California says locum tenens firms must pay employee tax

For decades, physician staffing firms have been the matchmakers of the locum tenens industry, pairing physicians who want temporary work with hospitals or other health entities who want their services.

During this time, the staffing firms have treated the physicians as independent contractors, acknowledging a mutual dependence on each other for services and yet recognizing a need for physician autonomy in health care.

But a bitter tax dispute in California is calling into question the very nature of that relationship. And critics say it is threatening to drive the locum tenens industry out of the state. Further, they say that if the state taxing authority leading the charge in this fight wins, it could set a dangerous precedent for locum tenens work in other states.

"Clearly, this is a concern for our industry," said Katie Abby, president of the National Assn. of Locum Tenens Organizations. "If California is successful in forcing their assessments, it could potentially drive the locum tenens companies out of the state."

The call for alarm has erupted in the wake of several rulings by the California Employment Development Dept. finding that physician staffing firms owed taxes or penalties because they were acting as employers to the physicians that they were serving.

Abby said that during the last year at least four or five firms had been ordered to pay assessments, some of which totaled millions of dollars. The firms, which have never considered themselves physician employers, have balked, vowing to appeal the rulings. They point to the treatment of locum tenens physicians as independent contractors both historically and in other states, and say several Internal Revenue Service rulings have supported that classification as well.

They are also scratching their heads because they say that under California law, they wouldn't be permitted to employ physicians anyway. That is because of the state's corporate practice of medicine law, which forbids most nonphysicians from directly employing physicians.

"It's a 'Catch-22,' and they kind of have us over a barrel," said Phil Miller, spokesman for Staff Care, an Irving, Texas-based locum tenens company that has been snared in the imbroglio.

Staff Care, which has helped place locum tenens physicians with California's corrections department, received a bill for $2.6 million from the EDD about a year ago. The company denies that it was employing physicians, and although the assessment was later reduced by about half, it is appealing the ruling.

Still, Staff Care is taking the threat seriously. Miller said the company stopped working with the corrections department and could pull out of the state completely if it loses the fight.

For doctors, an exodus of staffing firms such as Staff Care could put an end to their ability to find locum tenens work in California. And without those doctors working, an existing physician shortage could worsen.

Samuel G. Benson, MD, PhD, said the small locum tenens firm that he runs, Registry of Physician Specialists, would have to try to find a way to continue doing business in California regardless of what happens because that's where it operates exclusively. The firm was assessed $1.5 million by the EDD and is appealing the ruling.

Dr. Benson, a psychiatrist, said he enjoys doing locum tenens work because it gives him the "freedom to choose where I practice."

Indeed, scores of physicians nationwide have been attracted to locum tenens work because of the flexibility it offers. Abby said roughly 20% of all physicians do locum tenens work at some point in their careers, and about 30,000 are doing it at any give time.

EDD spokeswoman Suzanne Schroeder said the agency was trying to determine whether those physicians are employees or independent contractors. In doing so, it must examine "who has control of the work and the time and the place, and who says what will be done where and when," she said.

Even if the EDD succeeds in proving its case, it seems unlikely that any of the physicians involved would face fines or assessments, because the agency has focused its investigation on the alleged employers.

But it is possible that the physicians could get pulled into a state tax audit through the EDD review, said Ross Stromberg, a health care attorney in San Francisco who is representing Staff Care in its appeal.

He also said that "theoretically" the Medical Board of California could seek administrative action against physicians and staffing firms for violating the corporate practice of medicine statute if an employment relationship was found, though it was not expected to do so.

The EDD has asked Staff Care to prove that its physicians have been paying appropriate employment taxes, so Staff Care has set about tracking down the physicians it has served and asking them for tax information.

Along the way, the company also has asked physicians to write a letter to Gov. Arnold Schwarzenegger urging him to support legislation moving through the state assembly that is aimed at resolving the dispute.

The bill, SB 279, would reaffirm that locum tenens staffing agencies cannot employ physicians. The California Medical Assn. had thrown its support behind the measure, which was recently awaiting a third reading in the California House.

Harvey Small, MD, a psychiatrist in Burlingame, Calif., also offered his support, writing to the governor that he has taken pleasure in doing locum tenens work since retiring from full-time practice in 1999. He said the EDD had made a "grave mistake" in claiming that such work constitutes an employment relationship with the staffing firms.

"The locum tenens company has no control over my professional activities: working hours, clinical decisions, etc.," Dr. Small wrote. "It is merely a useful go-between."