Bench verdict upheld on appeal in nurse staffing agency lawsuit

A health care staffing company misclassified about 1,100 nurses as independent contractors, the 4th U.S. Circuit Court of Appeals found in a 2-1 opinion upholding a trial court ruling.

Medical Staffing of America LLC, doing business as Steadfast Medical Staffing, appealed the U.S. District Court for the Eastern District of Virginia’s decision following a bench trial.

The U.S. Department of Labor had sued Steadfast and the company’s owner, Lisa Ann Pitts, in her individual and corporate officer capacity in 2018, alleging violations of multiple provisions of the Fair Labor Standards Act. The DOL’s claims included that Steadfast failed to pay overtime in accordance with the law.

The DOL sought back wages and liquidated damages. Steadfast was found liable for about $5 million in unpaid overtime and nearly as much in liquidated damages. Steadfast and Pitts appealed.

Although Steadfast did not control specific aspects of the nurses’ work, “the evidence amply supports the proposition that the control factor weighs heavily in favor of their employee status,” Judge Robert B. King wrote in the majority opinion, which was joined by Judge Henry F. Floyd.

Additionally, King noted that the company set the nurses’ hourly pay and controlled access to available shifts, resulting in the company determining when and where nurses worked. The evidence further demonstrated that Steadfast’s actions were “consistent with exercising significant supervisory control over its nurses,” King stated.

Judge Julius N. Richardson dissented, writing that the majority disregarded precedent, crucial trial testimony, and errors by the trial court that were at the heart of Steadfast’s appeal.

The 102-page opinion is Chavez-Deremer v. Medical Staffing of America LLC (VLW 025-2-266).

Broad implications

Abram John Pafford of McGuireWoods in Washington represented Steadfast. Pafford did not respond to a request for comment. Anne Warren King represented the DOL. An agency spokesperson declined to comment.

But Arlington practitioner Joshua Erlich said Chavez-Deremer is an important decision for two reasons.

“This opinion could have broad implications for other companies that connect labor to individuals, including Uber and DoorDash.”

— Joshua Erlich, Arlington

First, he said, the labor force depends more than ever on staffing services and their apps to connect them to employers, while, at the same time, “the courts continue to recognize that an employment relationship is fundamentally different from an independent contractor relationship.”

As a result, Erlich said, “this opinion could have broad implications for other companies that connect labor to individuals, including Uber and DoorDash.”

Regarding the dissent, Erlich said whenever courts use a multi-factor balancing test to reach a decision, judges may find a different balance.

“Judge Richardson clearly believes that the level of control Steadfast’s labor holds over their own scheduling is sufficient for an independent contractor classification,” he said.

Tysons attorney Declan Leonard said the majority fully embraced the traditional — and currently binding — six-factor test for determining if an employment relationship exists under the FLSA.

Leonard noted that Richardson argued that the six-factor test “ignores the actual text enacted by Congress within the FLSA, and it should be this text and not some ‘judicially contrived, many-factored’ test that should determine the outcome of FLSA cases.”

In contrast, Richardson’s dissent not only comes out on the side of the nurses as independent contractors when the six-factor test is applied, but he advocates for the court to abandon the test altogether, Leonard said.

Erlich said a takeaway for employers is that if their company’s labor force includes independent contractors, they should carefully analyze that relationship to determine if the workers are properly classified.

And while the issue didn’t surface here, under Virginia’s misclassification law, “an individual is presumed to be an employee unless proven otherwise,” he said.

Finally, Leonard also noted that the employer in this case may want to consider an appeal, given the U.S. Supreme Court’s conservative majority’s move away from court-created tests.

Bench verdict appealed

The DOL began investigating Steadfast’s business practices in 2017.

The department notified Steadfast that it was violating the FLSA. It alleged that, between August 2015 and January 2023, the company misclassified its certified nursing assistants, licensed nurse practitioners and registered nurses as independent contractors, failing to pay them overtime as required by law and failing to keep proper records.

Despite being notified, the company failed to rectify the issues, according to the DOL, which sued in U.S. District Court in May 2018, alleging willful violations of provisions of the FLSA.

Established in 2015, Norfolk-based Steadfast is a medical staffing business that supplies nurses to health care facilities in Virginia and beyond. Once deemed qualified, the nurses would enter what Steadfast termed an “independent contractor” agreement and be added to a registry. The agreement also included a noncompete clause.

According to the opinion, upon receiving a staffing request from a client, Steadfast would decide which nurses in its database were eligible to fill available shifts. Nurses were notified by phone, text, email or through an app. If they accepted, they would report to work at the client’s facility.

Steadfast set hourly pay rates, negotiated fixed hourly rates for the work its nurses performed, and retained a percentage of the hourly rate paid to the company by the client.

And while the client generally set the nurses’ day-to-day patient care assignments, Steadfast also enforced its own internal policies and discipline measures that included blocking access to assignments or removing a nurse from the company’s registry.

Contentions of error

The court typically uses a six-factor test to “capture the economic realities of the relationship between the worker and putative employer,” King wrote.

The test elements are: the degree of control that the employer has over the way in which the work is performed; the worker’s opportunities for profit or loss dependent on their managerial skill; the worker’s investment in equipment or material, or their employment of other workers; the degree of skill required for the work; the permanence of the working relationship; and the degree to which the services rendered are an integral part of the employer’s business.

The 4th Circuit sided with the trial court in finding that Steadfast unilaterally set the nurses’ hourly wages and controlled their access to available work shifts. That meant the company effectively controlled when and where the nurses worked, the panel found.

“And at least four of the remaining five factors support the existence of an employment relationship between Steadfast and the Steadfast nurses. The totality of the circumstances clearly establishes an employer-employee relationship between the Steadfast nurses and Steadfast,” King wrote, noting that they were therefore entitled to overtime under the FLSA.

“On the facts, the majority ignores crucial testimony and glosses over clear mistakes from the District Court.”

— Judge Julius N. Richardson

Steadfast argued on appeal that the trial judge erred in ruling that it was not entitled to a good-faith defense for two timeframes from August 2015 to June 2021 and from June 2021 to January 2022.

The ruling meant Steadfast faced an assessment of statutory liquidated damages for those periods. The company further argued that that the trial court erred in accepting damages computations.

But the panel’s majority disagreed.

“Steadfast ‘could not have classified their nurses as independent contractors in good faith prior to seeking legal counsel in June 2018.’ Prior to that date, Steadfast had neither sought legal advice on the classification of its nurses nor taken any proactive steps to educate itself on the FLSA,” King wrote.

‘Wrong on the law’

In his dissent, Richardson noted that the court’s precedent focuses on economic dependence and that the testimony had shown that the nurses were not economically dependent on Steadfast.

“This testimony is hard to square with the idea that appearing on Steadfast’s registry put a nurse at Steadfast’s mercy. Instead, it shows that each nurse was free, based on a menu of options, to ‘determine his hours, his income, and who he worked for,’” Richardson said, citing Cilecek v. Inova Health Sys. Servs.

By minimizing or disregarding the testimony, “the majority deprives Steadfast of its best arguments — arguments that should be decisive when it comes to gauging the economic reality,” Richardson wrote.

Additionally, Richardson said Steadfast did not engage in meaningful management. The company did not provide an orientation, handbook or the like. The company did not assign anyone to supervise its workers on-site at facilities. And nurses could only join the company’s registry if they were already fully qualified.

As a result, Richardson said, “the majority is wrong on the facts and wrong on the law. On the facts, the majority ignores crucial testimony and glosses over clear mistakes from the District Court that form the heart of Steadfast’s argument on appeal.”

On the law, he said, “the majority dismisses careful distinctions in our precedent, relies instead on out-of-circuit cases, and stretches the factor test so far that it could cover most any economic arrangement.”