Is There a Difference Between Using 1099 Independent Contractors and W-2 Agency Nurses to Staff Your Nursing Home?

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At first glance, it may seem that it’s not an issue whether the agency nurses who work at your building are classified as W-2 employees or 1099 independent contractors with their respective agencies. However, on January 9, 2024, the Department of Labor Independent Contractor final ruling was published and has been in effect since March 11, 2024. In place of the rescinded 2021 rule, this final rule adopts a six-factor test focused on the “economic reality” of the relationship between the potential employer and worker. The current rule looks at the “totality of the circumstances” when reviewing the factors. This new ruling focuses on facility operators, rather than the agencies who supply the staff. 

The six-factor test to determine worker classification considers the following:

  • the worker’s opportunity for profit or loss
  • investments by the worker and potential employer
  • the degree of permanence of the relationship
  • the nature and degree of the potential employer’s control over the work
  • the extent to which the work is “integral” to the potential employer’s business
  • the worker’s skill or initiative.

These factors are not exhaustive, and others may be relevant in a given case. 

Why does the proper classification of your workers matter?

The difference between an independent contractor and an employee is critical when staffing your nursing home. Independent contractors are workers who represent an independent business, which means they are not always granted the same oversight, protections, or benefits as regular employees. 

Before the 2021 ruling, the DOL used a similar six-factor test to review a worker’s classification as an independent contractor (1099) or an employee (W-2). The 2021 rule then simplified the ruling to two primary factors which made the process of determining classification easier for businesses. 

A deeper look at the six-factor test:

The worker’s opportunity for profit or loss

Consider whether the worker has opportunities for profit or loss based on managerial skills that impact the worker’s economic success or failure in performing the work. If there is no opportunity for profit or loss, this factor suggests that the individual is an employee.

investments by the worker and potential employer

Consider whether the worker’s investments are capital or entrepreneurial. When the worker is making similar types of investments as the potential employer (even at a small scale), it is more likely that the worker is an independent contractor.

the degree of permanence of the relationship

This factor favors an “employee” classification when the work relationship is long-term, indefinite, or exclusive of work for other employers. This factor favors an “independent contractor” classification when the work relationship is for a defined term, nonexclusive, project-based, or sporadic. 

the nature and degree of the potential employer’s control over the work

Employers should review whether they:

  • set the worker’s schedule, supervise the performance of the work
  • explicitly limit the worker’s ability to work for others, use technological means to supervise the performance of the work, reserve the right to supervise or discipline workers
  • place demands or restrictions on workers that do not allow them to work for others or work when they choose and/or controls economic aspects of the working relationship, including control over prices or rates for services and the marketing of the services or products provided by the worker

The extent to which the work is “integral” to the potential employer’s business

Determining whether work is “integral” to the employer’s business requires an evaluation of whether the function the worker performs is “critical, necessary, or central” to the company’s primary business. This inquiry focuses on the work performed concerning the business of the company rather than whether the workers themselves are integral to the business. If the work is not critical or necessary for the company’s primary business, this factor favors classification as an independent contractor.

The worker’s skill or initiative

Where the worker uses specialized skills for the work and those skills “contribute to the business-like initiative,” this factor will favor classifying as an independent contractor. It is important to note that a specialized skill, which both an independent contractor or an employee may have, alone is not determinative. Where workers rely on the employer for training to perform the work, this factor will favor classification as an employee.

No one factor is determinative and employers should consider the totality of the factors and which classification each favors to determine if a worker is properly classified.

If your facility is perceived as misclassifying an agency worker, you may be liable to the Department of Labor and violating the Fair Labor Standards Act

Common liabilities and lawsuits associated with misclassifications of workers:

You must classify your nursing home staff according to the six-factor test above. Failure to do so may result in legal action. The following situations are the cause of the most common liabilities and lawsuits in worker misclassification

  • Employers failing to pay overtime to employees after 40 hours in a workweek risk potential back pay to employees and penalties.
  • Employers failing to cover employees with Worker’s Compensation insurance risk potential lawsuits to recoup the cost of medical expenses.
  • Employers not withholding state and federal taxes risk paying back taxes and accrued interest.
  • Employers not offering benefits to employees risk tax and Affordable Care Act penalties
  • Employers not keeping accurate time-tracking risk lunch break and payroll violations 

Avoiding liability for employee misclassification for facilities using an independent contractor is an added legal hurdle to consider when reviewing potential vendors, especially with additional state-specific independent contractor tests to pass. Employers of independent contractors should review the impact of the IC Final Rule on their nursing home. Facilities should consider seeking workers with correct classification, conduct a worker’s classification audit, and contact counsel for legal advice. 

ESHYFT is proud to be an employer of W-2 nurses because we firmly believe that W-2 is the right classification of per diem nurses per the DOL Independent Contractor Final Ruling. W-2 employee classification is most beneficial to nurses in the long run. Read more on our W-2 stance here

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