So You Think You’ve Got Independent Contractors? Well, Think Again

by LeClairRyan
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Virginia law requires most employers to carry workers’ compensation insurance in order to provide specific benefits to workers injured during the course of their work and to provide employers with protection from civil suits for those work-related injuries. Generally, an employer with more than three employees is required to carry workers’ compensation coverage. However, in the last decade especially, employers have more frequently misclassified employees as independent contractors in an effort to keep the number of employees below three and to avoid purchasing workers’ compensation coverage.

Misclassification of employees as independent contractors can benefit the individual employers, but it has negative effects on our Commonwealth, on other lawful and honest employers, and on the economy. Nonetheless, employers continue to misclassify employees as independent contractors as a means to cut their costs and avoid compliance with labor laws. Frequently, employers will either designate the worker as an independent contractor or pay them on a 1099. Yet, designations, contracts, and/or the 1099 do not control.  Instead, the facts of the working relationship determine the appropriate classification and are considered in the event a worker is injured and seeks coverage through workers’ compensation.

An injured worker seeking benefits under the Workers’ Compensation Act has the burden of proving that he/she was an employee at the time of the accident. Employers and insurers often argue that no employer-employee relationship existed in order to avoid having to pay for the injured employee’s workers’ compensation benefits. In such situations, the Workers’ Compensation Commission looks to the facts of the working relationship and considers four factors in making the determination of whether the worker/claimant is an employee or independent contractor. Those four factors are:

  1. Selection and engagement (i.e., the right to hire),
  2. The power of dismissal,
  3. Payment of compensation and how payment is made, and
  4. The power to control the individual’s actions or work.

While all four factors are considered, the power to control is usually the most significant and determinative factor; however, control is not based on whether an employer decides to exercise control, but rather a matter of whether the employer has the legal ability to control the workers.

In an effort to curb misclassification practices, Governor McAuliffe issued Executive Order 24 on August 14, 2014, entitled “Establishing an Inter-Agency Taskforce on Worker Misclassification and Payroll Fraud.” The Taskforce was charged with developing and implementing a comprehensive plan to reduce worker misclassification in Virginia and to minimize the harmful effects, such as depriving Virginia of millions of dollars in tax revenues 1, preventing workers from receiving legal protections and benefits they deserve, and undermining Virginia businesses that follow the law.

Misclassification of employees has negative effects on the Commonwealth of Virginia and its citizens. It is a practice that constitutes payroll fraud and deprives hard-working Virginia employees of basic legal protections, such as workers’ compensation, family and medical leave, and unemployment insurance. Eliminating such a practice would serve to better both our state and the lives of all those hard-working citizens.

 

1  Based on state and national studies, the Joint Legislative Audit and Review Commission (JLARC) estimated that worker misclassification lowers Virginia’s state income tax collections by as much as $28 million per year.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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