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1099 Sales Reps and Kickbacks

Report Kickbacks and 1099 Sales Reps

Many healthcare companies engage independent sales representatives or marketers to sell their goods and services.   These include pharmaceutical companies, diagnostic laboratories, home health agencies, imaging centers and many others.

Unfortunately, many of these companies violate the Anti-Kickback Statute (AKS) and the False Claims Act through the manner in which they pay these sales people.  In general, sales people can be engaged and paid in one of two ways:  (1) as W-2 employees, or (2) as 1099 independent contractors.  W-2 employees require greater supervision on the part of the employer, whereas independent contractors do not.  Also, employers must withhold taxes and pay payroll taxes for W-2 employees, which is not the case for 1099 independent contractors.

Many companies run afoul of the Anti-Kickback Statute because they engage 1099 sales people and pay them based on an “eat what you kill” formula tied to volume of sales.  Obviously, this encourages the sales people to sell as much as possible, posing a danger of over-utilization to the healthcare system.

The Anti-Kickback Statute makes it illegal for a healthcare company to pay any form of “remuneration” in exchange for referring or arranging for the furnishing of any item or service covered by a federal healthcare program.  See 42 U.S.C. § 1320–7b(b).  This means that paying independent contractors based on the volume of sales they generate is the same as paying a kickback.  See Medical Development Network, Inc. v. Professional Respiratory Care/Home Medical Equip. Service, Inc., 673 So.2d 565 (Fla. 4th DCA 1996) (consulting agreement that called for independent contractor to be paid a percentage of DME sales violated the AKS); Zimmer Inc. v. Nu-Med Medical Inc., 54 F.Supp.2d 850 (N.D. Ind. 1999) (agreement that called for independent contractor to receive a percentage of its medical product sales violated the AKS).

Healthcare companies commonly rely on the “bona fide employee” exception to the Anti-Kickback Statute, which allows companies to pay sales employees on a volume basis.  However, the exception does not extend to 1099 independent contractors who work on a volume basis.  When enacting regulations under the Anti-Kickback Statute, CMS expressly declined to extend the exemption to independent contractors, reasoning:

We are aware of many examples of abusive practices by sales personnel who are paid as independent contractors and who are not under appropriate supervision. We believe that if individuals and entities desire to pay a sales person on the basis of the amount of business they generate and be exempt from civil or criminal prosecution, they should make these salespersons employees where they can and should exert appropriate supervision for the individuals.

54 Fed. Reg. 3088, 3093 (1989).

In short, paying 1099 sales persons on a volume basis constitutes a kickback and poses great harm to the federal healthcare system.  If you know about an illegal kickback scheme, contact one of our lawyers for a free consultation.   You may be eligible to become a whistleblower under the False Claims Act and receive a reward.

West Palm Beach Area: Contact us to report sales rep kickbacks.