Companies should revisit contractors’ classification as state steps up investigations

Under Virginia law, most employers with three or more workers are required to carry workers’ compensation insurance that provides specific benefits to workers injured during the course of their employment and shields employers from civil suits for those work-related injuries. But an increasing number of businesses in Virginia — 40,000 employers with a total of 214,000 workers by some estimates — and elsewhere are potentially misclassifying employees as independent contractors, thus sidestepping the purchase of workers’ compensation insurance. Some may do it out of ignorance, although many appear to be trying to cut costs. Either way, these employers may be exposing themselves to significant penalties and other dangers.

One obvious risk is that injured workers may be able to sue for damages and do so without the cap that’s typically set under a workers’ compensation agreement. They may also be able to collect monetary damages for emotional distress, or pain and suffering.

The state of Virginia is cracking down on this practice. In 2014, then-Governor Terry McAuliffe issued Executive Order 24, “Establishing an Inter-Agency Taskforce on Worker Misclassification and Payroll Fraud” to chase down businesses that misclassify employees. Today, pursuant to §65.2-805, an employer will be assessed a penalty of up to $250 per day for each day uninsured, with a maximum penalty of $50,000, plus costs. The employer will also be liable for compensation to any injured employee.

An employer who still doesn’t obtain workers’ compensation coverage, even unintentionally, may be prohibited from operating its business and may be subject to criminal prosecution. Moreover, if the employer knowingly and intentionally failed to comply, it could be subject to criminal prosecution for a Class 2 misdemeanor.

The business may also be liabile for unpaid benefits, overtime wages, taxes, unemployment insurance and could face intensive audits by the federal Department of Labor. Additionally, business owners may face personal or corporate liability for up to three years of Fair Labor Standards Act and other violations; IRS penalties up to 100 percent; and repayment of back overtime wages plus interest.

An injured worker seeking benefits under the Workers’ Compensation Act has the burden of proving that he or she was an employee at the time of the accident. Consequently, employers and insurers often argue that an employer-employee relationship did not exist in order to avoid paying for workers’ compensation benefits.
Some business owners think that simply designating a worker as an independent contractor, and/or having him or her sign a contract to that effect, will establish an independent contractor relationship. But that’s not enough. Instead, the facts of the working relationship determine the appropriate classification.

For workers’ compensation, the Virginia Workers’ Compensation Commission looks to the facts of the working relationship and considers four factors to determine employment status:

 “Selection and engagement,” or the right of the business to hire the worker;
 The power of dismissal; 
 The terms of compensation and how payment is made; and
 The employer’s power to control the individual’s actions or work.

All four factors are considered, but the power to control is usually the most determinative one. Control is not based on whether an employer decides to exercise that power, but rather whether the employer has the legal ability to control the worker.

Employers who use independent contractors should maintain proper records to document the classification, including signed independent contractor agreements that include an acknowledgement that the worker is an independent contractor; and keep copies of the 1099s issued to workers.  Employers should also have the independent contractors provide certificates of insurance that provide proof that the worker has his or her own personal insurance for work-related injuries. Contractors should also be paid on a project basis instead of hourly, and contractors should pay for out-of-pocket expenses themselves.

The business and its representatives should refrain from providing instructions as to how and when tasks are completed and should not provide tools or equipment, or significant supervision. Terms for renewal and termination should be specified in the independent contractor agreement, including the independent contractor’s right to terminate the relationship. Additionally, the business should not withhold taxes on behalf of the independent contractor.

To further cover themselves, companies should consider periodically conducting an internal review to ensure that their independent contractors meet the standards for that classification. Retaining a law firm to guide the company through the process may help, but businesses should also stay current and provide proper training on the laws regarding workers’ compensation and worker misclassification. Neglecting this could be very expensive.

Shyrell Reed is a Richmond-based partner in national law firm LeClairRyan where she focuses much of her practice on professional liability defense, workers’ compensation and other employment-related matters. She can be contacted at: [email protected].

Whit Long is a Richmond-based associate at LeClairRyan, where he focuses much of his practice on  professional liability defense, business litigation and other matters. He can be contacted at [email protected].