A Primer on Virginia’s Independent Contractor Laws
The independent contractor laws of Virginia exist to regulate the rights and responsibilities of workers and employers in a landscape where freelance work continues to grow. These laws lay the foundation for the duties that both parties have to each other, then spell out the consequences for failing to meet these obligations. Some examples: parties can establish deadlines for deliveries, call for designated methods for complaint resolution, set the rate of pay and specify the contingencies for termination. These regulations help give clarity to an otherwise uncertain work agreement . An independent contractor agreement can take many forms, but in any case, it can only be written using the guidelines of Virginia law.
Under Virginia law, independent contractors are referred to as "agents." They are defined as "a person appointed as an agent to act for, or on behalf of, another in negotiating a contract for employment." It is important to note that even if parties use the term "independent contractor" in their employee contracts, until the parties’ behaviors, conduct and management practices likewise indicate that status, Virginia courts will generally not treat the parties as employee and employer.
Rules for Describing Workers as Independent Contractors
Generally, to establish an employer/employee relationship, it must be shown that the employer has the power not only to the result of the work to be performed by the employee, but also to control the manner and method by which such work is performed. 267 Va. at 498, 590 S.E.2d at 335. See also Trupin v. Cray, 200 Va. 892, 894, 104 S.E.2d 809, 811 (1958).
Workers who have an express written contract with detailed terms as to the rights, duties, and obligations of the parties will fall under the provisions of that contract. If the terms of that contract do not include certain provisions necessary to the relationship desired by the parties, and if no other factors would place the relationship under the provisions of an Asset Purchase Plan or something similar, then a court may classify the parties as employer/employee.
The following are the criteria typically used for classifying an individual as an independent contractor (and consequently outside the system): The amount of freedom from control over what work is to be done and how it is to be done; Whether the worker is engaged in a distinct occupation or business; The kind of occupation, and whether it is customarily done under a certain piece of skill; The location of the work; Whether there is a specific time for completion of the work; The methods of payment; Whether there is a belief on the part of the parties that an employer/employee relationship exists; Whether the work requires special skill or equipment; The duration of the relationship; Whether the worker hires his/her own employees; Whether the work is performed in the regular course of business of the employer; Whether the employer is in business; and Whether taxes are withheld from the compensation.
Virginia Unemployment Tax and Independent Contractors
A new employer must register and pay Virginia unemployment tax beginning the first day of operation if the company is under common control with other businesses. After operating for one year, a business that ceases all operations and has not been part of a larger company under common control will be relief from taxation. Any Virginia business that would otherwise be exempt (e.g. non-profits) will have its liability determined as though it were not a qualified business. Exempt Virginia businesses include clubs and student organizations. Exclusions do not apply until January 1 following approval of an application for exemption. Regardless of its size or salary paid, a Virginia religious organization must register, report wages, and pay unemployment tax. A Virginia business must register if it has at least one employee one day per week and if the gross payroll for any 13-week period or calendar year exceeds $1,500 and/or if it receives $1,500 in loan service fees from individuals related to its lending services.
An employer is also required to register and to pay Virginia unemployment tax if it is subject to unemployment coverage in another state. But there is an exception for professional employer organizations (PEOs) that service multiple clients. If a PEO registers, employers are then exempt from registration, reporting, and tax obligations. PEOs are obligated to make payments on behalf of their clients and maintain records. PEOs that cease doing business no longer have liability.
By default, a Virginia independent contractor is an employer and is subject to Virginia unemployment tax if: (1) engaging in an occupation and receiving a guaranteed amount, commission, fee or salary, AND (2) holding himself out to be a business available to provide services to the public OR regularly performing services defined by law as "employment." Employment is deemed to have occurred if the individual performs services that are substantially the same functions as those of an employee. By law, an individual is an independent contractor if the individual: (1) holds a separate and distinct business license that requires the performance of such service, (2) possesses and maintains business insurance required by law, and (3) employs employees for performance of the services.
Further, if an employer offers other services, it must obtain an additional account number for those services, even if the individuals who provide the service are not classified as employees.
The Cost of Classifying Workers Incorrectly
Virginia employers that fail to properly classify workers as either employees or independent contractors may be subject to penalties or fines by the Virginia Employment Commission. The VEC has the discretion to impose fines if the employer has "intentionally violated" employment laws and regulations/rules. Penalties can include, and may not be limited to: 1) the requirement that the employer pay 100% of the misclassified employee’s Virginia Unemployment Tax Assessment rate for the twelve months preceding the assessment; 2) repayment of benefits paid to a worker incorrectly classified as an independent contractor, recoverable from any current unemployment benefits payable to the claimant and otherwise from the employer; or 3) suspension of the employer’s account number, making it ineligible to receive any benefit charged to the account during the period of suspension.
While the penalties assessed by the VEC appear to be nominal in light of the potential liability an employer may face, such penalties published on the VEC website have not been updated since 2010, and it is uncertain whether the VEC has actually levied such $1,000 fines in recent years. Whatever the case, there are numerous other potential and significant penalties that could be assessed against employers guilty of misclassifying employees. These penalties could include severe civil and criminal penalties for misclassifying employees as independent contractors under the Virginia Workers Compensation Act, potential retaliatory discharge claims brought under the Fair Labor Standards Act, and hefty fines imposed on employers registered to do business in other states who have failed to check with the Secretary of Commonwealth for any potential contractor status prior to contracting additional services under the Furnish Labor or Services statutes.
Recent Developments in Virginia’s Independent Contractor Laws
In light of the various legislative changes enacted in 2018 and 2019, there is little to report for the time being. As described below, two new provisions have been added to the Virginia minimum wage laws which, ironically, affect independent contractor and employee classifications for the purposes of determining whether an individual is entitled to certain rights and protections. Further, as noted below, the Virginia General Assembly recently enacted a comprehensive anti-discrimination statute, which now has an independent contractor provision to protect individuals against discrimination based upon a protected characteristic.
The first new provision of the Virginia minimum Wage Laws & Regulations reads: "No person shall be misclassified as an independent contractor to avoid the requirements of this title or regulations promulgated hereunder." This was enacted in 2018.
The second new provision reads: Any person who is an independent contractor as defined in this chapter shall have the same rights and protections under this chapter as a covered employee and shall have the rights and protections of a covered employee as provided in § 40.1-2(6)." This was enacted in 2019.
The Virginia General Assembly has enacted a comprehensive anti-discrimination statute that includes a "misclassification provision" which expands the rights and protections of individuals misclassified as independent contractors or any manager , supervisor officer or agent of such an entity that misclassifies an individual as an independent contractor. This was enacted in 2019.
Because the aforementioned new provisions of the Virginia Minimum Wage statute and the total revised Employee Discrimination statute take effect on July 1, 2020, it is impossible to predict how the courts or state agencies will interpret and apply these new provisions. In addition, I suspect that differences in interpretation will arise from different jurisdictions because of the fact that in Virginia, the courts of different city and county jurisdictions have different supervisory and appellate authorities. In the Northern Virginia counties and cities, the Circuit Courts of Appeals have authority to supervise and reverse criminal convictions of defendants for alleged violations of minimum wages and other provisions of the Virginia Employment Commission statutes and the Virginia Human Rights Act.
Needless to say, the law in Virginia is changing for independent contractors and because these new provisions take effect on July 1, all stakeholders need to consider whether they place the independent contractors in jeopardy or whether they are placing themselves in a precarious position because they are unprotected either as a contractor or as an employer that is misclassifying an employee, or both.
Implementing Protections for Independent Contractors
A variety of laws protect the rights of independent contractors. For example, the Virginia Employment Commission handles worker’s compensation claims and wage claims. That means that if your employer doesn’t pay your wages, you have the right to bring a claim for unpaid wages.
There are also laws regarding the payment of compensation to any independent subcontractors. In Virginia, when a general contractor is required to pay an independent contractor under a contract, the general contractor is required to pay that independent contractor within 15 days of receipt of payment under the agreement or 7 days after the day on which the general contractor is required to pay the independent contractor, whichever comes first. There are significant penalties that apply to failure to comply with Virginia Code Section 11-4.6, giving independent contractors the right to pursue legal action against the general contractor for just cause.
If the independent contractor has agreed to provide services for a minimum period of time, under Virginia Code Section 11-4.5 an independent contractor cannot arbitrarily terminate, or be terminated, during the period.
Also, if there is a dispute between the independent contractor and the general contractor regarding the terms of the contract, it is the responsibility of the hiring party to create a written record of the oral agreement or adjustment to the written agreement.
In Virginia, independent contractors can collect interest and damages for unpaid compensation. It is important for a person working as an independent contractor to understand their rights under the law. If you believe your compensation has been dishonored, please contact us immediately.
Business Considerations: Hiring Independent Contractors
The prior section of this post made it clear that Virginia law on independent contractor classification is not black and white. To further emphasize this, there are few federal laws that apply to independent contractors that are independent of Virginia law on the subject, and therefore they may very well stand as an indicator of how Virginia would examine a given working relationship.
Nevertheless, we can observe some general trends in how Virginia has analyzed independent contractors. Or, said another way, what steps can you as an employer take to ensure you have the best possible argument that your independent contractors are actually independent rather than employees?
First, it is very important to make sure the contractor knows he is an independent contractor and is not an employee. The written agreement should specifically say that it is a contract for services rather than employment. Be sure to make the point repeatedly so that the contractor knows that he is not being hired as an employee. You cannot expect your contractor to draw the inference that he is not an employee if you do not communicate this clearly to him in a way he can understand.
Second, pay attention to what you call your independent contractors. You may even consider referring to them as "vendors" rather than "contractors." In fact, be wary of the term "contractor," as it suggests that you view them as a contractor for services, which is what they are, and could lead you astray. Do not use the word "employer" when it comes to discussing the relationship in any form or fashion, such as in job postings, agreements, emails, or verbal communication. One of the best ways to confine the individual to the contractor status you intend is to not even use the word in communication with him.
Third, a relatively common practice to minimize the control exercised by you as the employer is to have your independent contractors post a bond or insurance deposit, which is returnable upon completion of the work and termination of the relationship.
Fourth, have a specific written agreement for the services to be performed by the independent contractor that mirrors the written agreement for employees, but with the word "contractor" used wherever applicable in lieu of the work "employee." You may want to consider incorporating a specific cutoff for the business relationship, such as a stated date or length of time. While this is not required, it can help show that the contractor does not have the right to continue or renewal of the contract, which weighs against employer status. See Chamberlayne v. Summerour, 24 Va. App. 442, 482 S.E.2d 66 (Va. Ct. App. 1997).
Fifth, do not provide any of the tools or equipment that the contractor will need to perform the services. Commission allows the contractor to furnish his own tools. Failing to follow this also carries the risk that the IRS would apply the common law test for employment, and not the Workers’ Compensation statute analysis.
Sixth, be absolutely sure that the independent contractor actually pays one-half of FICA taxes, unless the tax is reimbursed by the employer in a manner not taxable to the contractor. This can be dramatic evidence that the relationship is that of contractor and not employee. The IRS has a published policy stating that if the contractor is an employee (which he is not supposed to be in order for him to be a contractor) but incorrectly treated as an independent contractor, then the IRS will calculate what the correct tax liability is under the common law test, given the true nature of the relationship. If the IRS concludes that the relationship was actually as an employee, then the IRS will recalculate the taxes on that basis. The takeaway here is that once the IRS loses the tax argument, they will aggressively try to go after you as the employer for Worker’s Compensation claims, since you can no longer use the argument that the IRS treated all these individuals as independent contractors. Be sure that your arrangement with your contractor completely avoids such issues.
Seventh, include a complete indemnification clause in the written agreement, which requires the contractor to indemnify the employer for any Workers’ Compensation liability arising out of the contractor’s work. See Nationwide Gen. Ins. Co. v. Simplex Grinnell, LP, 63 Va. Cir. 130 (Va. Cir. Ct. 2003).
Useful Resources and Help
For those who want to dig deeper into independent contractor laws in Virginia, there are a number of resources available. The Virginia Employment Commission provides an overview of the state’s independent contractor misclassification laws and lays out the steps for filing a complaint for misclassification of an employee as an independent contractor . If you believe that your (or your employees’) independence is being wrongly infringed upon, you should consult with an employment attorney familiar with employment law in Virginia. Providing sound legal advice to employers and employees alike, Law Office of Sam Adamo is ready to assist you in any employment law matters.