In latest edition of The Wright Toolbox:
- Independent Contractor? Maybe Not Anymore: New Virginia Worker Classification Statutes Took Effect on January 1, 2021 – read now
Independent Contractor? Maybe Not Anymore: New Virginia Worker Classification Statutes Took Effect on January 1, 2021
On January 1, 2021, the new provisions of Virginia Code § 58.1-1900, et seq. went into effect across the Commonwealth. These provisions are another step in bolstering Virginia’s new policy on classification of workers as either employees or independent contractors. These are big changes with significant consequences! This brief summary highlights the newest statutes and what can happen if a business fails to comply.
First, Virginia Code § 58.1-1900(A) states that “if an individual performs services for an employer for remuneration, that individual shall be considered an employee of the party that pays that remuneration unless such individual or his employer demonstrates that such individual is an independent contractor. The Department shall determine whether an individual is an independent contractor by applying Internal Revenue Service guidelines.” Essentially, the new statute states that a worker is presumed to be an employee. The only way around that for a business owner to establish the worker is a contractor using a complicated IRS test. Put simply, classifying a worker as a contractor, not an employee, is going to be an uphill battle for the foreseeable future in Virginia.
If a business fails to properly classify a worker, Virginia Code § 58.1-1901 establishes civil penalties for those employers. Specifically, the employer becomes subject to fines of “$1,000 per misclassified individual for a first offense, up to $2,500 per misclassified individual for a second offense, and up to $5,000 per misclassified individual for a third or subsequent offense.”
On top of the penalties, the next statute – § 58.1-1902 – sets forth a debarment procedure. After a company’s first offense, all public bodies and institutions are notified of that company’s name and their failure to properly classify. For subsequent violations by that company, “all public bodies and covered institutions shall not award a contract to such employer or to any firm, corporation, or partnership in which the employer has an interest in the following manner: (1) For a period of up to one year, as determined by the Department, from the date of the notice for a second offense; (2) For a period of up to three years, as determined by the Department, from the date of the notice for a third or subsequent offense.”
Furthermore, under § 58.1-1904, no employer can discriminate or take adverse action against someone for exercising the rights afforded by these statutes.
These statutes expand upon the statute that went into effect in July 2020 that gave individuals private rights of action against employers who knowingly failed to properly classify an individual (Virginia Code § 40.1-28.7:7). Under that statute, if the Court finds that the person was not properly classified, “the court may award the individual 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 fee, and the costs incurred by the individual in bringing the action.”
Any entity doing business in Virginia needs to carefully review the status of all of its workers. These new laws have put in place a strong presumption that all workers are considered employees, absent very specific circumstances. Therefore, if you utilize “contractors,” it is important to make sure such a classification is ironclad. If not, you can face serious consequences for such misclassifications.