Supreme Court Medical Resident Stipend Ruling Highlights Advisability of Worker Classification & Payroll Practice Review Advisable For Health Care, Other Employers

Cynthia Stamer
January 13, 2011 — 2,030 views  
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Stipends paid to medical residents to provide on patient care and other medical services for 40 or more hours per week as part of a accredited graduate medical education program are wages paid to employees for Federal Insurance Contributions Act (FICA) payroll taxes purposes and do not qualify as exempt from FICA tax or withholding as student stipends according to January 11, 201 U.S. Supreme Court ruling in Mayo Foundation v. U.S.   The decision is the latest reminder to health care providers and others of the need to critically review and update as necessary their organizations existing worker and wage characterization in light of evolving interpretations and the growing success of regulators and private plaintiffs in challenging these classifications.Mayo Foundation DecisionThe FICA rules set forth in Internal Revenue Code (Code) §§3101(a) and 3111(a) require that  employees and employers pay FICA taxes on all "wages" employees receive not otherwise exempted. In Mayo Foundation, Mayo Foundation For Medical Education And Research (Mayo) challenged a 2004 Internal Revenue Service (IRS) Regulation challenged a 2004 IRS regulation that ruled that medical students or others providing full-time services as part of their course of instruction do not qualify as "students" for purposes of the "student" exemption of Code § 3121(b)(10).  Code Section 3121(b)(1) excludes from FICA wages of amounts paid "service performed in the employ of . . . a school, college, or university . . . if such service is performed by a student who is enrolled and regularly attending classes at [the school]."Mayo Foundation filed suit after the IRS changed its historical interpretation of Code § 3121(b)(10). Prior to 2004, the applicability of the Code § 3121(b)(10) exclusion was determined subjectively using a facts and circumstances analysis.

In December, 2004, however, the IRS amended its regulations to provide that an employee's service is "incident" to his studies only when "[t]he educational aspect of the relationship between the employer and the employee, as compared to the service aspect of the relationship, [is] predominant." See Treas. Reg. §31.3121(b)(10)-2(d)(3)(i). The Regulation, which remains in effect today, also contains a "Full-Time Employee Rule": that categorically provides that"[t]he services of a full-time employee "are not incident to and for the purpose of pursuing a course of study regardless of the fact that "the services performed . . . may have an educational, instructional, or training aspect." See Treas. Reg.§31.3121(b)(10)-2(d)(3)(iii). 

The Full-Time Employee Rule specifies that which workers qualify as full-time generally is as defined by the employer's policies, but in any event includes any employee normally scheduled to work 40 hours or more per week. In the case of "Employee E," who is employed by "University V" as a medical resident, Example 4 of the Full-Time Employee Rule states that Employee E is not an exempt student under Code § 3121(b)(10) because his "normal work schedule calls for [him] to perform services 40 or more hours per week."Rejecting Mayo Foundation's challenge, the Supreme Court upheld the IRS' interpretation of Code § 3121(b)(1).  It said the regulation should stand because Congress has not directly spoken to foreclose that interpretation and because the Treasury Department's rule is a reasonable construction of what Congress has said. Worker Classification Growing Risk For Health Care & Other Industries Beyond its specific holding, the Mayo Foundation decision also serves as another reminder that that health industry and other employers should not take the defensibility of their worker classification and associated income and payroll tax, employee benefit, employment and other practices for granted.

Recent developments send a clear message that that health industry and other employers must remain constantly diligent about confirming and documenting the defensibility of their worker classifications and other associated practices in light of evolving rules and standards, enforcement, the growing frequency and success of regulators and private plaintiff challenges, and changing workforce practices. Tax, labor and other federal and state regulators are stepping up their scrutiny of health industry and other employer practices for classifying workers under existing laws.  Under an ongoing National Research Program, for instance, the Internal Revenue Service has begun conducting the first of approximately 6,000 payroll tax audits that it plans to complete over a three-year period focusing on the appropriateness of employer worker classification and other payroll and income tax practices. Meanwhile, Department of Labor officials also have stepped up scrutiny of and challenges to employer characterizations of workers as contractors, exempt, or otherwise not covered by wage and hour, discrimination, and other employment and employee benefit laws and have announced plans to further tighten existing rules.  For instance, the Labor Department Wage & Hour Division has announced plans to tighten Fair Labor Standards Act (FSLA) recordkeeping and reporting requirements to require, among other things that employers who wish to classify any employee as "exempt" from the overtime provisions of the FLSA or who wish to set up a relationship with a worker as an "independent contractor" engage in significant analysis and be able to provide proof that they have classified those relationships accurately. 

As other agencies and private plaintiff's follow suit, legislation that would further tighten worker classification rules continues to enjoy broad support among many members of Congress.In light of these and other developments, health industry and other employers should take reasonable steps to guard against these and other growing risks of worker misclassification and associated non-compliance.  To minimize their potential exposure, health industry and other employers should consult with qualified legal counsel for advice within the scope of attorney-client privilege concerning the need to audit or otherwise act to strengthen the defensibility of their existing worker classification, employee benefit, fringe benefit, employment, wage and hour, and other workforce policies to mitigate exposures to potential IRS, Labor Department or other risks of worker misclassification or the handling of associated payroll, employment or other responsibilities.For Help With Audits, Investigations, Policy Updates Or Other NeedsIf you need assistance in conducting a risk assessment of or responding to an IRS, Labor Department or other legal challenges to your organization's existing workforce classification or other labor and employment, employee benefit or compensation practices, please contact the author of this update, attorney Cynthia Marcotte Stamer here or at (469)767-8872.

Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization, management attorney and consultant Ms. Stamer is nationally and internationally recognized for more than 23 years of work helping employers; employee benefit plans and their sponsors, administrators, fiduciaries; employee leasing, recruiting, staffing and other professional employment organizations; and others design, administer and defend innovative workforce, compensation, employee benefit  and management policies and practices. The Chair of the American Bar Association (ABA) RPTE Employee Benefits & Other Compensation Committee, a Council Representative on the ABA Joint Committee on Employee Benefits, Government Affairs Committee Legislative Chair for the Dallas Human Resources Management Association, past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group, and the Managing Editor of Solutions Law Press HR & Benefits Update and other Solutions Law Press Publications, Ms. Stamer recently was a featured panelist on the ABA Joint Committee on Employee Benefits Teleconference on "Worker Classification & Alternative Workforce: Employee Plans & Employment Tax Challenges" and has worked, published and spoken extensively on worker classification and other related matters.

She also is recognized for her publications, industry leadership, workshops and presentations on these and other human resources concerns and regularly speaks and conducts training on these matters. Her insights on these and other matters appear in the Bureau of National Affairs, Spencer Publications, the Wall Street Journal, the Dallas Business Journal, the Houston Business Journal, and many other national and local publications. For additional information about Ms. Stamer and her experience or to access other publications by Ms. Stamer see here or contact Ms. Stamer directly at (469) 767-8872.

THE FOLLOWING DISCLAIMER IS INCLUDED TO COMPLY WITH AND IN RESPONSE TO U.S. TREASURY DEPARTMENT CIRCULAR 230 REGULATIONS.  ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN BY THE WRITER TO BE USED, AND NOTHING CONTAINED HEREIN CAN BE USED BY YOU OR ANY OTHER PERSON, FOR THE PURPOSE OF (1) AVOIDING PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW, OR (2) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED TRANSACTION OR MATTER ADDRESSED HEREIN.  ©2011 Cynthia Marcotte Stamer, P.C.  Limited non-exclusive license granted to HRResource.  All other rights reserved.

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Cynthia Marcotte Stamer, is nationally and internationally recognized for her work assisting businesses, governments, and other entities to develop creative strategies for dealing with employee benefit and related human resources, insurance, health care and finance concerns. Ms. Stamer helps businesses design, administer and defend cost-effective employee benefit other human resources programs, policies and procedures to meet their budgetary and other business objectives.