In January, a Federal District Court in Oklahoma issued a ruling in favor of a former marketing representative of a medical equipment distributor. The Court determined that Gary Weaver was, in fact, engaged on an independent contractor basis, not as an employee, and therefore his employment agreement with Joint Technology, Inc. was an unenforceable illegal contract under the Federal Anti-Kickback Statute. Mr. Weaver was being sued by the company in order to enforce the terms on a non-compete provision in his employment agreement.
Health care providers often take advantage of the “bona fide employee” exception to the Federal Anti-Kickback Statute in order to engage marketing representatives and incentivize them to create business by paying bonuses and commissions. In addition, many states also have similar “mini” anti-kickback statutes that apply whether or not reimbursement is from Medicare or Medicaid. These exceptions allow employers to incentivize employees by paying them a portion of the business generated – something employers could not do legally with persons engaged as independent contractors.
In Weaver’s case, this was not a particularly difficult conclusion to make. His “employment agreement” had a provision which specifically said that he would not be deemed an “employee”. He was also treated as an independent contractor for tax purposes.
Whether or not someone is an independent contractor or an employee is determined by statutory and common law rules. The common law analysis is set out on the IRS’ website here. The test turns largely on control. Employers have the right to control where, when and how their employees work, whereas independent contractors control themselves. The issue is important for tax purposes (withholding, eligibility for retirement benefits, etc.), for enforcing the terms of engagement, as well as for making sure that payments to representatives are legal under the Anti-Kickback Statute.
In 1996, a Florida court came to a similar conclusion in the case of Medical Development Network, Inc. v. Professional Respiratory Care/Home Medical Equipment Services, Inc. In that case, it was the marketing company suing for non-payment, and the medical equipment company defending under the theory that the agreement was illegal and unenforceable. The Court agreed with the defendant, and disagreed with the plaintiff’s argument that the Anti-Kickback Statute only applies to health care providers. The Medical Development Network case remains good law and is a warning to healthcare providers in Florida not to pay their independent contractor marketers on a commission basis.
