By: Jayna Genti, DiMuroGinsberg P.C.
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.