A recent decision by a Texas federal court, in Chapman v. ASUI Healthcare of Texas Inc., underscores the importance for healthcare entities of carefully assessing the nature of their relationship with workers to determine whether they may be classified as independent contractors.

The plaintiffs in Chapman were direct care specialists who worked for ASUI, a home and healthcare provider that operated group residences for cognitively disabled individuals. As direct care specialists, the plaintiffs worked at the residences performing such duties as washing, cooking, cleaning, and interacting with and assisting residents to meet their training goals. The plaintiffs typically worked every other day at the residences from approximately 3:00 p.m. until 9:00 a.m., though their work hours fluctuated due to residents’ field trips, doctors’ appointments, and other circumstances. The plaintiffs also sometimes worked additional shifts when requested to do so by ASUI. Although they stayed overnight at the residences, the plaintiffs were not paid from 10:00 p.m. to 6:00 a.m. while the residents were sleeping. ASUI classified its direct care specialists as independent contractors and paid them the same hourly rate regardless of the number of hours worked.

After having worked at ASUI for a number of years, the plaintiffs brought suit for unpaid wages and overtime under the FLSA, claiming they were misclassified as independent contractors instead of employees. To determine whether the plaintiffs were properly classified as independent contractors, the district court used the traditional five-factor “economic realities” test, assessing: (1) the degree of control exercised by ASUI; (2) the extent of the relative investments of the plaintiffs and ASUI; (3) the degree to which the plaintiffs’ opportunity for profit or loss was determined by ASUI; (4) the skill and initiative required in performing the job; and (5) the permanency of the relationship. The court found that each of these factors reflected that the plaintiffs were employees under the FLSA, not independent contractors.

In reaching its conclusion, the court emphasized that ASUI controlled the number of hours the plaintiffs worked, selected the residences to which they would be assigned, set their schedules, and set their rate of pay. Moreover, because of the hours they worked, the plaintiffs had little opportunity to work for other healthcare providers. Accordingly, ASUI effectively controlled their opportunity for profit. The court further noted that the plaintiffs did not have a specialized skill-set nor were they able to exercise any initiative as direct care specialists, such as building additional business through new referrals, because all referrals came directly from the state. Finally, the court noted that the plaintiffs had worked for ASUI for two and four years respectively, suggesting a permanent employment relationship.

The district court was not swayed by the fact that the plaintiffs’ 1099 Forms designated them as “non-employees” for tax purposes. The court found this designation merely reflected ASUI’s subjective belief that the plaintiffs were independent contractors, which is irrelevant under the FLSA.

Chapman serves as an important reminder to rehabilitation centers, nursing homes, and other healthcare providers that even if the parties initially agree that the worker will be designated an independent contractor, courts and the Department of Labor will generally look beyond that designation and assess the economic realities of the relationship to determine whether the worker is an employee under the FLSA.