DOL Rule Could Complicate How Behavioral Health Providers Use Contractors

The Biden administration could mix up how behavioral health operators address worker classification.

The U.S. Department of Labor (DOL) said in October it would undo Trump-era classification rules that made it easier to classify workers as contractors. This bolstered the gig economy and placed an emphasis on how much control the employer had over the worker — and the worker’s potential for profit or loss.

Instead, the DOL will go back to the precedent of an encompassing view of worker-employer relationships. As a result, companies may have a harder time relying too much on contracted labor.

Worker classification in behavioral health has come up more in recent years. Telehealth and big investments in digital health made contract work much more relevant and available.

“This is something that’s come up a lot — even more recently,” Pete Tedesco, managing partner of Health Enterprise Partners, said of worker classification. “It’s come up in just about every investment we’ve looked at of late across all health care — not just behavioral health.”

Health Enterprise Partners is a health care-focused investment firm based in New York City. It has invested in several behavioral health companies. These include in-home addiction treatment provider Aware Recovery Care, CenterPointe Behavioral Health System, which sold to Acadia Healthcare Co. (Nasdaq: ACHC) in January, and the virtual startup provider NOCD.

The DOL intends to “combat employee misclassification” through a new proposed rule, according to a news release.

“Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” Secretary of Labor Marty Walsh said in the release.

The proposed rule doesn’t add anything new, Larry Perlman, partner with the health care law firm Foley & Lardner LLP, told Behavioral Health Business.

Rather, it equalizes the criteria used to assess the “economic reality” dictating worker classification. They come from the Fair Labor Standards Act and court precedent:

• The degree of control an employer has
• The worker’s potential for profit or loss
• Employer versus worker investment to do the job
• The permanence of the work relationship
• The centrality of worker’s performance to the business
• The workers’ specialization and how they use skills

The new rule re-establishes a historic understanding of law and precedent, Perlman said. He added that the rule also acts as a “canary in the coal mine.”

“You can have some certainty that the DOL is going to be taking a closer look at issues of classification,” Perlman said.

Workers sometimes get referred to by the IRS forms companies use to report their income. For most employees, companies generate a Form W-2. For contractors, it’s one of the Form 1099 filings.

Contractors and behavioral health balance sheets

Employees and contractors present companies with different advantage-disadvantage trade-offs.

In short, contractors are not granted the same level of protection by federal law. These include minimum wage and other benefits. They are also easier to terminate and their work is taxed differently. In turn, contractors are less of a burden on a company’s balance sheet. Employers also see contractors as a flexible source of labor.

Since 1099 employees are not as regulated as employed staff members, industry stakeholders have posed questions about contractors’ care consistency and stability, Tedesco said.

How companies classify employees has come to the forefront over the past year via controversy in the digital health space.

Well-known virtual mental health companies Talkspace Inc. (Nasdaq: TALK) and Cerebral Inc. have faced such scrutiny.

Talkspace, which provides live and asynchronous therapy and psychiatry, enacted policies prompting dozens of employed therapists to become contractors. The move came after the company rolled out patient hour standards for therapists that some considered unrealistic.

The new efficiency standards and shift to contractors are tied to the company’s financial turnaround.

Cerebral has shifted its model several times over the past year. The company switched providers to contractors in late 2021. Executives admitted to growing the company too fast. It did so largely with contracted providers. It also nixed care counseling services, most of which were provided by contractors.

These moves were met with skepticism because each has recently succeeded in raising investment. Talkspace rolled out a $1.4 billion IPO in June 2021 that provided $250 million of additional capital. Cerebral has secured $462 million in funding since launching in 2019.

Administrative roles more easily fall into the employee category, Perlman said. Companies typically have more control over admin roles. They also usually have to invest in all the tools for workers to do the job.

Providers such as psychiatrists are often easier to classify as contractors, Perlman said. They often are in business for themselves and have highly specialized skills, addressing two of the economic reality criteria.

However, Perlman warned that companies must carefully classify clinicians even if contractor status seems to fit.

“What we are seeing now is that it’s not going to be enough to satisfy the control and risk of loss factors,” Perlman said.

A more holistic approach to worker classification would reemphasize skill levels and what employers invest in a worker’s role to do the job such as training and tools.

Perlman highlighted Uber and Lyft as examples. These tech giants give up power over worker schedules. Yet the job depends more on the tech platforms than on drivers’ skills.

Similar structures appear in digital mental health companies Talkspace, Cerebral and BetterHelp.

Impacts on dealmaking

Worker classification is unique in behavioral health. This has created some challenges in investing and M&A.

Ezra Simons, managing partner and co-founder of Physician Growth Partners, said therapists tend to be “nomadic.” Physician Growth Partners is a health care M&A consulting firm.

“All these [therapists] have like four jobs,” Simons told BHB. “[The companies] that are super unique are the ones that have robust, full-time employees.”

Simons added that valuation and buyer interest improve when a mental health company’s providers are employees.

However, some in the mental health space dispute the notion that therapists prefer to be contractors.

Marc Goldberg, the co-founder and CEO of New York City-based Resilience Lab, said nearly all of the therapists his company interacts with are interested in employed roles.

“I’m not sure I buy this free-floating characterization,” Goldberg said. “Being a free agent is nice but, at the end of the day, you want to know that you have some security and some belonging.”

Physician Growth Partners works with provider-owned practices across several health care segments. And this question of employed and contracted providers doesn’t come up in a similar way.

In other segments of health care, investors and buyers would balk if a target company relied on contracted providers. Simons specifically highlighted dermatology and gastroenterology. These are two segments where private equity has already played a major role.

The last three years have seen remarkable increases in private equity dealmaking. Still, it is a relatively new force in the industry.

Misclassification also opens a company to potential investigation and lawsuits by state and federal regulators as well as employees, he added.

Telehealth and the labor market

The U.S. faces a behavioral workforce shortage defined by inequitable provider distribution.

Contract providers using telehealth make for an alluring option, Tedesco said. But this too comes with another trade-off.

“To constantly be able to recruit, find, recruit and retain those W-2 providers … that’s really hard,” he said. “That’s a real differentiator that would increase my interest.”

Using telehealth adds another legal layer to the worker classification question. Companies must also consider the interplay of state and federal regulations. Some states, like California, have rules that go beyond federal standards, Perlman said.

“In the digital health world, by definition, we have a remote workforce,” Perlman said. “That means you have to be aware of what the rules are everywhere in addition to federal rules.”