Virginia Lowers the Boom on Misuse of “Independent Contractor” Label

Two new Virginia laws taking effect Wednesday, July 1, attack the misclassification of employees as if they were independent contractors with a vengeance.  As a result, those who have been sliding by, misusing the “independent contractor” label to evade obligations for minimum wage laws, payroll taxes, or fringe benefits, must change their practices immediately, or else face new, stiff and comprehensive liabilities and penalties.

The new laws are a wake-up call to those who pay for services performed by individuals, while trying to avoid the burdens of payroll tax filings, or the expenses of fringe benefits.  While examples of the misclassification of employees can be found in literally any field, the practice is quite common in the so-called “gig economy,” in the construction field, and perhaps most commonly in the employment of nannies by parents.  Thus, literally no one is left untouched by the new laws.

The first new statute focuses on what someone who is truly an employee, but being compensated as if he or she were an independent contractor, can sue the employer for.  An employee who was illegally mislabeled as an independent contractor can sue the employer for any shortfall in wages, the value of benefits, and all attorney’s fees incurred in the course of suing.  If the employer avoided providing health insurance through the misclassification, the employer might also find itself reimbursing the employee for medical expenses that the health insurance would otherwise have covered.

As if that were not enough to serve as a wake-up call that the General Assembly was determined to stamp out this fairly common (but long illegal) practice, a second law was passed to empower the Commissioner of Taxation to serve as a clearinghouse for information on violators.  The identities of violators will be gathered from, and then also shared with, all other state agencies.  First-time violators can face civil penalties of $1,000 per affected employee, in addition to the liabilities to the employee noted above.  Second time violators face fines of $2,500 per employee, plus debarment from consideration for any state government contracts for a full year.  Third and subsequent violations would draw a $5,000 per employee fine, plus a two-year debarment.

Both new laws also specify that anyone performing services for another person for compensation is legally presumed to be an employee.  The burden will fall on the employer to prove that it is within prevailing legal standards – IRS regulations – in attaching the “independent contractor” label instead.  Because misclassification is rife in the economy, it will be a rare case when the employer could hope to win.

Perhaps no new law has such far-reaching consequences, without receiving any particular publicity thus far.  But in a year where the public’s consciousness has been consumed with the pandemic, with protests and riots, and with the upcoming elections, these new laws threaten to expose literally tens of thousands of businesses, and perhaps far more parents of young children, to scrutiny and liability they have never seen before.

Anyone currently paying for any services from individuals on an ongoing basis, who is currently classifying the payees as independent contractors, has only until July 1 to review their practices with their lawyer to determine whether what they are doing will survive scrutiny under the new laws.  While lack of enforcement has left many feeling safe in ignoring legal obligations until now, the sudden imposition of these new liabilities makes continuing with improper practices a high-stakes gamble.

Marrs & Henry remains fully open and available to you during our current, difficult time.  If you need help, there’s no need to wait.  We can meet with you in person at our offices, we can come to you, we can talk by telephone, we can be reached by e-mail, and we’re also available via video teleconference.