New Virginia Contractor Misclassification Law

On Behalf of Odin, Feldman & Pittleman, P.C. | Jun 25, 2020 | Business law, Featured, Labor & Employment

Spring brought significant changes to Virginia’s employment law landscape.  Virginia Governor Ralph Northam recently signed a series of new employee-centric laws, including the ones intended to fight against worker misclassification.

Summary of new laws relating to misclassification

Effective July 1, 2020, House Bill 984 enacts a new statute, Va. Code § 40.1-28.7:7, which creates a private cause of action against employers for misclassifying a worker as an independent contractor.  It also creates a presumption that a worker who performs services for compensation is an employee, rather than a contractor. The payer/employer has the burden of proving that the worker is properly classified as a contractor based on the Internal Revenue Service guidelines.  If the worker’s claim of misclassification is successful, the employee is entitled to any past wages or salaries, employment benefits (including any expenses that the worker paid out of pocket that would have been covered by insurance had the worker been properly classified), and any other compensation lost due to the misclassification, as well as attorney’s fees and costs for bringing the action.

In addition, effective Jan. 1, 2021, House Bill 1407 creates a new state law that prohibits employers from misclassifying employees as independent contractors and allows the Virginia Department of Taxation to investigate and impose civil penalties against employers.  The civil penalty may be up to $1,000 per misclassified individual for the first offense, up to $2,500 per misclassified individual for the second offense and up to $5,000 per misclassified individual for subsequent offenses.  This new law also allows for debarment (i.e., being prohibited from bidding on state government contracts) of employers, their officers and other agents for multiple violations.  No one may require or ask an employee to enter into an agreement or sign a document that misclassifies the employee as an independent contractor.

The new laws also ban any discrimination and retaliation against employees exercising their rights under the statutes.

IRS guidelines

The new Virginia laws adopt the federal IRS multi-factor test to determine whether an individual is properly categorized as an independent contractor.  The test has been derived through common law rules to determine whether the payer/employer exercises sufficient control over the worker to establish an employer-employee relationship.

While the IRS used to employ a 20-factor analysis, the current analysis consists of three categories of facts that provide evidence of the degree of control and independence: Behavioral Control, Financial Control and Type of Relationship. The Behavioral Control category includes facts that tend to show whether the payer controls or has the right to control how, where and when the worker performs the job.  The Financial Control category includes facts that tend to show whether the payer controls or has the right to control the economic aspect of the worker’s job.  The Type of Relationship category includes facts that tend to show what the understanding was between the payer and the worker as to the worker’s relationship including whether there was a written agreement in place, whether the worker was treated as an employee for benefits, and permanency of the relationship, among others.

All the IRS factors must be assessed and weighed in determining proper classification of workers.  No one fact is more probative, and one fact may have more weight in determining the relationship under one circumstance over another.

Independent contractor misclassification has been a hotly contested area of employment law for years.  There are different tests and standards depending upon the locality’s law that applies and which agency is reviewing the matter.  For example, the federal Department of Labor and courts have traditionally utilized the seven-factor “economic realities” test when deciding whether an individual categorized as an independent contractor is actually an employee for the purposes of the Fair Labor Standards Act (FLSA), and thus, owed overtime. Given the overlap in remedies allowed under both the Virginia misclassification law and FLSA, courts will have to work through which test(s) to apply when deciding unpaid compensation claims involving overtime.

Potential implications of the new laws

Even prior to the new legislation, employers faced potential negative consequences for misclassifying independent contractors, such as tax liabilities for failure to withhold taxes and failure to properly pay minimum wage and/or overtime pay under the FLSA.  However, the new laws add significant additional consequences to these exposures. For instance, the potential damages that a worker may recover under the new private cause of action could include out-of-pocket medical expenses that they incurred because the employer failed to provide insurance under the company-sponsored health insurance plan. Such expense could be significant and would be in addition to claims for back wages to which the worker is entitled under the FLSA. The new law also provides for additional civil penalties and debarment, which could also result in substantial financial burden on employers.

Now may be a good time for companies to review and audit classification decisions for workers performing as independent contractors.

Disclaimer: The information contained herein is provided for informational purposes only and should not be construed as legal advice on any subject matter. This information contained herein is not provided in the course of an attorney-client relationship and is not intended to constitute legal advice. Any information contained in this article is not intended to be a substitute for legal counsel. No one should act or refrain from acting on the basis of any content included in this article but should instead seek the appropriate legal advice on the particular facts and circumstances at issue from a properly licensed attorney. The author expressly disclaims all liability in respect to actions taken or not taken based on any of the contents of this article. This article contains general information and may not reflect current legal developments.