Part 2 of 5 of our Practice Compliance Series: Licensing Regulations, Mandatory Supervision, and Employment Law
In the first installment of our five-part Practice Compliance Series, we explored the IRS rules, behavioral control tests, and severe financial penalties associated with misclassifying workers in private practice.
While federal tax classification rules apply to every industry, mental health group practices face an additional layer of administrative compliance: state health licensing boards.
In Maryland, mental health job boards frequently feature listings advertising positions for Licensed Master Social Workers (LMSWs) and Licensed Graduate Professional Counselors (LGPCs) as 1099 independent contractors. Additionally, group practices often bring on clinical supervisors as 1099 contractors to oversee those associate clinicians.
Despite how normalized this practice has become in private practice culture, it represents a direct conflict with both federal tax law and Maryland health licensing statutes.
When you examine the Code of Maryland Regulations (COMAR) alongside IRS behavioral control standards, the legal standard is unmistakable: provisionally licensed clinicians and the supervisors managing them cannot legally function as 1099 independent contractors.
The Legal Problem with 1099 LMSWs and LGPCs
The prohibition against hiring associate-level clinicians on 1099 agreements rests on two distinct legal foundations: statutory authority and operational control.
1. Statutory Prohibition of Independent Practice
To qualify as an independent contractor, an individual must be legally permitted to engage in an independent trade or business. An independent contractor operates an enterprise that sells its trade directly to client businesses or the public.
Under Maryland law, provisionally licensed clinicians are statutorily forbidden from independent practice.
For Social Workers (COMAR 10.42.02): An LMSW is legally licensed to practice social work only under the direct supervision of an authorized LCSW-C or clinical supervisor. They are barred from independent clinical practice.
For Professional Counselors (COMAR 10.58.12): An LGPC must practice under a board-approved clinical supervisor (LCPC). They cannot legally open an independent practice, market unsupervised psychotherapy, or operate an independent clinical business.
Because LMSWs and LGPCs lack the statutory authority to engage in independent practice, they cannot form a lawful, independent business entity to contract out clinical therapy services. Attempting to classify them as an independent business flies directly in the face of Maryland licensing law.
2. The IRS Behavioral Control Trap
The IRS establishes that if an organization directs, evaluates, and controls how a worker performs their job, that worker is an employee.
Maryland licensing regulations mandate that clinical supervisors maintain active, continuous oversight over provisionally licensed associates. The supervisor must review session notes, inspect treatment plans, direct clinical interventions during crises, and monitor legal compliance.
A practice owner cannot have it both ways. You cannot tell the IRS that a clinician is entirely autonomous, self-directed, and free from administrative control, while simultaneously telling the Maryland Board of Social Work or the Board of Professional Counselors that you are actively supervising and directing their clinical work. The mandatory supervisory requirements imposed by Maryland regulations automatically trigger W-2 employment status under IRS common law rules.
Why Clinical Supervisors Must Also Be W-2 Employees
If provisionally licensed clinicians must be W-2 employees, what about the clinical supervisors brought in to supervise them?
Many practice owners attempt to classify clinical supervisors as 1099 contractors, treating them like external consultants. Within an operating group practice, this setup rarely survives regulatory scrutiny.
Supervisors running internal oversight must be W-2 employees for several key reasons:
Vicarious Liability and Practice Agency
Under Maryland legal doctrines of vicarious liability and respondeat superior, an employer is legally liable for the negligent actions of its staff. When a clinical supervisor approves a diagnostic formulation, signs a treatment plan, or intervenes in a suicidal crisis, that supervisor is exercising direct authority on behalf of the group practice.
A business cannot outsource core clinical liability to an independent third party while employing the supervisee who delivers the care. The supervisor functions as an agent and manager of the business, which establishes an employment relationship.
Managerial Authority and Policy Enforcement
An internal clinical supervisor does not simply offer academic advice. They enforce clinic documentation standards, review billing records, evaluate associate performance, and ensure HIPAA compliance. Managerial oversight and employee evaluation are fundamental indicators of an employer-employee relationship under federal guidelines.
Administrative Integration
Supervisors require unfettered access to internal electronic health records (EHR), practice policies, and quality assurance audits. Treating this supervisory tier as an independent contractor creates administrative friction and weakens the practice's supervisory chain of command.
The Reality of Associate Exploitation
Beyond the legal and tax risks, classifying LMSWs and LGPCs as 1099 contractors creates substantial ethical concerns.
Associate-level clinicians are in the earliest stages of their professional careers, often balancing significant graduate school debt while working toward independent licensure. When an owner misclassifies an associate as a 1099 contractor, they shift the entire burden of employer payroll taxes onto the clinician.
A misclassified associate pays the full 15.3% Self-Employment Tax on their earnings, receives zero paid sick leave protections under the Maryland Healthy Working Families Act, and lacks access to workers' compensation coverage or unemployment protections. Shifting administrative overhead onto emerging clinicians while maintaining full managerial control over their licenses undermines the integrity of our profession.
Structuring a Compliant Practice
If your clinical model involves training provisionally licensed associates and cultivating early-career clinicians, you must embrace the W-2 employment model:
Hire your LMSWs and LGPCs as W-2 employees.
Hire your clinical supervisors as W-2 employees (or perform the supervision yourself as the practice owner).
Build payroll taxes, workers' compensation insurance, and supervision time into your fee-split structures.
Transitioning to a W-2 model may feel administratively daunting, but it provides the legal foundation required to build a sustainable, ethical, and audit-proof group practice.
Research References:
Code of Maryland Regulations. (2024). COMAR 10.42.02: Board of Social Work Examiners, General Regulations and Supervision Requirements. Division of State Documents.
Code of Maryland Regulations. (2024). COMAR 10.58.12: Board of Professional Counselors and Therapists, Requirements for Supervised Clinical Experience. Division of State Documents.
Internal Revenue Service. (2024). Independent contractor (self-employed) or employee? U.S. Department of the Treasury. Publication 15-A (Employer's Supplemental Tax Guide).
Maryland Department of Labor. (2024). Worker misclassification and the Maryland Workplace Fraud Act. Division of Labor and Industry. State of Maryland.
