The Internal Revenue Service, U.S. Department of Labor, countless other government agencies, and plaintiffs’ attorneys have long sought unpaid taxes, wages, and benefits – plus attorney’s fees and other remedies – by challenging employer classifications of workers as independent contractors. This year, the Virginia General Assembly and Governor have put their thumbs on the scales in favor of claimants who allege they were misclassified as independent contractors, as opposed to employees.
A new Virginia statute, with an effective date of July 1, 2020, establishes a presumption that any individual who performs services for a person for remuneration is an employee of the person that paid such remuneration, unless the individual is shown to be an independent contractor under Internal Revenue Service guidelines. As used in the statute, “Internal Revenue Service guidelines” means the most recent version of the guidelines published by the IRS for evaluating independent contractor status, including its interpretation of common law doctrine on independent contractors, and any regulations that the IRS may promulgate regarding determining whether an employee is an independent contractor, including 26 C.F.R. § 31.3121(d)-1.
The statute provides that an individual who has not been properly classified as an employee may bring a civil action for damages against his or her employer if the employer had knowledge of the individual’s misclassification. The court may award 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’s fee, and related litigation costs.
Use Written Agreements and Good Practices.
To avoid controversy about a worker’s independent contractor status, careful attention to the structure of the relationship at the outset, including by use of a written independent contractor agreement, is essential. Once the agreement is in place, the parties should conduct themselves in a manner that ensures the worker controls the means and methods by which he or she performs the work. Before the new misclassification statue becomes effective, existing independent contractor relationships should be reviewed, and updates to any agreement and practices should be considered.
The IRS applies a “right to control” test which provides that an individual is an independent contractor if the party paying the individual has the right to control or direct only the result of the work and not what will be done and how it will be done. IRS guidance specifies factors and categories to be considered. Consistent with Virginia common law, under the IRS’s test, no one factor is determinative; rather, all the facts and circumstances are considered to determine how the worker should be characterized.
Key Categories and Factors.
When classifying particular workers for compliance with the new statute, facts relating to behavioral control, financial control, and the parties’ intentions regarding the relationship should be considered.
Behavioral Control – Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not actually have to direct or control the way the work is done – as long as the employer has the right to direct and control the work.
- Degree of instruction by the business to the worker. More detailed instructions indicate that the worker is an employee. Less detailed instructions reflect less control, indicating that the worker is more likely an independent contractor. An employee generally must obey his or her employer’s directions concerning when, where, and how to work. On the other hand, an independent contractor generally makes those decisions himself or herself.
- Evaluation System. If an evaluation system measures the details of how the work is performed, then this factor would point to employee status. If the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
- Training. Employees are generally trained to perform services in a particular manner, but an independent contractor generally has the training already and is able to deliver the result for the principal.
Financial Control – The general point with respect to financial control is whether the business aspects of the worker’s job are controlled by the payer. These include things like how the worker is paid, whether expenses are reimbursed, and who provides tools/supplies. Independent contractors operate their own businesses, and thus are less likely to be reimbursed for common business expenses (e.g., gas, meals, traffic tickets, etc.) than employees.
- Extent of the worker’s investment. An employee usually has no investment in the work other than his or her own time. An independent contractor, on the other hand, often has a significant investment in the facilities he or she uses in performing services for someone else.
- Services available to the market. Workers are more likely to be characterized as independent contractors if they are free to work for other companies without retribution or punishment from the principal and if they, in fact, do provide their services to others.
- Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. An independent contractor, on the other hand, is often paid by a flat fee for the job.
- Extent to which the worker can earn a profit or loss. The more likely an individual can earn a profit or a loss, the more likely that individual is an independent contractor.
Type of Relationship – Facts that show how the worker and business perceive their relationship to each other can be critical to determining proper classification.
Written Contracts: A court is more likely to determine that a worker is an independent contractor if there is a written agreement between the company and the individual that expressly states the individual is an independent contractor. The language in the agreement is not dispositive but it can be helpful in establishing independent contractor status. How the parties actually work together under the agreement is critically important in determining whether the worker is an employee or an independent contractor.
- Employee Benefits: If a company provides its workers with health insurance, a pension plan, or vacation or sick pay, the worker is more likely to be deemed an employee.
- Permanency of the Relationship: If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is evidence that the intent was to create an employer-employee relationship.
- Key Activity of the Regular Business: If the services a worker provides to a company are a key aspect of the company’s regular business activity, it is more likely that the company will have the right to control his or her activity.
Timothy M. McConville is President of Praemia Law, PLLC. This article is for general informational purposes only and should not be relied upon or regarded as legal advice. Please contact Timothy McConville at Timothy.McConville@praemialaw.comor 703-399-3603 concerning particular facts and circumstances.