One of the more common issues in a dental asset purchase agreement transition is determining the after-sale status of the selling dentist or existing associates.
As you are about to see, dental practice sale associate agreements are not just simple paperwork. Failing to select the agreement type that aligns with the actual business circumstances may expose the business to worker misclassification risk, leading to audits and penalties.
Scenario: Recently, we represented a buyer who bought his first dental practice in Missouri. The seller was going to stay on and do some post-closing clinical work to help our client transition the practice. The question then became whether the seller should remain an employee or become an independent contractor.
We will discuss when to opt for W-2 employment vs. 1099 for associate dentists and the pros and cons of each choice.
After the transition, the dilemma is choosing between an employee vs. independent contractor for a dentist. The option you choose will primarily depend on the length of the transition and the level of control the buyer requires.
However, the choice isn't entirely free and will depend on the specific business circumstance.
The independent contractor agreements must meet the standards set by the DOL 2024 Final Rule and the upcoming changes.
The Department of Labor applies a "totality of the circumstances test" to determine whether an independent contractor is truly independent.
Labeling a contract as "1099" is largely meaningless if the dentist is economically and functionally dependent on the buyer.
Let's break this down through two scenarios:
Private sales are usually followed by an arrangement in which the selling dentist stays 30-90 days. This allows them to introduce patients to the new owner and complete procedures that require their personal involvement.
In this situation, the seller is usually hired as an independent contractor. This allows the buyer to avoid payroll taxes and benefit costs for that temporary period.
But this type of arrangement carries risks.
Even if it is a short-term situation, if the new owner dictates the seller's hours, provides materials, and exerts significant influence over their practice, this can still constitute a misclassified employment agreement, leading to regulatory scrutiny.
In situations when the seller plans to work for a longer period post-sale, which is common in DSO acquisitions, the post-closing deal dental associate contract should almost always be a standard W-2 Employee arrangement.
When the associate dentist works as a W-2 Employee, the buyer has full control over scheduling, staff management, materials, and everything else.
But because there is no dispute over who is in charge of the business, the buyer must also assume responsibility for the benefits and handle the tax obligations.
Choosing dental practice sale associate agreements that do not align with the actual working relationship and conditions is one of the fastest ways to trigger an audit.
To prevent that, buyers should talk to an experienced dental practice transition lawyer to audit the business's existing 1099 associates. If they are integral to the business, they might need to be converted to W-2 Employees at the sale closing.
Sellers, on the other hand, should clean up the agreements before the sale. Even though it might temporarily increase expenses, a practice with properly classified W-2 employees is worth more and easier to sell than one that relies solely on high-risk 1099 contractors.
The key takeaway from this article should be that dental practice sale associate agreements are not just simple administrative documents you tick off your transition checklist. These arrangements directly impact legal risk and post-sale business stability, and therefore deal value, making them super important for both buyers and sellers.
Experienced legal guidance can help you evaluate existing associate agreements, reduce risk, and simultaneously increase business value, benefiting the seller and protecting the buyer's investment.
Contact FinnLaw today to schedule your consultation and ensure your dental practice transition is handled with confidence.
