Nursing Home Operators Targeted in Increasing Number of Litigation Tied to 1099 Misclassification

Litigation tied to the use of independent contractors in the nursing home space has increased ever since the Department of Labor (DOL) in January cracked down on the criteria used to classify workers in the sector. Operators are being targeted, rather than the agencies supplying such staff, and the changes are bound to affect recruitment.

Cases against operators in Massachusetts, Kansas, and Pennsylvania deal with back wages, and certified nurse aides (CNAs) classified as 1099 workers, according to reports from Skilled Nursing News, MedCity News and Staffing Industry Analysts (SIA). The Kansas case, for one, was brought to court by two CNAs against nursing home operator Medicalodges for the company’s alleged failure to fully compensate the CNAs for hours worked, including overtime, because they were misclassified as independent contractors.

The suit seeks class action status, SIA reported. Medicalodges, which operates facilities in Missouri and Oklahoma as well as Kansas, used ShiftKey for its 1099 workers, although the agency isn’t named as a defendant in the case.

It’s a similar situation to what happened to Comprehensive Healthcare Management Services (CHMS) in Pennsylvania. The case also concerned overtime pay and Clipboard, which Comprehensive used to contract 1099 workers, wasn’t named in that lawsuit either.

IntelyCare CEO John Shagoury believes the DOL is taking definitive steps to guarantee gig health care workers have the proper employer support to ensure patient safety, now that the final rule is in effect. IntelyCare provides a health care staffing management platform but follows the W2 model.

However, an unintended fall out from DOL’s move is likely to impact recruitment and retention, according to Eric Su, labor and employment group partner at law firm Crowell & Moring.

With licensed practical nurses (LPNs) and registered nurses (RNs) being in such high demand – and short supply – some operators have been offering enticing pay packages as part of an independent contractor agreement to attract them, said Su.

“They could deduct a lot of their expenses and be in a more favorable tax position than their colleagues who are W2 employees,” Su said of LPNs and RNs that opt for this route.

Previous Fair Labor Standards Act (FLSA) guidance during the pandemic didn’t really address the nuances of health care and its staff, Shagoury added. It’s become more clear now that any worker needing to be scheduled for a shift, who is supervised or has to be trained, will be considered a W2 worker, he said.

Moreover, the definition of an independent contractor adopted in 2021 was vague. The  classification was open to many available interpretations. This was the main challenge for courts looking to file misclassification suits. Now, the level of clarity has been improved.

In the end, a consideration in terms of whether a lawsuit against an operator has a chance to succeed will depend on the timing of the alleged failures, Su said. For existing litigation, the worker could attempt to apply the final rule retroactively while the defense for the nursing home could successfully make the argument that these rules didn’t exist prior to January, and therefore shouldn’t be enforced for any cases involving 1099 appointments prior to 2024.

Shagoury believes the DOL will continue to tailor classification for each industry in order to help protect workers, as nuances of being an independent contractor across multiple industries come to the forefront.

“It’s interesting that the DOL also has been filing more complaints … the courts seem to be understanding the Department of Labor’s more clearly defined guidance,” said Shagoury. “I think the momentum is building. The momentum [of more stringent classification] is building across 1099 and multiple industries as well.”

Su echoed these sentiments, saying the DOL rule underlies a growing trend among many blue states as well as the political will of the Biden administration to tighten the classification of workers as independent contractors.

More suits as DOL adds clarity

The rule, which became effective on March 11, reverts back to the historical norm when it comes to classifying workers. It restores a multifactor analysis used by courts for decades, ensuring that all relevant factors are analyzed when it comes to determining whether a worker is an employee or independent contractor. These factors delve into a worker’s relationship with an employer, including any opportunity for profit or loss a worker might have.

Other factors the rule takes into account consider the financial stake and nature of any resources a worker has invested in the work. These include, the degree of permanence of the work relationship; the degree of control an employer has over the person’s work; whether the work the person does is essential to the employer’s business; and, consideration of the worker’s skill and initiative.

“The interesting thing is that the lawsuits are not going after the agencies at this point. They’re going after the facilities,” said Shagoury. “Even though the facility is bringing them on as temporary workers, or even shift by shift, the facility is the one that is theoretically responsible for paying them overtime, and treating them as an employee.”

Staffing agencies aren’t getting hit with litigation because they position themselves as matchmakers, or a marketplace, he said. There’s little oversight or control these agencies have on independent contractors. The worker is classified as 1099, and what that’s saying is that they don’t work for the staffing agency, said Shagoury.

“[Courts] go after the facility that they worked at, that’s where the worker goes, and that’s where the suits are being filed,” said Shagoury.

To this point, operators that argue in favor of their choice to keep independent contractors take a “very, very murky and probably risky position,” added Su.

Backlash and aligned goals

As more lawsuits pop up concerning worker misclassification, and facilities are found guilty in these cases, operators will use 1099 workers less, or be more selective with the types of employees hired as independent contractors.

“Our industry is a very tight knit industry in that facilities all talk to each other. They are starting to realize that if they’re going to use temporary help, they need to use agencies that provide W2 workers,” said Shagoury.

He expects operators will check more often on whether an agency is aligned with the DOL rule, otherwise they are putting themselves at risk.

IntelyCare, along with other W2 staffing agencies in the nursing home space, formed a coalition to advocate for ensuring that the majority of temporary staff are classified as W2 employees. 

Shagoury sees the DOL’s rule as confirmation that federal officials agree with this sentiment – and makes their position stronger.

“They acknowledged numerous points that we raised, including things like the level of training, the oversight, the support needed for nursing staff, to uphold the standards of care that these facilities are required to provide,” said Shagoury. “The fact that they took the time to really understand it, and then articulate it was really beneficial and rewarding for us to see.”

Ultimately, the DOL’s move will focus on not treating 1099 workers as one big block of staff. The changes aim to recognize that the differences in worker roles matter, especially in health care, when it comes to worker classification.