Friday, Oct 29, 2021

Independent Contractor or Employee? Businesses Beware of Misclassification

For businesses small and large, the temptation to avoid having to deal with payroll taxes, unemployment insurance and benefits for employees is strong and the savings can be quite substantial. Why not just call someone that does work for you an “independent contractor” and avoid all of that expense? For the employee, isn’t it nice to get a larger check each pay period without the pesky reduction for Social Security and Medicare?

The answer is a resounding NO!

Last year, the Virginia General Assembly passed a law concerning the misclassification of employees as independent contractors that actually has some teeth and should make businesses think twice about whether the savings is worth the risk. Additionally, the IRS is scrutinizing larger companies such as Uber for this exact thing.

Why the scrutiny? Estimates are that the taxing authorities are losing billions of dollars to this sort of activity. Employees don’t realize that they are really on the short end of this designation. Not only do employees not receive benefits they are entitled to, they actually lose money because the employer is no longer contributing its 50% of the payroll taxes (~7.5%). Moreover, independent contractors are not covered by unemployment by the business (they are independent right?).

To address this issue, in 2020, the Virginia general assembly enacted Va. Code § 58.1-1900 addressing the misclassification of employees as independent contractors. First, there is a presumption of an employee relationship as opposed to IC. Second, under § 40.1-28.7:7. Misclassification of workers is a civil cause of action for an employee to pursue damages for misclassification. Virginia ties the standard to the then existing IRS standard for classification.

As to enforcement, there are both civil penalties and a private cause of action by the employee. Under § 58.1-1901, civil penalties range from $1,000 to $5,000 per employee. Under § 40.1-28.7:7.A, the law provides that:

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.

As with the Fair Labor Standards Act and the Virginia Wage and Hour laws, this is now an area that businesses should document their reasons that particular individuals that regularly provide services are truly independent contractors rather than employees.

For any questions on this topic, please contact litigation and business transactions attorney Andrew Burcher.