The Biden administration is signaling a major shift in how behavioral health companies classify their workforce, with potential consequences for operations, investments, and care delivery. In October, the U.S. Department of Labor (DOL) announced it would reverse Trump-era rules that made it easier to classify workers as independent contractors. Those prior rules focused largely on employer control over workers and the workers’ potential for profit or loss. The new direction returns to a broader, more holistic approach to evaluating worker-employer relationships, which could complicate behavioral health worker classification for organizations that rely heavily on contracted labor.
Why Worker Classification Matters in Behavioral Health
Behavioral health worker classification has become an increasingly important topic with the rise of telehealth and digital health investments. Contract work is now more prevalent in the sector, allowing companies to scale quickly while maintaining operational flexibility. Pete Tedesco, managing partner of Health Enterprise Partners, highlighted that classification issues are now a key consideration in healthcare investments, including behavioral health. Health Enterprise Partners has invested in companies such as in-home addiction provider Aware Recovery Care, CenterPointe Behavioral Health System, and virtual startup NOCD—all of which rely on a mix of employees and contractors.
DOL’s Proposed Rule: Returning to “Economic Reality”
The DOL’s proposed rule aims to combat employee misclassification, which Secretary of Labor Marty Walsh says deprives workers of federal labor protections like minimum wage and overtime. According to Larry Perlman, partner at Foley & Lardner LLP, the rule restores long-standing criteria used to assess behavioral health worker classification, grounded in the Fair Labor Standards Act and court precedent. Key factors include:
- Employer control over the worker
- Worker’s potential for profit or loss
- Employer versus worker investment in the job
- Permanence of the work relationship
- Centrality of the worker’s role to the business
- Worker specialization and skills
Perlman calls the rule both a return to historic legal precedent and a warning that the DOL will scrutinize behavioral health worker classification more closely.
Contractors vs. Employees: Balancing Costs and Care
Behavioral health worker classification impacts how companies structure their workforce. Contractors offer flexibility, lower financial burden, and less regulatory oversight. However, they can also introduce concerns about care consistency and workforce stability. Tedesco notes that while telehealth enables the use of contract providers, recruiting and retaining full-time W-2 employees remains a major differentiator for companies seeking long-term success.
High-profile digital mental health companies, such as Talkspace and Cerebral, have faced scrutiny over contractor-heavy models. Talkspace shifted therapists to contractor status amid new patient-hour standards, while Cerebral relied on contracted providers during rapid expansion. Despite these moves, both companies continued to secure significant investment, demonstrating the trade-offs between workforce flexibility and regulatory risk.
The Nuances of Classification by Role
Not all roles fit neatly into a contractor classification. Administrative roles, which require more employer oversight and provision of tools, are easier to classify as employees. Specialized providers, such as psychiatrists and psychologists, often operate independently, making them more likely to qualify as contractors. Still, Perlman warns that behavioral health worker classification cannot rely solely on control and risk-of-loss factors; companies must consider skill levels, employer investment in training, and support resources.
Implications for Investment and M&A
Worker classification plays a major role in investment and M&A activity within behavioral health. Ezra Simons, co-founder of Physician Growth Partners, notes that therapists tend to be “nomadic,” holding multiple jobs simultaneously. Companies with full-time employed providers tend to see higher valuations and stronger buyer interest.
Some industry experts dispute the idea that therapists prefer contractor roles. Marc Goldberg, CEO of Resilience Lab, says most therapists seek stability and a sense of belonging, which comes from employment. Misclassification not only raises regulatory risks but can also affect investor confidence, particularly in a sector increasingly shaped by private equity.
Telehealth Adds Another Layer
Telehealth has made contractor models more appealing by enabling recruitment across states and addressing behavioral health workforce shortages. However, it also adds regulatory complexity. Employers must navigate federal labor laws alongside state-specific rules, some of which exceed federal standards, such as California’s.
“To constantly recruit, find, and retain W-2 providers … that’s really hard,” Tedesco said. “A stable, employed workforce is a real differentiator in behavioral health.” Companies must weigh financial efficiency against compliance and care quality when determining behavioral health worker classification strategies.
Looking Ahead
The Biden administration’s shift in worker classification policy underscores the need for behavioral health companies to adopt a careful, holistic approach. Organizations must consider financial efficiency, quality of care, regulatory compliance, and workforce satisfaction when determining behavioral health worker classification. Proper classification strategies could influence recruitment, retention, telehealth deployment, investment opportunities, and long-term operational stability in the industry.
Behavioral health worker classification is no longer a simple administrative decision—it is central to company strategy, regulatory compliance, and the quality of patient care. As the DOL implements the new rule, providers and investors alike will need to navigate this evolving landscape with care, ensuring that contractors and employees are correctly classified to support sustainable growth and high-quality behavioral health services.
