Medical Residents Ruled Employees

January 12, 2011

Medical residents are considered employees for payroll tax purposes, and therefore do not qualify for a student exemption, the U.S. Supreme Court ruled Tuesday.

The case, Mayo Foundation v. United States (09-837), pitted the Mayo Foundation and the University of Minnesota against the U.S. Treasury Department, which issued regulations in 2004 that declared residents to be employees rather than students during their training. The department’s rules concluded that residents, who spend between 50 and 80 hours a week caring for patients, are appropriately classified as employees. Consequently, they are subject to taxes for Social Security and Medicare, which both residents and teaching hospitals must pay.

The ruling addresses courtroom battles that stretch back to the 1990s, and the financial implications are significant. While the university has been paying the taxes in accordance with Treasury rules since 2005, a ruling in Mayo’s favor would have netted $24 million in estimated refunds for residents, officials said. Applied more broadly to other medical schools and universities, the government estimated an adverse decision would result in more than $1 billion in reimbursements.

“We are disappointed that the Supreme Court decided to uphold the Treasury Department's exclusion of medical residents from the scope of the Student Exemption enacted by Congress,” Theodore B. Olson, counsel for the university and the Mayo Clinic, said in a statement Tuesday. “As the Court itself acknowledged, medical residents are engaged in a formal and structured educational program that is an indispensable component of their medical training. The Treasury Department's regulation overlooks the important educational pursuits in which residents are engaged."

The court noted that Congress had not directly addressed whether residents qualified as students, but added that it was “perfectly sensible” for the Treasury Department to focus on the hours students spend working as a measure of whether they are employees.

Citing wording from federal regulations, the Court said, "The Department certainly did not act irrationally in concluding that these doctors -- ‘who work long hours, serve as highly skilled professionals, and typically share some or all of the terms of employment of career employees' -- are the kind of workers Congress intended to both contribute to and benefit from the Social Security System."

Tuesday’s ruling followed a host of previous lower court decisions, many of which sided with universities. But a 2009 ruling from the U.S. Court of Appeals for the Eighth Circuit sided with the Treasury Department, and that judgment was upheld by the high court. The opinion, delivered by Chief Justice John Roberts, was joined by all members, excluding Associate Justice Elena Kagan, who recused herself due to her work as solicitor general.

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