How Health Care Systems Can Guard Against Independent Contractor Misclassification ‎Liability for Contract Nurses

We can learn quite a lot from a legal challenge faced by other business organizations in the same industry. In September, we noticed that a large health care system operating in seven states west of the Mississippi had been sued in a class action for allegedly misclassifying registered nurses (RNs) as independent contractors instead of employees. Independent contractor misclassification issues have been front page news for several years in an array of other industries – most notably ride sharing – but this 1099 business model is prevalent in hundreds of other industries, including health care. How many health care systems utilize independent contractors to provide key health care services?  Many, because this business model makes business and economic sense in many instances. But it also runs the risk of very substantial misclassification liability if independent contractor relationships are not structured, documented, and implemented in a manner than enhances compliance with applicable laws and minimizes this type of legal exposure.

The proposed class action was filed in a federal district court in Washington state by an RN who alleges that the health care system that engaged him as an independent contractor had directed and controlled him and other similarly situated contract RNs, whom he alleges perform duties similar to the RNs working for the system as W-2 employees. Ward v. Providence St. Joseph Health, No 2-24-cv-01528 (W.D. Wash. Sept. 24, 2024).

The plaintiff nurse claims that the health care system failed to pay him overtime compensation for hours worked over 40 in a workweek in violation of the federal Fair Labor Standards Act and Oregon state law. According to the complaint, the health care system controls and directs all aspects of the work by RNs that have been classified as ICs; requires adherence to company policies and procedures; and maintains control, oversight and direction of the contract RNs, including their hiring, firing, and discipline.

It is far too early to assess whether the health care system structured, documented, and implemented its independent contractor relationships with the contract RNs in a manner that will survive this legal challenge or will ultimately result in a settlement that is favorable to the health care system. But there are steps that health care systems can take to minimize their exposure to these types of lawsuits and place themselves in a commanding position to successfully defend against legal challenges to their independent contractor relationships.

First, it is critical to assess whether the role being classified on a 1099 basis can likely be legally classified in that manner. Some functions are simply not susceptible to being classified legally as independent contractors, although most are, if all of the i’s are dotted and t’s are crossed. Once determined that a role can likely be legally structured, documented, and implemented as an independent contractor as a general matter, there are a variety of federal and state tests for independent contractor status that may be applicable. In some situations, the position may be classified properly under some state laws but not under other state laws.

The documentation of the independent contractor relationship is key. Under most state and federal tests, there are as many as three to four dozen facts that may relate to the factors taken into account by the courts and government agencies. A useful agreement that includes two dozen of so facts favoring independent contractor status, and eliminates as many facts as feasible that favor employee status, can tilt the scales heavily in favor of independent contractor status. Many businesses including those in the health care industry have accomplished this approach to enhancing their level of compliance by using type of a process such as IC Diagnostics (TM).  This type of process focuses on structuring and documenting independent contractor relationships in a manner that maximizes compliance with applicable laws – and does so in a customized and sustainable manner consistent with the company’s business model.

In February 2022, an article published in Law360 Employment Authority discussed how the nation is facing a nurse shortage, and online staffing platforms are seeking to meet that need with opportunities for nurses to provide their services as independent contractors. Regarding the specter of misclassification claims and the need for robust agreements that set forth details of the relationship between the business and the independent contractor, the author of this blog post was quoted as follows: “You can have nurses who are independent contractors legitimately, and you can have nurses who are not legitimately independent contractors, who are misclassified. You shoot yourself in the foot if you don’t have an independent contractor agreement that is state-of-the-art.”

Where a health care system uses both employees and independent contractors to perform similar roles, meaningful distinctions need to be implemented so that it is abundantly clear that the differences support the classification of some workers as independent contractors and others as employees.

Finally, it is not enough to have solid documentation supporting an independent contractor relationship; it must be implemented effectively as well. Communications with independent contractors need to recognize and reflect that the independent contractors are their own bosses. Health care systems need to treat them that way – and not in the same way management communicates with its employees.

Communicating in “IC-speak” does not come naturally to many, so management training is important. So, too, is eliminating “employee-centric” terms from documents used to communicate with independent contractors and patients that use them.  Unwittingly referencing independent contractors RNs as “our nurses” or even “our contract nurses” does not indicate they are independent contractors and can be misconstrued as suggesting just the opposite. Giving such documents an “IC bath” is a lot less challenging than it seems, but can and should be done.  If not, a health care system’s own words will be used against it in a lawsuit.

Indeed, that was the case in the class action that has been the focus of this blog post, where the complaint references a passage in the health care system’s website advertising that all its caregivers are employees: “Together, our 122,000 caregivers (all employees) serve in 51 hospitals, 1,000 clinics and a comprehensive range of health and social services across Alaska, California, Montana, New Mexico, Oregon, Texas and Washington.”

By Richard Reibstein.

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