Employers, there is no such thing as a ‘1099 employee’

January 21, 2023

Employers who misclassify employees as independent contractors are under fire more than ever with Virginia’s 2020 legislation and by the U.S. Department of Labor’s proposed regulations.

Employers too often bring on workers under the false premise that they are independent contractors who will, at the end of their services, receive an IRS form 1099-MISC instead of the typical W2 for employees.

There are plenty of advantages for having workers classified as independent contractors: The employer can usually avoid a host of employment laws, taxes, expenses, such as health care, and workers’ compensation insurance.

However, it’s probably illegal. If a person providing services is an “employee” under separate definitions provided by IRS rules, Virginia law or the Department of Labor, then that person is an employee entitled to all the benefits that flow from that arrangement.

Under Virginia law, “[I]f 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 burden is on the employer to prove that the person falls into the narrow IRS guidelines for independent contractors.

Employers who violate the law are subject to a variety of penalties for each offense. In addition, the misclassified worker can bring a civil suit for damages and recover attorneys fees. The law says, “If the court finds that the employer has not properly classified the individual as an employee, the court may award the 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 costs incurred by the individual in bringing the action.”

Thus, an employee denied health insurance due to misclassification who incurs medical expenses that would have been covered by insurance but for the misclassification could be awarded medical costs.

If the employer also does business for the public sector, the employer can be subject to debarment under Virginia law.

Even if the employer has an “agreement” with the person to be an independent contractor, the arrangement is still illegal. Virginia law provides, “No person shall require or request that an individual enter into an agreement or sign a document that results in the misclassification of the individual as an independent contractor or otherwise does not accurately reflect the relationship with the employer.”

The Department of Labor announced earlier this month that a national auto parts distributor and Arizona logistics firm will pay $5.6 million in back wages in liquidated damages for misclassifying 1,398 drivers as independent contractors.

In the consent decree, the U.S. District Court ordered the employers to pay $2.8 million in back wages and an equal amount in liquidated damages to the affected employees, as well as imposed on the company and its owner a $150,000 civil fine. The court held the owner individually liable for the violations.

In the case, the Wage and Hour Division of the Department of Labor conducted an investigation and found that the employer had misclassified the workers, and as a result, the company failed to meet the minimum wage requirements and instead paid straight-time rates for all hours worked, thus failing to properly pay overtime. According to the announcement, “The company also required employees to use their personal vehicles for deliveries without compensation. By doing so, the employers denied their drivers’ rights under the Fair Labor Standards Act.”

The Solicitor of Labor sent a warning to employers in the announcement: “Employers cannot avoid their obligations to pay the minimum wage and overtime through contracting with another entity to obtain employees.” It went on to promise to use the authority of the U.S. Department of Labor to “combat misclassification schemes and wage theft through pursuing all the employers that are responsible for depriving employees of their rights under the Fair Labor Standards Act.”

In October 2022, the Department of Labor proposed changes to the independent contractor test, which would make it even less likely that a worker is properly classified as an independent contractor.

Employers need to immediately assess whether anyone performing services for the organization is classified as a “1099” or independent contractor. If so, consult with an attorney on whether they are properly classified. The rules are complicated, there are many of them and they are conflicting at times.