On November 16, 2022, the Department of Labor announced that it had recovered $1.2 million in back wages from four different home health care agencies on behalf of 599 home healthcare workers. One of the responsible employers, Guardian Angels Care Services, Inc., owed $160,477 in overtime back wages for misclassifying its employees as independent contractors. Earlier in 2022, a federal court in Virginia ordered a medical staffing agency to pay $7.2 million in back wages to over one thousand aides and nurses it misclassified as contractors rather than employees.
There is a growing trend with health care practices and staffing agencies serving the health care field to classify their workers like certified nurse assistants, licensed vocational nurses and registered nurses as independent contractors rather than as employees. Some of the entities are employing Gig-economy practices to allow health care workers to select their shifts on mobile phone-based applications.
It’s easy to see why companies are engaging in this practice. According to Businessweek magazine, companies save an average of 30 percent on hiring an independent contractor versus an employee because of the tax, overtime, insurance and benefits savings. If a worker is properly classified as a contractor rather than an employee, the company does not 1) pay overtime to the employee; 2) provide health insurance and benefits; 3) not providing workers’ compensation insurance coverage; 4) provide retirement or other savings benefits; 5) withhold the worker’s federal and state tax obligation nor pay the company’s portion of those federal and state tax obligations which are now borne 100% by the worker; and 6) pay unemployment taxes so the worker is eligible for unemployment. Moreover, the company working with the contractor cannot be sued by the contractor for discrimination, harassment or retaliation, and the company may not even provide liability insurance for the health care worker. However, a worker misclassified as an independent contractor (rather than an employee) is likely not receiving overtime compensation, is not getting the benefit of the employer paying 1/2 of the employee’s tax obligations on the employee’s behalf, is not being provided health or retirement benefits and is not contributing to their social security fund to fund the employee’s social security benefits. The contractor also cannot receive workers’ compensation benefits for injuries sustained in the course and scope of employment, they are not eligible for unemployment benefits and are not afforded the protections of the civil rights laws that protect employees from unlawful discrimination, harassment and retaliation. And because many African American women are more widely represented in healthcare than other groups, the misclassification disproportionately affects persons of color.
The cost savings of using properly classified independent contractors versus employees is significant, and there are substantial risks and liabilities to the company that misclassifies those workers. The consequences of misclassification are significant as evidenced by the DOL’s enforcement actions mentioned above. The consequences are also significant to the government’s collection of tax revenue. The Government Accountability Office has estimated that the government loses $2.72B annually in unpaid social security, unemployment insurance and income taxes as a result misclassification of contractors by companies.
The test for determining whether the worker is properly classified as a contractor versus an employee is the economic reality test. The economic realities test asks whether the entity functions as the individual’s employer or if the worker is really in business for herself. The following nonexclusive factors are often examined by the Courts in this analysis (1) the employer’s right to control the work; (2) the worker’s opportunity to influence his profit or loss depending on his managerial skill; (3) the worker’s investment in equipment and materials; (4) whether the service requires special skills; and (5) the degree of permanence of the working relationship. Because it is a fact intensive rather than a bright line test, it is difficult for an entity to have much certainty in the classification of its workers; particularly where the workers are involved in core business operations like health care service. Mistakes can be very costly for employers found to have engaged in misclassification.
If you have any questions about how to properly classify workers, you should contact legal counsel.