In August 2018, Governor Northam signed Executive Order 16, which established the Inter-Agency Taskforce on Misclassification and Payroll Fraud. The Taskforce’s purpose was to make recommendations on how to measure and combat “misclassification” of workers as independent contractors in the view of the Commonwealth. The Taskforce included representatives from a variety of state agencies, such as the Virginia Employment Commission, the Department of Professional and Occupational Regulation, the Department of Taxation, and the Office of Attorney General. The Taskforce did not include non-governmental representatives.
The Taskforce produced its report on November 22, 2019. The report reiterates the importance of potential misclassification of persons designated as independent contractors instead of employees. It found that “up to one-third of audited employers in certain industries misclassify employees,” reducing their overhead by 40% and lowering Virginia state income tax by $28 million a year. Further, the report criticizes independent contractor relationships and looked at ways to address related perceived “misconduct” through incentives and penalties.
Along with providing their own recommendations, the Taskforce looked at the laws and regulations of other states. According to the report, over 20 states have specific laws to combat worker misclassification and an additional 15 have taskforces for the same purpose. In some states, there is a rebuttable presumption that workers are employees/the employer has the burden of overcoming that presumption. In other states, the state must certify independent contractors. Based on the research of other states laws and an analysis of the current enforcement and investigation procedures in various Virginia agencies, the Taskforce offered the following 11 recommendations aimed at deterring and correcting what the Taskforce deemed worker misclassification:
- Formally adopt and continue applying the IRS standard for employment and assess greater penalties substantial enough to deter misclassification.
- Apply penalties to employers even when they received advice, consultation, or counsel on its business model, effectively eliminating a good faith defense to penalties.
- Create a private cause of action for workers to sue an employer for damages resulting from misclassification, such as wages, taxes, value of benefits, lost, and attorney’s fees.
- Provide whistleblower protection for those who report suspected misclassification or other workplace fraud.
- Allow the DPOR Board of Contractors to sanction licensed contractor firms for misclassification.
- Make employers who have misclassified workers ineligible to bid on contracts under the Virginia Public Procurement Act.
- Produce uniform investigative and enforcement procedures for the task force and the agencies to utilize in combating misclassification.
- Identify an agency to lead the efforts in the inter-agency investigation and enforcement of misclassification.
- Fund education for the general public, workers, and employers on worker misclassification.
- Apportion funding to support the inter-agency model to hire investigators and continue joint cooperation.
- Keep the Taskforce in place to monitor and inform on these efforts.
Although these recommendations do not have the force of law, they provide a signal for employers. In particular, employers can expect greater attention to perceived worker misclassification by Virginia enforcement and investigative agencies. Losing at the agency level could lead to fines, legal expenditures, and litigation. Given the continuing evolution of these and related employment law matters, employers should continuously evaluate their independent workforce approaches and the appropriateness, and defensibility, of such arrangements.