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Employment Law Alert: $9.3 Million Judgment Highlights High Stakes of Employee Misclassification

Deciding whether to classify a worker as an employee or an independent contractor is a nuanced and complicated decision in an area that is constantly changing. A recent $9.3 million judgment against a Virginia medical staffing company shows just how catastrophic misclassification can be. In Lori Chavez-Deremer v. Medical Staffing of America LLC, Steadfast Medical Staffing kept a registry of nurses it connected with client healthcare facilities. The nurses were classified as independent contractors. The DOL brought an action against Steadfast, which made its way to the U.S. Court of Appeals for the Fourth Circuit. The Fourth Circuit applied the “economic realities” test to determine whether the nurses were employees or independent contractors. This test requires analysis of six factors which are (1) the employer’s degree of control over the worker, (2) the worker’s opportunities for profit or loss, (3) the worker’s investment in equipment/materials, (4) the degree of skill required of the worker, (5) the permanence of the worker’s position, and (6) how integral the worker’s services are to the employer.

By analyzing these factors, the Fourth Circuit determined that the nurses were employees, not independent contractors. Although physicians at client facilities supervised the typical nursing tasks the nurses performed, Steadfast exercised significant control over the nurses by unilaterally determining their pay, assigning nurses to specific locations, and monitoring and enforcing standards of performance at the client facilities. The court also held that the nurses’ services were integral to Steadfast’s business model centered on supplying nurses to healthcare facilities. The fact that the nurses signed an independent contractor agreement after they were hired as employees was of no significance under the “economic realities” test.

As a result, Steadfast had misclassified its employees, and the Fourth Circuit upheld the lower court’s $9.3 million judgment. As this case makes clear, classifying workers is an extremely difficult decision with very expensive consequences for misclassification.

Complicating this matter further, the Department of Labor recently announced it would be departing from the “economic realities” test to a more employer-friendly test in its enforcement actions. The “total activity or situation which controls” test requires employers to consider (1) the extent to which the services rendered are an integral part of the principal’s business, (2) the permanency of the relationship, (3) the amount of the alleged contractor’s investment in facilities and equipment, (4) the nature and degree of control by the principal, (5) the alleged contractor’s opportunities for profit and loss, (6) the amount of initiative, judgment or foresight required in open market competition with others for the success of the claimed independent contractor, and (7) the degree of independent business organization and operation.

We understand this can be a very confusing area for employers. We are here to help. Please do not hesitate to reach out for assistance related to employee classification.