Virginia’s new employment misclassification laws make it very likely that any independent contractor working with your organization is a de facto employee, entitled to all the benefits, rights and obligations that go along with the employment status of an individual.
For decades, employers have attempted to avoid the burdens of creating an employment relationship with certain workers under the guise that the person is a self-employed independent contractor, sometimes referred to as 1099 employee because the contractor receives a 1099 form to report income on his or her tax return.
Likely during all those years, an independent contractor was in reality a legal employee.
Now new Virginia laws — two of which became effective July 1 and a third will take effect Jan. 1 — solidify the legal obligations of employers to make sure they properly classify employees.
One new law creates a civil private right of action for individuals who are misclassified as independent contractors against their employers if the employer had knowledge of the individual’s misclassification.
If the court finds that the employer has not properly classified the individual as an employee, that law provides that “the court may award individual damages in the amount of any wages, salary, employment benefits, including expenses incurred by the employee that would otherwise have been covered by insurance, or other compensation lost to the individual, a reasonable attorney fee, and the cost incurred by the individual in bringing the action.”
The law further provides that “an individual who performs services for a person for remuneration shall be presumed to be an employee of the person that paid such remuneration, and the person that paid such remuneration shall be presumed to be the employer of the individual who was paid for performing the services, unless it is shown that the individual is an independent contractor as determined under the Internal Revenue Service guidelines.”
The IRS guidelines establish a multi-factor test to determine if an employment relationship exists.
Consider you have a person providing IT consulting to your organization as an independent contractor.
The person contracts COVID-19 and is hospitalized for several weeks. The law now will presume that this worker was misclassified, and it will be the organization’s burden to prove the person was an independent contractor.
If it turns out that the person was actually an employee who was entitled to insurance benefits, your organization may now be liable for the hospital bills.
The risk of misclassification is significant.
Under a separate law that goes into effect Jan. 1, the Virginia Department of Taxation also will have jurisdiction to fine employers who misclassify workers.
“If an individual performs services for an employer for remuneration, that individual shall be considered an employee of the party that pays that remuneration unless such individual or his employer demonstrates that such individual is an independent contractor,” the statue for that law says.
That law states that the tax department shall determine whether an individual is an independent contractor by applying Internal Revenue Service guidelines.
“Any employer that fails to properly classify an individual as an employee and fails to pay taxes, benefits, or other contributions required to be paid with respect to an employee” shall be subject to “a civil penalty of up to $1,000 per misclassified individual for a first offense, up to $2,500 per misclassified individual for a second offense, and up to $5,000 per misclassified individual for a third or subsequent offense,” according to the new state law.
In addition to the civil penalty, more than one offense can result in debarment for a year from any state contracts.
Furthermore, merely because the parties agree to an independent contractor arrangement doesn’t make it legal. If the person performing the work is actually an employee under the IRS guidelines, the individual must be an employee for all legal purposes and the parties cannot agree otherwise.
In fact, another new law makes it illegal to compel an individual to enter into such an agreement.
The new laws also provide that an individual who questions or complains about his or her status as an independent contractor cannot be retaliated against.
The Virginia Department of Labor and Industry can investigate and institute proceedings against the employer for claims of retaliation and order reinstatement, penalties and lost wages.
For any individual performing work for your organization who is not an employee, organizations must assess how long the worker has been providing services to the company. Any full-time relationship that has lasted longer than six months likely will be more akin to an employment relationship, not independent contractor.
The organization also should determine if the worker has an independent business, including whether the individual has an established entity (such as a limited liability company), whether that entity files tax returns, whether the individual maintains a website advertising the business and whether the individual can demonstrate that he has performed services for more than just your firm in the last six to 12 months.