Fourth Circuit Affirms Multi-Million Dollar Decision, Underscoring Risks in Worker Misclassification
Many businesses rely on independent contractors to stay flexible, control costs, and meet fluctuating demand, but misclassifying those workers can carry massive financial consequences. On July 17, 2025, the Fourth Circuit affirmed a $9.3 million judgment against a staffing agency for misclassifying more than 1,000 nurses as independent contractors under the Fair Labor Standards Act (“FLSA”). The Chavez-Deremer v. Medical Staffing of America decision largely hinged on applying the “Economic Realities” test – a multifactor legal standard that looks beyond job titles or contracts to assess the nature of the working relationship and determine whether certain protections are afforded because the person is an employee rather than an independent contractor.[1]
This decision offers detailed guidance on applying the “Economic Realities” test and key insights into the good-faith defense. This case also offers a reminder that even well-meaning business decisions can carry financial risk and liability exposure when those decisions impact worker classification. And, as the dissent examines, the many-factor “Economic Realities” test makes it difficult for businesses to predict how the law will treat their workers. Still, the majority opinion functions as a guiding compendium that teases out the factors of “Economic Realities” test.
Economic Realities Test at Work[2]
Control
Control played a central role in the court’s finding of employee status, even though the employer did not exercise daily control. Although the agency described itself as a neutral platform connecting workers with facilities, the court found that it acted more like an employer by setting fixed hourly wages, blocking workers from negotiating their rates, and deciding which nurses would be offered work. The agency demonstrated further control by issuing rules on attire, timekeeping, and conduct, and disciplining workers who broke these rules or declined work.
Other Factors
The court disagreed with the staffing agency’s argument that workers had the opportunity for profit by working more for more pay; instead, independent contractors can typically increase their income through rate negotiation or exercising business judgment, neither of which these workers could do (workers’ opportunity for profit or loss). The court also rejected the agency’s claim that its noncompete clause had no effect because it was rarely enforced; the chilling effect alone limited workers’ ability to pursue outside opportunities (workers’ opportunity for profit or loss, permanence of the relationship). And, despite the work being for a set term, the worker often only worked for the staffing agency during the term, rather than for others (permanence of the relationship). The court also found it immaterial that the nurses purchased some of their tools, noting that items like stethoscopes were common personal purchases in the industry and did not amount to the type of capital investment that signals independent contractor status (workers’ investment in tools or materials). And, although licensed and trained, the nurses did not use their skills to run independent businesses or offer services on their own terms (level of skill required).
Good Faith Defense and Liquidated Damages
The court also explored liquidated damages, which a violating employer must pay and are generally equal to the amount of unpaid overtime wages. This harsh penalty is the “norm” for overtime violations, unless the employer can show it acted in good faith and had reasonable grounds for believing their practices complied with the law. This requires more than just “ostrich-like” ignorance, confusion, or minimal effort; it demands concrete, proactive steps towards complying with the FLSA. Per the court, relying on the well-informed advice of counsel is essential for businesses to show that it meets the defense standard. The staffing agency failed to do that, instead withholding key facts from its attorney and ignoring the advice it received. The court clarified that simply checking the box with a quick phone call to an attorney does not qualify as acting in good faith compliance with the law. Instead, the defense is stronger when counsel can review business operations and classification practices.
Takeaways
As businesses work through this fact-intensive analysis, it helps to keep the core purpose of the FLSA in view: protecting workers who depend on wages to earn a living. Additionally, businesses should consider how to conduct operations and meet business goals without undermining proper classification. Getting advice from counsel early on not only helps guide the classification process and flag risks in real time, but also help lay the groundwork for a good faith defense if issues arise later.
[1] Chavez-Deremer v. Med. Staffing of Am., LLC, No. 23-2176, 2025 WL 1969525 (4th Cir. July 17, 2025).
[2] Distinguishing between employees and independent contractors calls for a detailed, fact-intensive analysis, evaluating (1) the degree of control exercised by the business, (2) the worker’s opportunity for profit or loss, (3) the worker’s investment in tools or materials, (4) the level of skill required, (5) the permanence of the relationship, and (6) whether the work performed is integral to the business (the staffing agency conceded the sixth factor). See McFeeley v. Jackson St. Ent., LLC, 825 F.3d 235 (4th Cir. 2016) (enumerating the Supreme Court’s Silk factors).