equipment and instruments).
• Pays their own professional liability insurance, lab bills and some overhead expenses.
• Makes their own estimated tax payments on a quarterly basis.

The impact of classifying as employee vs. independent contractor

Properly classifying a worker as an independent contractor may save the employer money and the expense of benefits, such as pension, group health and workers’ compensation insurance as well as Social Security and unemployment insurance taxes. Generally, for independent contractors, the employer only has to complete a year-end Form 1099-MISC. Associates, in turn, can avail themselves of the tax benefits of being a business owner.

If you consider working as an independent contractor, ask the practice owner for proof of workers’ compensation and premises liability coverage in addition to active professional liability insurance.

How to determine an employee vs. an independent contractor

The Internal Revenue Service’s (IRS) 20-Factor Test is used as an analytical tool; however, the IRS’ 1996 guidelines direct its agents to focus on the overall situation rather than to emphasize one or two of the 20 factors. The legal test is whether the person receiving the services has the right to direct and control the means and details of the work.

The Fair Labor Standards Act also uses a similar test. Common law rules examine the relationship of the worker and the business, taking into consideration all evidence of control and independence. An employer generally controls an employee’s work performance, but independent contractors determine for themselves how they will perform their work. The determination of whether a worker is an independent contractor or employee involves a delicate factual balancing. How a worker will be classified often depends upon what agency or court is making the determination. Intentionally misclassifying employees as independent contractors may result in liability for unpaid withholding and payroll taxes. The exposure for unintentional misclassification is serious, but not as serious as an intentional misclassification. Before entering into an independent contractor relationship, obtain legal advice about structuring the relationship. Also, have a legal expert prepare a contract that sets out the rights and obligations of the contracting parties.

In California, the Supreme Court adopted a test in the case of S.G. Borello & Sons Inc. v. Dept of Industrial Relations (1989) 48 Cal.3d 341, which applies to all dental practices. This Borello test indicates that the dental practice must satisfy the following factors if hiring an independent contractor:

(A) The individual maintains a separate business location.

(B) The individual has a business license, in addition to any required professional licenses or permits for the individual to practice in their profession.

(C) The individual has the ability to set or negotiate their own rates for the services performed.

(D) The individual has the ability to set the their own hours.

(E) The individual is customarily engaged in the same type of work performed under contract with another hiring entity or holds themselves out to other potential customers as available to perform the same type of work.

(F) The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

Other Business Relationships

Office sharing

This usually involves dentists who share space or rent adjoining offices. The dentists operate as independent contractors, but may have agreements for shared services, employees and equipment. It’s important not to promote an office sharing arrangement as a single practice, as that may create a liability exposure for both dentists. The dentists should not use the same professional stationery and should identify their practices separately on signage and in professional advertising. In fact, we recommend that if you are going to share space that you attain your own phone number, website and other distinguishing factors such as logo and practice name. Of course, it is also important to maintain your own clinical records either on a separate server or computer software. A written contract is essential to avoid problems with this type of arrangement.

Trial associateship

This scenario is defined as dentists who wish to “try out” an associateship but not enter into a long-term relationship right away. The usual course is for one dentist to work as an employee or independent contractor in the practice of another while they build their joint practice. Often, the terms of such a relationship are set out in a written employment contract.

Associate Contract Negotiation

Develop a written agreement that details the terms governing the relationship, including duties, term of employment, compensation, insurance, days and hours, benefits, termination details and the nature of the relationship.

If a dentist can acquire an ownership interest in an existing practice, the circumstances under which that will occur should be spelled out. It’s important to understand the practice value or how to determine for the potential buy-in. If the purchase is part of the discussion as an associate, it’s appropriate to ask the owner the point at which the value will be determined. Practice valuation and acquisition agreements can vary significantly, depending on the community, patient demographics, location, economy, practice condition and many other factors. Professional advisors, such as an attorney, tax advisor and possibly a practice transition broker, should be involved.

If you intend to create an independent contractor relationship, ensure that the terms are consistent with independent contractor status. The agreement should spell out how the relationship can be terminated by the parties under various circumstances and the rights each has once the relationship ends.

Ownership of patient records and retreatment

It’s prudent to ensure a provision exists in the associate agreement that clearly establishes to whom the patient record belongs and who is responsible for retreating patients. Also, include the length of time that the retreatment clause is active (one year, 18 months, etc.).

Any contractual agreement may create certain unintended responsibilities and duties. To avoid financial and legal complications, both parties should consult with an attorney and/or a tax advisor who deals with dental transactions and associate agreements. All agreements documented in a written contract by an attorney serve as reference and may help to avoid future legal conflict.

Compensation

A variety of compensation options should be considered before you commit to any agreement/contract. The financial history of the practice and the level at which the practice participates in managed care plays a role in determining the best compensation method as well as the profit that the practice owner desires as a result of hiring an associate.

Employers must be cognizant of wage and hour laws when paying an associate. An associates salary when classified as Exempt under the Professional Exemption must earn a minimum salary which is the equivalent of two times the state minimum wage for full time employment.  The compensation examples below do not  provide for "salaried" compensation. When the compensation plan does not provide a true “salary” to the associate, the associate may be classified as a “non-exempt” employee requiring the practice to pay the associate overtime wages in accordance with state and federal laws.

Fixed per diem

• A fixed per diem is usually a daily amount that may increase with experience. It may be appropriate to request a time period (six to 12 months) in which the compensation will be reevaluated to determine if an increase is warranted. This type of compensation is based on time and is usually only offered in an employer-employee relationship, as opposed to an independent contractor. With a fixed daily or hourly rate, the employer pays all payroll taxes and withholds income taxes for the associate.

Production-based

• Salary is based on the income produced. Sometimes with a production-based arrangement, the owner may also require the associate to pay a percentage of lab costs. If lab costs are not mentioned during negotiations, be sure to get clarification. In production-based employment, an associate is commonly paid between 25% to 35% of production. Further, it is common for the associate to pay a percentage or full amount of their lab costs.

Collection-based

• The owner-dentist compensates the associate a percentage of their monthly collections. This is often a more difficult type of arrangement for the associate because many offices receive deferred payment and dental benefit plans. The associate may not know when payment is collected. In these arrangements, ask questions related to the practice collections process and past history. The practice should collect 98% of the adjusted production and most payments within 30 days of services rendered. If this is not the case, compensation based on collections may be a logistical challenge for both the associate and staff who manage the collections. With collection-based compensation, a common range to be paid is 28% to 35% of their collections. As with production-based employment, be sure to ask who will be responsible for lab costs.

To determine the production/collection percentage, calculate the percentage of collections required to cover overhead, along with the percentage of expenses the associate will pay (lab costs, insurance, dues and license fees) and use this data to determine the rate. The associate is typically not expected to cover overhead expenses other than a percentage of lab costs, as the practice owner should consider the overhead costs as part of the associate’s production/collection percentage. The ability to monitor and control overhead costs, coupled with the amount of expenses the associate is expected to cover, will ultimately determine whether an associate is offered a rate on the low or high end of production/collections.

If you are being paid on a percentage of collections, inquire as to how soon you can expect payment. If the collections process is lengthy, you may request a draw against future earnings or initial fixed salary to get you through the first three to six months.

Additional Resources available for review:

Dental Economics: Options for Associate Compensation

Practice Impact: FAQ When Adding an Associate to Your Dental Practice

Cain Watters: How to Determine New Associate Compensation

Independent contractor

• Compensation is based on a rental fee the associate pays to the practice owner each month for use of the facility. The associate is typically responsible for their own business operating expenses. It’s important to clearly outline the facility-sharing arrangement to determine the specific areas/resources in which the associate will have access. Rental fees will vary depending on the level of access the associate has to the practice in terms of space, staff, supplies, equipment, signage, marketing, computer and telephone systems, etc. In general, this compensation rate is determined by figuring the total practice operating costs and dividing that number by a projected fixed expense total for the associate. Then, the annual figure is usually divided into a monthly or daily rental fee.

Additional Compensation Factors To Consider

With any form of compensation, be sure to ask who is responsible for operating expenses.

These may include:

• Lab fees.
• C.E.
• Professional dues.
• Licensure fees.
• Marketing costs.
• Retirement contributions.

Also, inquire about medical coverage and any other benefits. The coverage of these costs may depend on whether you are classified as an employee or independent contractor. Independent contractors are not able to participate in the employer-paid benefits, such as medical and retirement plans. These additional expenses, as well as the federal and state taxes that must be paid when self-employed, should be considered if you plan to work as an independent contractor. Work with a tax advisor to inquire about the additional taxes and also the tax advantages of being self-employed.

If the associate is to pay all or a portion of lab fees, inquire as to how this calculation will be done. If lab fees are deducted from the gross production/collections prior to calculating the associate’s percentage, the associate’s net compensation will be higher than if the lab fees are deducted after the associate’s percentage is calculated.

If offered compensation based on a percentage of production or collections, it’s fair to ask the practice owner to project what you will need to produce on a daily/monthly basis. The practice owner should be able to answer this question and analyze the practice’s break-even number with the addition of an associate when determining the associate compensation.

To determine the break-even number:

Daily/monthly production/collections figure X the percent of production/collections offered = projected gross income.

Work with a tax advisor to assess the net income from the gross income and deduct all expenses to be paid from both the gross and net income. The result is an idea of the actual income you will take home.

When paid on production or collections, the practice owner likely has a projected production/collections range for an associate. Be conservative and plan your budget according to the low end of the range. If offered a flat daily rate with the opportunity to earn more if production exceeds that rate (i.e., $450/day or 25% of production if greater), plan your budget around the base rate.

The compensation structure and benefits should be clearly outlined in the associate agreement. In addition, have payment dates and expenses covered by the practice owner spelled out. As always, have an attorney review the agreement before you sign and commit to it.