Employees are increasingly aware of their rights and employer obligations. Knowing the federal, state, and local rules, and having your HR house in order may prevent lawsuits and increase groups’ valuation.
DSOPro: Tell us about your background and how you got into dentistry.
My wife is a pediatric dentist, and as a lawyer I began helping many of her classmates and co-residents with their practice purchases, leases, and partnerships, etc. I realized that working with dentists was more fun than what I was doing before so I created the Dental & Medical Counsel, PC, law firm about 17 years ago. Then around 10 years ago we saw a large number of new clients were being sued for human resources (HR) violations, so I did some market research and decided to start HR for Health as there was nothing in the industry to support them when it came to HR compliance.
Our research indicated that when dentists needed HR help, they either asked law firms to help draft an employment manual or went to some mom-and-pop shop that creates employment manuals or asked their payroll companies for a generic employment manual.
That’s how HR was handled in dentistry until we got involved. We knew Fortune 1000 companies were using different types of HR software that companies had created for them. I wanted to create something like that for dentists, and that’s how HR for Health came about.
DSOPro: Where you working with solo or group practices?
Back then, there wasn’t the same level of group practice as exists now, of course. But in the past 10 years, we have seen many dental groups being created and consolidation at a massive level. As these groups were growing, HR was usually not at the forefront of their minds. Some of them were being sued by employees of the office they just bought, or employees at their other offices, because they didn’t have a centralized system for HR. That’s what got us thinking about how to provide a solution for dental groups and DSOs that could minimize their exposure as they were growing.
DSOPro: What are some of the common HR-related issues you see in the dental industry?
As for trends, there are many interesting things happening in the DSO world when it comes to HR. The primary thing from an HR perspective is that a lot of employees are becoming really smart about HR in terms of their rights and what obligations their employer has to employees. And it’s still not a topic that a lot of DSOs focus on. We see a lot of claims brought by employees for what is called “wage and hour claims,” which is the most common type of lawsuit brought against a dental practice. Basically, it means not providing lunch hours, not paying for breaks, and not paying overtime. There are also issues with payroll, such as not giving payroll on time or not having the right information on pay stubs. Those are the kinds of things that fall into wage and hour issues.
And what’s crazy is that these issues and violations are so common that most insurance companies do not cover these damages because it’s such a common lawsuit. Increases in this type of claim are more common in the DSO world because groups are not usually as involved, if you will, with their employees as solo practitioners are. There is a separation in the DSO environment that causes employees to be a little bit less loyal to the office.
The average settlement is one to two times an employee’s annual salary. If someone is being paid say $20 an hour, which is roughly $40,000 a year, the average settlement is $40,000 to $80,000 if they’re bringing a legitimate claim. So, there are big dollars at stake.
Another trend is the fact that a lot of new rules are coming out pertaining to COVID leave, paid time off, and sick leave. These are throwing DSOs into a bit of a panic mode. If they have multiple offices, especially across state lines, there may not be a centralized way to manage their HR.
In addition, many of these rules are not just federal rules, they’re also state and local rules – and HR for DSOs becomes even more complex.
DSOPro: What is compelling employees to become savvier about HR?
I think employees are starting to realize they have a lot of power when it comes to HR violations. And there are lawyers who go after these employees and educate them about what rights they may have been giving up, or maybe they’re not knowledgeable about. That’s creating an increase in knowledge.
Often, within group practices, there isn’t the same level of knowledge. Usually, office managers are tasked with running the operations of the office plus doing HR. Everyone should know HR is not something you can do on the side. It’s also not something you can necessarily learn on the job either, because it can be so complex. A lot of office managers do their best, but it’s tough for them to ensure they are complying with all the different rules. And, unfortunately, these lawyers know where the pitfalls are, and that’s what they jump on.
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DSOPro: Describe how your software works and how it is customized, especially for groups with practices in different states.
We’re SaaS-based and operating in all 50 states. We not only provide customized employment manuals for each of our clients, but the most modern and compliant timekeeping, tracking, and benefits system in the industry. We have an entire team that manages all the HR questions that come up daily in running a dental group. Everyone has different policies and rules, so we make sure everything is specific to their office.
In sum, we allow groups to manage all their HR needs from one location usually with one person, or two if it’s a big operation. Centralization of HR makes groups more efficient with regard to their HR but allows the office manager or administrator to focus on the operations and growth of the practice as opposed to HR compliance paperwork. One person can basically manage all the HR for a large group from one centralized place because they have all the data at their fingertips via our software.
DSOPro: Let’s discuss the contractor versus employee designation.
That impacts groups so heavily when it comes to valuations. This issue has been debated for years because the IRS has this 21-point test that any business can use to determine whether a person they hire should be an independent contractor or an employee. For years, pre-COVID, a lot of groups would hire dentist associates as independent contractors and skirt the rules so they didn’t have to pay payroll taxes, FICA, Medicare, and other insurance taxes that are either taxed or given to employees.
Since COVID though, the rules have become a lot more restrictive, at both the federal and state levels. Now it has become difficult to hire someone as an independent contractor in almost any state because of the new rules the IRS has clarified, and many states have put into place as well. We recommend our groups hire their workers as employees versus independent contractors.
Some groups will hire only their doctor associates as independent contractors, but other groups take a lot of risk by hiring other people, such as billing specialists, front desk people, hygienists, surgical assistants, and orthodontic assistants as independent contractors. That is a definite no-no. There is absolutely no way that those roles meet IRS or state standards. My advice is to not do that.
There is another financial reason not to do it. When private equity wants to buy or invest in these group practices, they’re seeing a reduction of the enterprise value of the business if their HR house is not in order. Hiring independent contractors versus employees brings down their valuation. If the practice doesn’t have all their new-hire forms, or an up-to-date employment manual, or they’re not doing other things to centralize HR, that brings down their valuation. These private equity groups are super smart, and they don’t want to take on dental groups that don’t have all their HR stuff figured out.
A new owner does not want to find a bunch of violations. And those are what an unhappy employee will go after the groups for. They sometimes go after the sellers too, but usually they go after the deeper pockets, which are the larger groups.
Private equity backers could find themselves inheriting a lot of the same problems the seller had, or they create them for themselves by not getting their HR in place when they buy practices and start to grow. I don’t blame them because they are focused on growth, on raising capital and finding good practices, but the HR stuff always comes back to haunt them.
One of the advantages that HR for Health brings to dental practice buyers is a very thorough due diligence program. We help a buyer conduct all the due diligence they need to determine if the office they are buying is HR compliant and if it is not, what they need to do. Groups and private equity firms use HR for Health to reduce their risk and ensure a better ROI on their acquisition. We are very proud of that achievement.
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DSOPro: How pervasive is the independent contractor issue?
It’s very pervasive. A lot of groups and insurance companies are talking about it. There are basically more employment cases against dentists than there are malpractice cases. This independent contractor issue is a very common error within group practices.
DSOPro: What other common compliance issues do you find in dental practices or discover when they are sold?
One thing we see often is when sellers do not have all the employee documents they need to have. Usually, the seller must terminate all the employees and then the buyer must hire them all back. Then they are often in such a rush they don’t provide all the documents they need and now they don’t have all the new-hire documents either. Depending on the location, those could be anywhere from 12 to 17 documents. Some states require more documents and others require fewer.
The necessary documents include I-9s (immigration documents), W-4s, employment applications, sexual harassment information sheets, and at-will acknowledgements. There are so many of them, and they differ from state to state, but it’s very important to have them.
Another issue that gets dental groups in trouble is not keeping track of benefits correctly. Most states, as well as the federal government, track benefits directly as it relates to their time clock. So, when they’re clocking in and clocking out, their benefits sort of accrue. Many people are tracking it on spreadsheets, on paper, or using practice management software. This can definitely cause a lot of issues.
Not having the new-hire forms, not setting up benefits correctly, and not managing that through an electronic time clock are the biggest hiring mistakes. Not having an employment manual that is specific for each office is also a big problem.
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DSOPro: Any other advice?
To increase your valuation, don’t forget about the “human capital.” Group valuations increase when your entire HR situation is figured out and in order. Understanding the value of a well-organized and happy employee situation can make a deal sink or swim. When private equity groups are looking at practices to buy, they often don’t bring this up initially, but then do in due diligence. When they find these problems, they often reduce the offer they’ve already made. We have seen that occur.
The best thing to do is get compliant in advance. HR for Health can centralize everything in one location and be used to ensure that if an HR employee leaves, the data doesn’t go with them because it’s on our system. That also makes it easy for their replacement to manage it, as well as reduce legal claims and help them increase their valuations.
Another good thing to remember is that an employee manual is a guide. Sometimes when an organization has a lot of different HR people working in their offices and do not have a good system in place for making sure that everything is done correctly, they often keep adding things to their manuals that makes it more restrictive for them later on. It shouldn’t be so specific that it hampers what you’re able to do moving forward. It should be general enough that the employees know their benefits, etc., but also gives the employer the flexibility to be able to do what they need to do for their business.
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Ali Oromchian, JD, LL.M. is co-founder and Chief Executive Officer of HR for Health, which is a software as a service platform that provides web-based human resources solutions and advice for healthcare practice owners and managers. Ali is also a founding attorney of the Dental and Medical Counsel, P.C. law firm and one of the nation’s leading legal authorities on topics relevant to doctors. Since its creation, the Dental and Medical Counsel P.C. law firm has been regarded as one of the preeminent law firms devoted exclusively to healthcare professionals. Clients seek Ali’s advice on practice acquisitions and sales, creation of corporations and partnerships, associate contracts, estate planning, employment law matters, office leasing, and state board defense.
HR for Health
HR for Health empowers dental group practices with the resources to develop and implement enforceable employment policies and avoid legal pitfalls. The platform provides practices with a comprehensive and compliant HR experience including state-specific employee handbooks, seamless time and attendance tracking, payroll, performance and task management tools, plus live HR support with SHRM-certified specialists. HR for Health makes it easy for business owners to protect their interests while drastically simplifying HR administration.
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