Correctly classifying psychotherapists as either independent contractors or employees has always been a matter of significant importance, and with the U.S. Department of Labor’s (DOL) final rule taking effect on March 11, 2024, it has become even more crucial. This rule introduces a “totality-of-the-circumstances” economic reality test, emphasizing the economic realities of a worker’s relationship with their employer to determine their correct classification.

Understanding the New Economic Realities Test

The new economic realities test reintroduces a comprehensive approach to worker classification, considering six key factors without assigning any predetermined weight to any single factor or group of factors. This shift signifies the DOL’s intent to ensure that workers are classified more accurately based on the nuances of their work conditions and relationships with their employers.

Analyzing the Six Factors for Correctly Classifying Psychotherapists

In the wake of the U.S. Department of Labor’s (DOL) implementation of the final rule effective March 11, 2024, it’s imperative to delve into the intricacies of the “economic realities” test designed to determine worker classification. This comprehensive approach assesses six pivotal factors to discern whether individuals should be classified as independent contractors or employees under the Fair Labor Standards Act (FLSA). Each factor is crucial in its own right, providing insight into the worker’s economic dependence on the employer. Understanding and correctly applying these factors to therapists’ roles in psychotherapy group practices is not just a matter of legal compliance; it’s a foundation for ethical practice and operational integrity. This section aims to meticulously analyze these six factors, shedding light on why psychotherapists are best classified as W2 employees rather than independent contractors when viewed through the lens of the new DOL rules.

1. Opportunity for Profit or Loss: Psychotherapists in group practices often have limited control over the profitability of their work. Generally, they do not set the price for their services. Group practice owner(s) typically set prices for services. In other words, unlike true independent contractors, staff clinicians cannot meaningfully negotiate pay or seek out clients independently, suggesting they are better classified as employees.
2. Investments by Worker and Employer: Psychotherapists typically make minimal capital investments in the group practice. The group practice owner’s investments in infrastructure, branding, and client acquisition are significantly more substantial, pointing towards an employer-employee relationship.
3. Degree of Permanence: The relationship between psychotherapists and group practices tends to be continuous and, in many cases, exclusive, indicating an employment relationship rather than an independent contracting one.
4. Nature and Degree of Control: Group practices often exert significant control over psychotherapists’ work hours, methods, and terms of service, which is indicative of an employer-employee relationship. True contractors work independently and can freely decide how to execute their work with little or no input from the owner. True contractors can outsource the work to subcontractors or their respective employees. 
5. Integral Part of the Business: Psychotherapy services are central to the business model of group practices, further reinforcing the argument that therapists should be classified as employees. (Conversely, website design services are not central to the work product of psychotherapy group practices; therefore, hiring website designers as contractors is perfectly appropriate.)
6. Skill and Initiative: While psychotherapists possess specialized skills, the lack of autonomy and initiative in how they apply these skills within group practices suggests they function more as employees than independent contractors.

The Consequences of Misclassification

Misclassifying psychotherapists as independent contractors can lead to significant legal and financial consequences for group practices, including penalties and back payments for wage and hour violations. Moreover, it raises ethical concerns, as it may deny therapists the protections and benefits they are entitled to under the law.

The Benefits of Correct Classification

Classifying psychotherapists as W2 employees ensures compliance with the law and offers numerous benefits. For therapists, it provides access to employment protections, benefits, and a clearer understanding of their employment status. Group practices foster a more stable and committed workforce, enhancing the quality of care provided to clients.

Conclusion

The new DOL rules underscore the importance of correctly classifying workers, particularly emphasizing the nuanced relationship between psychotherapists and group practices. By adhering to these guidelines, practices can ensure they are on the right side of the law while supporting their therapists’ rights and well-being.

Further reading resources:

https://sbshrs.adpinfo.com/blog/the-new-independent-contractor-test-key-points-to-know?cid=elq_sales_enablement_45435&campaignid=45435&ecid=24079223&utm_source=eloqua&utm_medium=email&utm_campaign=SBS_FY24_Client_Q3_Newsletter