The Legal Maze of Sales Rep Comission Payments: Independent Contractor vs. Employee.

Introduction

Earlier this year, a lab found itself in hot water, facing allegations that led to a hefty $11.6 million settlement. Among the charges was a violation of the Anti-Kickback Statute (AKS) due to commission payments to sales organizations for patient referrals. This incident raises an important question: What happens when healthcare entities pay commissions to independent sales representatives and marketers, especially when it comes to referrals for Medicare or other federal healthcare programs? In this blog post, we'll delve into the legal complexities surrounding Sales Rep commission arrangements in healthcare and the implications for labs and pharmacies.

Legal Background - Anti-Referral Laws

In the healthcare industry, paying a commission to a Sales Rep in exchange for the sales rep having solicited a referral implicates several State and Federal Laws.

• Federal Laws:

  • Anti-Kickback Statute (AKS) prohibits offering or receiving remuneration in exchange for referrals of patients covered by Medicare or other federal healthcare programs. This includes the payment of commissions to independent sales representatives, unless specific exceptions or safe harbors apply. While the AKS has an exception for payments to employees, it does not extend to independent contractors.

  • The Stark Law prohibits referrals by a physician for designated health services (“DHS”) covered by Medicare that are provided by an entity (person or entity) with which the referring physician has a direct or indirect financial relationship with. 42 U.S.C. 1395nn (a)(1)(A).

    • Additionally, the federal stark law holds liable any person/entity that presents or causes to be presented, a claim or bill for DHS furnished pursuant to a prohibited referral.

  • The Elimination of Kickbacks in Recovery Act of 2018 (EKRA) applies to labs but offers no exception for commission payments, even to employees. EKRA does not allow payments based on the number of referrals or the volume of tests.

• NY State Laws:

  • Social Services Law 366-d is New York State’s anti-kickback law and mirrors the Federal AKS law, applying the same prohibitions to the referral of services for which payment is made under the Medicaid program. Compliance with federal AKS safe-harbors will exempt an arrangement from State anti-kickback enforcement.

  • New York State Stark Law prohibits the same self-referral as the federal Stark Laws except that the state law does not contain the exemptions under the federal stark law. As such, compliance with federal law does not automatically mean that the arrangement is compliant with state laws.

While anti-kickback laws (Federal & State) require that the government prove that the parties had the “intent” required to be liable, both Stark Laws are strict liabiity laws which means that there is no “intent” requirement and parties may be liable even if they did not intend to violate the laws.

Legal Precedent

The application of the AKS to commissions for independent sales representatives has been clear since at least 1989. The HHS-OIG advised against expanding its employee safe harbor to include independent contractors paid on a commission basis. Courts have consistently upheld this stance, with decisions voiding commission-based healthcare contracts due to AKS violations.

The Department of Health and Human Services Office of Inspector General (HHS-OIG) has also established a safe harbor for payments in exchange for "personal services." However, this safe harbor does not cover remuneration like sales commissions, which are determined based on the volume or value of referrals.

The Elimination of Kickbacks in Recovery Act of 2018 (EKRA) applies to labs but offers no exception for commission payments, even to employees. EKRA does not allow payments based on the number of referrals or the volume of tests, further emphasizing the legal consequences for non-compliant commission arrangements.

Key Distinctions: W2 Employees vs. 1099 Independent Contractors

It is crucial to understand the difference between W2 employees and 1099 independent contractors under the law. While W2 employees can be subject to commission arrangements, 1099 independent contractors are treated differently.

Healthcare providers, such as Durable Medical Equipment (DME) suppliers, are allowed to pay commissions to bona fide full-time or part-time W2 employees. This exception exists because suppliers have an obligation to supervise and control their employees, making them liable for their actions.

In contrast, healthcare suppliers are not responsible for supervising and controlling 1099 independent contractors, making them less accountable for their actions. Paying commissions to 1099 independent contractors for generating business is considered “remuneration” and violates state and federal law.

Avoiding Violations

It's crucial to note that if a 1099 independent contractor generates referrals from both commercial and government program patients, paying commissions only for commercial referrals will not circumvent AKS violations. The law recognizes such arrangements as disguising remuneration for government program business.

Conclusion

The legal landscape surrounding commission arrangements in healthcare is complex and unforgiving. The AKS, EKRA, and state anti-kickback statutes all play a role in shaping the rules governing these transactions. Understanding the distinctions between W2 employees and 1099 independent contractors is critical to avoid potential legal pitfalls in healthcare commission arrangements. Staying informed and compliant is the key to navigating this intricate legal maze and avoiding costly consequences.

Sources:

https://medtrade.com/news/general-healthcare/do-not-pay-commissions-to-1099-sales-reps/

https://jeffnewmanlaw.com/in-healthcare-paying-commissions-to-1099-sales-reps-violates-the-anti-kickback-statute-will-labs-and-pharmacies-ever-learn/