Identifying and eradicating the misclassification of employees as independent contractors continues to be a key objective for the Obama Administration.  The U.S. Department of Labor (“DOL”) and the IRS have intensified their enforcement efforts regarding worker misclassification, and audits have increased substantially, particularly within the home health industry.  In September 2011, the DOL and IRS announced an effort to coordinate with each other and with several states by, pursuant to a Memorandum of Understanding, permitting the sharing of information to combat misclassification.

Legal Tests for Independent Contractor Status

Liability for misclassification can arise under different laws, including labor, employment, and tax, and the standards for assessing independent contractor status vary.  Workers classified by one agency or court as employees may be classified as independent contractors by another agency or court.  Most courts and regulatory agencies adhere to the general rule that an individual is an employee if the company has the right to control or direct the manner and method of accomplishing a desired result.  Thus, when a company retains the right to tell a worker how to perform the details of the job, including the procedures she should follow, a determination of employee status is likely.   Although the determination of employment status is a case-by-case resolution based on the totality of the circumstances, most courts consider the following  factors to determine whether a worker is an independent contractor or an employee:

  • The permanency of the relationship between the parties;
  • The degree of skill required for the rendering of the services;
  • The extent of the worker’s investment in equipment or materials for the task;
  • The worker’s opportunity for profit or loss, depending on his skill;
  • The degree of the company’s right to control the manner in which the work is performed;
  • Whether the service rendered is an integral part of the company’s business; and
  • Any other relevant factors.

“Other relevant factors” include pertinent facts that may or may not indicate control over the worker by the company, including the location of the work, whether the worker is free to set his or her own work hours; whether the worker is free to come and go as he/she pleases; the method of payment; whether the worker has his/her own business and is free to work for competitors and take other jobs; and whether he/she has signed a contract.  No one factor is determinative.

Increased Focus on the Home Health Care Industry

Courts have taken a harsh stance regarding the classification of employees as independent contractors, and in the home health industry specifically, the vast majority of courts have concluded that under the Fair Labor Standards Act (FLSA), private duty nurses should be classified as employees.  A recent example is Lemaster v. Alternative Healthcare Solutions, Inc.  In Lemaster, home health LPNs sued a staffing company that recruits nurses (as independent contractors) and refers them to home health agencies and nursing homes to provide health care services to their patients. The LPNs also sued the company’s owners personally.  The evidence disclosed that the company interviewed, hired, and set the nurses wages, as well as assigned the nurses their work, collected time sheets, and maintained personnel files.  Based on these facts, the court determined that no factor favored independent contractor status, and several factors strongly favored employee status.  Accordingly, the court concluded that the nurses were employees under the FLSA, and the staffing companyand its owners were jointly and severally liable to the LPNs for damages.

Other courts have analyzed home health care nurses and similarly concluded that private duty nurses, including LPNs and RNs, were properly classified as employees, resulting in large  wage and hour damage awards to the plaintiffs:

  • Crouch v. Guardian Angel Nursing, Inc., (Nov. 4, 2009) (determining that LPNs were employees of staffing agency because they relied on the company for job placements and scheduling, had no significant investment in equipment or materials, and had their daily activities monitored by the company for quality assurance; court entered judgment for $2.2 million for overtime back pay and liquidated damages);
  • Gayle v. Harry’s Nurses Registry, Inc., (Mar. 9, 2009) (concluding that LPNs and RNs were employees because they were integral to the company’s business of referring temporary healthcare personnel, and because the company exercised control over the nurses, retained the power to terminate them unilaterally, and set their rate of pay);
  • Wilson v. Guardian Angel Nursing, Inc., (July 31, 2008) (determining that LPNs were employees because, among other things, the company maintained a significant degree of control over the LPNs and thus controlled the manner and means in which they performed their job duties; court entered judgment for $3.2 million for overtime back pay and liquidated damages)

While no one test is determinative, and each factor should be evaluated as it relates to the relationship with the workers, regulatory agencies and courts are more closely monitoring independent contractor relationships.  All prudent companies with large numbers of independent contractors would be wise to conduct an internal legal review to ensure proper compliance with federal and state laws before the federal or state government conducts an audit or a group of employees files a class action lawsuit.  As the old adages goes:  “an ounce of prevention is worth a pound of cure.”