Virginia Cracks Down on Employers Misclassifying Employees as Independent Contractors

As reported in an article by Jayna Genti in an earlier issue of DGRead, in 2019, then Virginia Governor Ralph Northam issued an Executive Order calling for an inter-agency task force to make recommendations on how to address the problem of companies in Virginia misclassifying their employees as independent contractors. During 2019-2020, legislation was introduced at the federal level and in at least 20 states to deal with this issue. The Virginia study results were issued in November 2020 and revealed that about 214,000 Virginia workers were misclassified as independent contractors, and this alone was costing the Commonwealth approximately $28 million in tax revenues each year.

Virginia’s New Law
In response to the task force’s recommendations, the Virginia General Assembly passed legislation in 2020 to deter companies from misclassifying their employee and penalizing those employers that have misclassified their workers. Then Governor Northam signed the legislation into law, which took effect January 1, 2021.

As set out in DGRead, the new Virginia misclassification law has some real teeth. Businesses that improperly treat their employees as independent contractors are now 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.

This legislation also carries the potential for companies violating this law being prohibited from being awarded public contracts. Employers that misclassify workers can be debarred 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.

Criminal Actions to Enforce the Law
To implement the new law, the Attorney General’s office set up a Worker’s Protection Unit to work with the Office of the State Inspector General, and the state first took action under the new legislation in October, 2021. The action was brought against building drywall subcontractors who were working on major construction projects in Virginia, including the building of the new Virginia General Assembly Building. Former Virginia Attorney General Mark Herring empaneled a multi-jurisdictional grand jury that returned charges against several companies, including GTO Drywall and Richmond Drywall Installers, for misclassifying workers as independent contractors rather than as employees allegedly in an effort to avoid paying taxes.

Each company was ultimately charged with ten counts of felony embezzlement. In December 2021, Richmond Drywall pled guilty to five counts of felony embezzlement and the other five counts were nolle prossed. In February, 2022 under the new administration, GTO Drywall pled guilty to five felony counts and the other five counts were similarly nolle prossed. Each company was eventually fined $2,500 for each guilty finding, plus court costs and restitution to the Virginia Department of Taxation for the unpaid taxes.

Civil Actions by Workers
But that is not where the enforcement efforts ended. Enforcement of the Virginia misclassification laws are not limited to the Commonwealth bringing a criminal action. Workers affected by their misclassification may bring a civil action for lost wages under federal and state law, which include penalties, such as trebling the damages if proven. In October 2020, laborers working for some of the same drywall subcontractors, and others, filed a class action in federal court claiming that they were improperly classified as independent contractors instead of as employees. They filed under the Virginia statute as well as the federal Fair Labor Standards Act (“FLSA”). See Moran, et. al. v. Agent Wall Sys., Inc. et. al., Civil Action 3:20-cv-00823- (E.D. Va. October 22, 2020). The laborers had been hired through various labor brokers, but claimed they should be considered employees of both the labor broker and the drywall subcontractor.

In December, 2020, a second group of laborers working for another subcontractor brought almost identical claims in Richmond federal court under the Virginia and the federal misclassification provisions. See Rosales, et. al. v. Capital Interior Contractors, Inc., et. al., Civil Action 3:20-cv-00916 (E.D.Va. December 1, 2020). The laborers claimed, among other things, that the subcontractor failed to pay them overtime constituting a violation of the Virginia Wage Payment Act, which would permit them to recover up to three times the amount of unpaid overtime. In January, 2022 the Rosales case settled. The defendant companies agreed to pay the Primary Group in the class action two times the amounts of alleged underpaid wages that Plaintiffs’ counsel had calculated for each participating class member, plus an additional $400 for each Plaintiff. In addition, defendants agreed to pay $86,000 for Plaintiffs’ attorney fees.

Making the Right Decision
As evidenced by the above referenced criminal and civil cases, the fallout for misclassifying an employee as an independent contractor can be substantial. Employers not only need to be concerned about federal laws prohibiting such practices; it is now clear that Virginia law similarly prohibits such practices. Wage and tax theft statutes are now in place in Virginia that are designed to compensate victims and incentivize employers’ compliance with lawful wage payment practices.

Determining whether a potential hire is an employee or an independent contractor is not always clear cut. Employers in Virginia should consult with experienced legal counsel in making their employment related decision as to how to properly classify their workers as employees or independent contractors. A wrong decision can result in criminal and civil liability.