1099 vs. W2: Guide to Employee Misclassification in Healthcare
Healthcare facilities and their resource managers face a number of staffing challenges on any given day — from confirming that shifts are staffed at the right ratios to ensuring that the right type of staff are in place to address the dynamic needs of patients or facility residents.
One way that facilities have been able to meet those needs in an efficient and flexible manner has been to utilize a staffing strategy that includes full-time (W2) and contract (1099) staff — with contractors offering the benefit of short-term support without long-term commitment. However, the legal significance of 1099 (vs. W2) workers is an important factor to consider as it can lead to increased exposure under federal and state “employee misclassification” laws.
Here’s an overview explaining the misclassification of employees as independent contractors, the different tests used to measure it, and how this can impact facilities in the healthcare setting. We’ll also address ways that facilities can still achieve the flexible workforce they need while minimizing the risks and penalties associated with misclassification.
What Is Employee Misclassification? Definition and Tests
Employee misclassification occurs when a company hires a worker as an independent contractor, but the worker behaves — and is treated — more like an employee. Companies might hire an independent contractor instead of a worker classified as an employee based on the apparent cost savings, but they can also assume significant legal and financial risk if they end up misclassifying the worker.
This is because employees have certain rights under federal employment laws as well as state laws. For example, under the Fair Labor Standards Act (FLSA), many employees are entitled to minimum wage protections, overtime pay, and basic recordkeeping per pay period. Many of these rights, and employer responsibilities (which also include payment of Social Security and Medicare taxes), don’t apply to workers who are independent contractors, making them an appealing staffing option for industries that need a flexible workforce.
Whether a worker has been improperly classified as an independent contractor instead of an employee — and who makes that determination — can vary depending on the nature of the misclassification and its impact. Here are a few examples of governmental entities that can make a determination of misclassification and the various tests they use.
IRS 1099 vs. W2 Test
The IRS is concerned about misclassification because employers are generally required to withhold and pay income taxes, Social Security, and Medicare for employees, but not for independent contractors. When a violation is identified, the IRS penalties for misclassification of independent contractors would include, among other things, efforts to recover back taxes owed by an employer.
To determine the appropriate worker classification, the IRS employee misclassification test looks to common law rules involving the degree of control and independence of the worker. Specifically, it looks at the level of control that an employer has in what the worker does (behavioral), the business aspects of the worker’s job (financial), and the stated relationship between the employer and the worker (type of relationship).
U.S. Department of Labor 1099 vs. W2 Test
The U.S. Department of Labor (DOL), through its Wage and Hour Division, conducts employee misclassification investigations with a focus on whether employers are avoiding labor laws — and skirting employee rights — by designating workers as contractors instead of employees. The DOL can initiate a workplace audit of a business for any reason, but they’re often triggered by a worker complaint or by the fact that the business’s geographic region or industry has a history of 1099 misclassification issues.
The DOL has traditionally used a “totality of the circumstances” test to determine whether a worker has been misclassified, with the ultimate focus on the work relationship. Is the worker economically dependent on the employer for work (employee) or in business for themselves (independent contractor)? Under the totality of the circumstances test, the DOL considers multiple factors, such as the:
- Degree of control that the employer has over the worker.
- Opportunity for profit or loss.
- Worker’s level of investment in equipment and facilities.
- Permanency of the relationship.
- Level of skill and initiative of the worker.
- Degree to which the work is an integral part of the employer’s business.
Federal Courts’ 1099 vs. W2 Test
The court system can also be involved in determining whether an employee misclassification exists, but only on the filing of a complaint by a worker alleging damages or when a governmental agency seeks to enforce the law by filing suit.
Based on Supreme Court precedent, courts generally use the “element of control [as] the principal guidepost” in determining whether an employee has been improperly classified as an independent contractor. With this as the guiding principle, courts ultimately rely on multi-factor, fact-based tests like the one used by the DOL.
State 1099 vs. W2 Tests
States also have laws against employee misclassification. While there are exceptions and variations, many jurisdictions rely on the “ABC Test,” under which a worker is presumed to be an employee unless each of the following three criteria are met:
- They are free from the hiring entity’s control and direction while performing their service.
- They are performing a service that’s outside the hiring entity’s usual course of business.
- They are engaged in an independently established trade or business that involves services that are similar in nature to those they are performing for the hiring entity.
This is a stricter test that leans more toward an employee designation. There are states that use the ABC Test, but with exceptions for certain industries. California, for example, uses the stricter ABC Test for most industries, but then uses a less stringent test for certain professional occupations like attorneys or architects, or for construction subcontractors.
Other states have targeted misclassification specifically in the healthcare field. For example, in 2022, Illinois updated its laws requiring nursing care facilities to deem any nurse contractors as employees when operating within their facilities. In updating its laws, the state recognized that nursing professionals in a facility require supervision in order to provide safe and effective care and to comply with their licensing requirements, a level of control that isn’t consistent with an independent contractor status.
State Employee Misclassification Laws
The table below provides a list of key 1099 vs. W2 laws in select states, with links to our state-specific misclassification guides for a more in-depth discussion.
What Does Employee Misclassification Look Like in Healthcare?
At first glance, the healthcare setting is an ideal environment to bring in temporary contractors, especially when a facility needs to surge staff to deal with a sudden influx of patients. With all the hazards of short staffing, having a standby pool of healthcare workers is essential.
However, 1099 vs. W2 misclassification carries weightier risks in the healthcare setting. Consider what a true independent contractor status — where a worker has full autonomy to perform their services without any direction or control — means in a healthcare setting. Here are just a few examples:
- Nursing professionals who aren’t bound by a set shift or break schedule can lead to patient abandonment, especially when no nursing handoff is performed.
- Nursing professionals who aren’t required to abide by the control imposed by a facility’s policies or standards of care could perform their services in an inconsistent, and perhaps negligent, manner.
- LPNs or CNAs who must operate under the supervision of an RN could instead be operating autonomously in violation of their licensing requirements and authorized scope of practice.
To better illustrate this distinction, when you hire an independent contractor to paint your facility, you don’t tell them which brushes to use. However, when you hire a nurse contractor to care for your patients, you do want to direct how they care for their patients to ensure that they abide by facility policies and are adequately reporting to a supervisory chain.
What Are Some Employee Misclassification Penalties?
There is significant risk of legal and financial exposure associated with 1099 vs. W2 misclassification. When a patient, or even a staff member, incurs an injury as a result of workers operating without needed oversight in a healthcare facility (to preserve an independent contractor status), a plaintiff’s attorney could hone in on the lack of supervisory control as evidence to show a breach of the basic duty of care.
Facilities can also face legal exposure resulting from increased interest in misclassification by governmental agencies. For example, the DOL has increased its misclassification enforcement efforts in the healthcare space and has noted a wide range of violations by staffing agencies and facilities. Often these employee misclassification lawsuits have resulted in costly multimillion dollar settlements covering back wages, unpaid employment taxes, overtime, and other employee benefits that should have been provided. Some states, like Massachusetts, impose treble (triple) damages for any lost wages or benefits in employment misclassification cases.
What is the penalty for misclassification of employees when the violation is ongoing or willful? Some states will increase penalties where a pattern of misclassification exists. In California, for example, employers that engage in a pattern or practice of misclassification face increased penalties of up to $25,000 per violation. Other states like Missouri can impose criminal penalties (including up to six months in jail per violation) where it finds that a misclassification defrauded the state, particularly with regard to unpaid unemployment taxes or workers’ compensation.
Penalties like these present healthcare facilities that use 1099 nursing professionals with a catch-22 dilemma — supervise and increase the risk of penalties for a 1099 misclassification, or don’t supervise and risk the danger of accidents, injuries, and possible lawsuits for negligence or malpractice.
Ways to Reduce the Risk of Employee Misclassification
Despite the apparent financial incentives to hire independent contractors at your healthcare facility, the risks associated with misclassifying W2 vs. 1099 workers should give you pause. In addition to the fines, settlements, and other financial sanctions you could face by misclassifying your staff, you also have to consider the legal fees, audit costs, and the potential hit to your facility’s reputation.
So, what are some ways to minimize the risk of employee misclassification? Awareness of the distinction between 1099 workers and W2 employees is an important first step, but here are a few other steps you can take to minimize your misclassification risks.
1. Ensure Staffing Agencies Properly Train and Support Staff
Employment law can be intimidating, especially when you look at how federal and state laws overlap with regard to worker classification. Learn the basics of what defines an employee under federal law and the laws of your state and look out for red flags in your hiring practices. Don’t assume the staffing agency has this covered, and remember that your facility can face legal exposure for a staffing agency’s noncompliance with these requirements since the workers are ultimately providing care in your facility and to your patients.
2. Clarify the Roles and Responsibilities of Independent Contractors
If you’re planning to simply fill staffing holes with 1099 nursing professionals, without considering how their classification affects their role, then you may be opening yourself up to legal problems. States differ in how the roles of nursing professionals working as independent contractors are defined, but they generally are not subject to direct management as are employees. Be sure to have very clear guidance in place for if, when, and how your facility uses independent contractors.
3. Work With a Trusted W2 Staffing Partner
Utilizing a staffing partner that hires its nurse professionals as W2 employees means that healthcare facilities can still fill shifts with temporary support staff, but these workers will already have a designated employer to support, train, and help supervise their work. Unlike a staffing partner, typical “1099” staffing agencies are less invested in the ongoing, long-term needs of your facility and are more geared toward providing short-term fixes with fewer legal protections.
Also, partnering with a W2 staffing agency means your facility will be working with nursing professionals who have better access to healthcare, paid vacation, sick time, and other key benefits from their employer of record. This makes it less likely that you would face a misclassification action requiring you to provide them with such benefits.
Want Flexible Staffing Without Increasing the Risk of a Misclassification Lawsuit?
The risks and penalties associated with 1099 vs. W2 employee misclassification, even if by mistake, make your job that much more challenging. But there’s good news. IntelyCare can offer the benefit of a talented pool of support staff when you need them, but with the added protection that only a W2 staffing partner can provide. Find out more about the wide range of safe staffing solutions we offer.
Legal Disclaimer: This article contains general legal information, but it is not intended to constitute professional legal advice for any particular situation and should not be relied on as professional legal advice. Any references to the law may not be current as laws regularly change through updates in legislation, regulation, and case law at the federal and state level. Nothing in this article should be interpreted as creating an attorney-client relationship. If you have legal questions, you should seek the advice of an attorney licensed to practice in your jurisdiction.