Keep a Paper Trail!; Rocket Docket Update; Employee or Contractor? Don’t Misclassify!; DG/30 Milestone
By: Jayna Genti
Companies misclassifying their employees as independent continues to be a hot-button issue throughout the country, and Virginia is no exception. In the last year alone, legislation related to independent contractor misclassification was introduced at the federal level and in at least 20 states. New Jersey and California recently enacted employee misclassification laws, and other states including New York are considering similar legislation.
Virginia Acts to Prevent Misclassification
In 2019, Virginia Governor Northam issued an executive order calling for an inter-agency task force to make recommendations on how to address the issue. The study results issued last November found that about 214,000 Virginia workers are misclassified as contractors, costing the Commonwealth some $28 million in tax revenues each year.
In response to the task force’s recommendations, the Virginia General Assembly passed legislation this term that seeks to prevent misclassification and to penalize those employers who misclassify their workers. Governor Northam recently signed the legislation into law, which will take effect January 1, 2021.
Classification of Employees
Under the new law, the Virginia Department of Taxation will determine whether a worker is an employee or independent contractor by applying Internal Revenue Service guidelines. The IRS guidelines involve a multi-factor analysis, with the most important being the level of control exercised by a company. In making the requisite assessment, the presumption will be that a worker who performs a service for an employer for pay will be considered an employee unless the individual or his or her employer demonstrates that she is an independent contractor.
Penalties and Enforcement
The new Virginia misclassification law has some real teeth. Businesses that improperly treat their employees as independent contractors will be subject to a fine of up to $1,000 per worker for a first offense. Maximum fines will increase to $2,500 per misclassified individual for a second offense, and up to $5,000 per misclassified individual for a third or subsequent offense.
The new legislation also prohibits the awarding of public contracts to employers that misclassify workers. Debarment will last for up to one year for a second offense and up to two years for a third offense. The legislation further requires the Virginia Department of Taxation to share information to help with enforcement.
Further Efforts to Halt Misclassification
The new Virginia law imposing penalties for employee misclassification will not be the end of the story. Further efforts are likely to be forthcoming to crack down on employers who misclassify their workers, and deny tax revenues to both states and the federal government. The impetus for the Commonwealth to move quickly against employee misclassification has arisen as a result of the recent federal legislation extending unemployment insurance to gig workers and other independent contractors who do not traditionally receive unemployment when they cannot work. Unemployment benefits are funded by specific payroll taxes on employee pay. Companies, however, do not pay unemployment insurance for independent contractors, even though they will now be able to receive unemployment benefits courtesy of the federal government.
Thus, we can expect heightened scrutiny on companies that misclassify employees as independent contractors and, thereby, evade their obligation to pay unemployment taxes. As it stands, misclassification already has reportedly denied the Commonwealth substantial revenue, and this concern will only be heightened by the current COVID-19 pandemic and the stay-at-home orders shuttering many businesses.
Going forward, you can expect greater attention by Virginia enforcement and investigative agencies to claims of worker misclassification. Those agencies are on high alert for violations of the law and undoubtedly will use the full spectrum of available enforcement mechanisms to crack down and penalize those employers that evade the law. The stakes of losing at the agency level are high and can lead to fines, legal expenditures, and litigation.
Given the continuing evolution of these and other related employment law matters, you are well advised to undertake a thorough assessment of the appropriateness and defensibility of classifying any members of your workforce as independent contractors. Such an evaluation should be undertaken under the direction of an employment law attorney who is well versed in these matters and can review your policies and present workforce classifications to ensure legal compliance. Misclassification no longer will result in simply a slap on the wrist. Real penalties will now be imposed.
By: Jarrad Wright
A recent Fourth Circuit opinion is a reminder for all employers to thoroughly document problems with employees before making firing decisions. In a two to one decision, a Fourth Circuit panel on July 1, 2020 upheld the decision of a Virginia federal district court judge to disregard a jury verdict in favor of a former employee who had brought a wrongful termination claim pursuant to the Family Medical Leave Act (“FMLA”).
The case, Fry v. Rand Construction Corp., No. 18-2083 (4th Cir. 2020), involved Arlene Fry’s (“Fry”) suit against her former employer, Rand Construction Corporation (“Rand”), for several claims, including firing her for taking leave under the FMLA. Among other protections, the FMLA provides covered employees with twelve weeks of leave during any twelve-month period for family related reasons or for an employee’s serious health condition. After taking leave, employees are entitled to return to their prior position or an equivalent position.
Fry had worked as an administrative assistant for Rand’s CEO for several years before tension in their relationship developed. During the trial, Fry’s counsel argued that shortly after Fry had taken two weeks leave for a medical condition, the CEO complained that Fry had been on a cruise instead of medical leave. Fry later filed with the company two complaints that her FMLA rights were violated, and she was fired the day after filing her second complaint. Following the completion on Fry’s case-in-chief and before Rand presented its evidence, Rand moved for judgment as a matter of law, arguing that there was insufficient evidence to go forward with the trial. While District Judge Anthony Trenga expressed reservations about the lack of evidence, the trial proceeded, and the District Court stated it would decide the motion after the trial verdict if necessary.
Rand’s case involved putting on extensive evidence of prior documented problems with Fry’s work that existed before Fry had taken FMLA leave or had notified her employer of her health problems. The information submitted at trial included emails from the CEO to human resources personnel and the Chief Operating Officer complaining about Fry’s lack of diligence in keeping the CEO informed of changing appointments. Rand also put on evidence of the conduct that occurred after the FMLA leave occurred.
Notwithstanding this evidence, the jury entered a verdict in favor of Fry for the FMLA claim in the amount of $50,555, and rejected the remaining claims. Thereafter, Judge Trenga granted Rand’s motion for judgment as a matter of law and set aside the verdict. Applying the burden-shifting framework set forth in McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973), the District Court found that Rand had established a legitimate nondiscrimatory reason for terminating Fry, namely her job performance, and held that Fry had “failed to introduce evidence from which a jury could reasonably find that Rand’s proffered reason was untrue or pretext.”
The Fourth Circuit Decision
In upholding District Court’s decision, the two Circuit Court Judges in the majority relied upon the documented instances in which the CEO and Rand had expressed unhappiness with Fry’s job performance, both before and after her taking FMLA leave. Ultimately, the majority opinion held that the perception of the employer was the relevant issue, not Fry’s self-assessment, and concluded that Fry had not presented enough evidence to show that the documented reasons for the firing were mere pretext.
By contrast, Judge Motz in his dissent restated the evidence and reasoned that the CEO’s comments questioning the legitimacy of Fry’s FMLA leave combined with the timing of Fry’s termination, could have led a reasonable jury to find an FMLA violation. Judge Motz, therefore, would have allowed the jury verdict in favor of Fry to stand.
While the legal determination in the Fry case is solidly rooted in its facts, a key takeaway consideration from the saga for both employers and employees, alike, is the need for documentation. The District Court and Fourth Circuit relied upon the ongoing contemporaneous documentation of Fry’s perceived problems both before and after the FMLA issues arose. This documentation included both emails and other more formal records of work performance problems. Likewise, Rand’s prompt response in granting the FMLA leave was an important consideration for both courts in deciding that the FMLA had not been violated.
Given this evidence and a fully and properly documented personnel file, the employer was able to convince both the District Court and the Fourth Circuit that the jury verdict in favor of the employee should not be the end of the case, and in actuality, the employer had not violated the employee’s FMLA rights when it terminated her employment.
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