Kick Back or Kickback? Using Independent Contractors in This Situation is a Felony

With summer coming, you’re probably ready to kick back, to relax. Vacation rentals invite you to kick back and relax. Meditation music invites you to kick back and relax.

But remove the little space between “kick” and “back,” and that’s not something you want at all.

The federal Anti-Kickback Statute makes it a crime to “knowingly and willfully” offer, pay, solicit, or receive any remuneration to induce referrals of items or services reimbursable by Federal health care programs. 42 U.S.C. § 1320a–7b(b).

That means you cannot retain an independent contractor sales agent to refer customers to buy items or services that are reimbursable by Federal health care programs. Paying commissions or any other thing of value for these referrals is illegal. (There are some limited exceptions.)

Violations are a felony, punishable by up to ten years in prison and massive fines. Violations of the Anti-Kickback Statute are also automatic violations of the False Claims Act, 31 U.S.C. § 3729.

The risk of prosecution is real. One recent decision upheld damages and penalties of more then $100 million against a blood testing lab that had retained independent contractor sales agents to provide referrals.

But employees can provide these referrals, even when independent contractors cannot. The Anti-Kickback Statute says it is not a violation when the remuneration is paid to an employee providing services in the course of employment. 42 U.S.C. § 1320a–7b(b)(3)(B). To avoid violating the Anti-Kickback Statute, these sales agents should be classified as employees, not independent contractors.

There are other safe harbors too. Earlier this year, the Department of Health and Human Services adopted a new rule describing these safe harbors, but they are narrow and all conditions must be met. There is a Personal Services Arrangements Safe Harbor that, under some circumstances, will permit payments to an independent contractor agent. You can read more about the new rule here.

Tread very carefully. The penalties for violating the Anti-Kickback Statute are serious. But if you get it right, maybe you can kick back and relax after all.

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© 2021 Todd Lebowitz, posted on, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.


A Million Dollar Bill? Be Careful Before Relying on the Direct Seller Exemption for Contractor Status

All this cash is available on Amazon for just $13.67!

A Tennessee woman was recently busted for trying to use a $1 million bill to buy a cartful of personal items at a dollar store. The clerk reported the woman to Blount County police, who issued a no trespass order.

That really had no chance of working. Did the woman really think the register at a dollar store had $999,900 or so in change? She did not think that one through too carefully.

Thinking things through is important in all walks of life, including when classifying sales personnel as contractors or employees.

You may have heard that the Internal Revenue Service treats a “direct seller” as an independent contractor, not an employee. But don’t assume all directs sellers are contractors, not employees. Here are two important notes of caution:

First, the definition of “direct seller” is narrow. Here’s what it means, according to IRS Guidance on Direct Sellers:

Direct sellers include any of the following:

  • A person who sells consumer products in the home or a place of business other than a permanent retail establishment,
  • A person who sells consumer products on a deposit or commission basis, or to other persons who will sell the products in the home or place of business,
  • A person who delivers and/or distributes newspapers or shopping guides.

Direct sellers have certain things in common. Their compensation is related to sales rather than to the number of hours worked. Services are performed under a written contract between the seller and the person for whom the seller performs the services.

And the contracts involved provide that sellers are not treated as employees for federal tax purposes.

But wait, there’s more. The Internal Revenue Code also requires, for someone to be a “direct seller,” that:

(B) substantially all the remuneration (whether or not paid in cash) for the performance of the services described in subparagraph (A) is directly related to sales or other output (including the performance of services) rather than to the number of hours worked, and

(C) the services performed by the person are performed pursuant to a written contract between such person and the person for whom the services are performed and such contract provides that the person will not be treated as an employee with respect to such services for Federal tax purposes.

The full statute is here. Further IRS Guidance can be found here.

Second, even if someone is a “direct seller” under the Internal Revenue Code, that doesn’t mean they’re automatically independent contractors under other laws, including federal wage and hour laws state laws.

For example, the FLSA says that “outside sales” professionals are exempt from minimum wage and overtime requirements, but the requirements are different. DOL Fact Sheet #17 explains this exemption.

California’s ABC Test does not apply to “direct salespersons,” but only if those individuals meet the test in California’s unemployment law. Other states have different rules for sellers.

The bottom line when classifying direct sellers is to remember that different tests apply to different laws. Be thorough, and remember that a worker’s classification may be different under federal tax law than under wage and hour law or state law. You’ve got to think this all the way through.

Getting it wrong can be costly, especially for businesses that use lots of independent contractors, and — most important — novelty U.S. currency like million-dollar bills won’t cover those penalties or litigation damages. But, according to the seller of these bills on Amazon, these are the “million dollar bills that get the WOW response.” So there’s that.

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© 2021 Todd Lebowitz, posted on, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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