Virginia’s Independent Contractor Misclassification Law: Control and Independence

Virginia’s misclassification of workers statute allows workers to file suit against their employers who have misclassified them as independent contractors. If the worker prevails, the court may award the worker any wages, employment benefits, or other compensation lost as a result of the employer improperly classifying the worker as an independent contractor.

Difference Between Independent Contractors and Employees

A true independent contractor is someone who is in business for himself or herself. He controls his work environment, invests his own money, and is not economically dependent on the companies for which he works. An employee, by contrast, generally is not in business for himself or herself and, compared to an independent contractor, is more economically dependent on the companies for which he works. Independent contractors have more control over their work than employees, who are generally subject to the control of the companies for which they render services.

The distinction is important. Employees generally are entitled to overtime compensation and minimum wages (if non-exempt), as well as employment benefits like health insurance, worker’s compensation, payroll taxes, and retirement benefits. Some of the specific benefits offered to employees may depend on the employer (like health insurance), whereas other benefits available to employees are determined by the law (like payroll taxes and overtime pay). Independent contractors generally do not receive overtime pay or employment benefits.

Due to the costs of employment benefits and overtime compensation, businesses that use contractors instead of employees can save a lot of money. For this reason, companies may sometimes try to classify workers as independent contractors, such as by having the workers sign independent contractor “agreements,” even though the workers are more properly classified as employees. This works to the detriment of the workers, who miss out on overtime compensation and other employment benefits available to employees.

Remedy for Employees Misclassified as Independent Contractors

Fortunately, Virginia law provides a remedy for workers who are incorrectly classified as independent contractors. The law allows an individual “who has not been properly classified as an employee” or his representative to bring a civil action for damages against his employer “for failing to properly classify the employee if the employer had knowledge of the individual’s misclassification.” VA Code § 40.1-28.7:7(A).

IRS Independent Contractor Guidelines: Control and Independence

The Virginia misclassification law creates a presumption that individuals paid remuneration for performing services are employees of the person paying them, and the payor the employer of the individual, “unless it is shown that the individual is an independent contractor as determined under the Internal Revenue Service guidelines.” VA Code § 40.1-28.7:7(B). This effectively puts the burden on the putative employer to show that the worker was not misclassified under IRS guidelines.

The IRS independent contractor guidelines, including the guidance available here, and the regulation at 26 CFR § 31.3121(d)-1, provide that whether a worker is an independent contractor depends on the worker’s “degree of control and independence.” Generally, the greater the worker’s control and independence, the more likely he is an independent contractor. Conversely, the less control the worker has over his work environment and the more dependent he is on the company or companies he works for, the more likely the worker is truly an employee. In making this assessment, the guidelines call for consideration of three categories of factors: behavioral control and independence, financial control and independence, and type of relationship.

Behavioral Control and Independence

“Behavioral control” refers to who has the 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. Significantly, the business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work. The IRS guidelines identity several categories of behavioral control, including:

• Type of instructions given: An employee is generally subject to the business’s instructions about when, where, and how to work.
• Degree of instruction: Generally, the more detailed the instructions, the more control the business exercises over the worker. The amount of instruction needed, however, varies among different jobs. Importantly, the key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right. Where the business retains the right to control the details of the worker’s performance, this supports a finding that the worker is an employee.
• Evaluation systems: If an evaluation system measures the details of how the work is performed, that suggests an employment relationship. If, on the other hand, the evaluation system measures just the end result, then this can point to either an independent contractor or an employee.
• Training: If the business provides the worker with training on how to do the job, this indicates that the business wants the job done in a certain way. This is strong evidence that the worker is an employee.

The key question on the behavioral control factor, therefore, is does the company control or have the right to control what the worker does and how the worker does his or her job? The IRS’s behavioral control guidelines are available here.

Financial Control and Independence

“Financial control” refers to whether or not the business has the right to control the economic aspects of the worker’s job. The IRS guidelines identity several categories of financial control, including:

• Significant investment: An independent contractor often has a significant financial investment in the equipment he uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees.
• Unreimbursed expenses: Independent contractors are more likely to have unreimbursed expenses than are employees.
• Opportunity for profit or loss: Independent contractors generally have greater opportunity than employees to lose money (such as by expenses exceeding their income from the work) than employees.
• Services available to the market: Independent contractors are generally free to seek out business opportunities. They often advertise, maintain a visible business location, and are available to work for many different companies in the relevant market.
• Method of payment: An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job.

The key question on the financial control factor, ultimately, is who controls the business aspects of the worker’s job? These “business aspects” include things like how the worker is paid, whether expenses are reimbursed, and who provides tools, supplies, and equipment for the work. The IRS’s financial control guidelines are available here.

Type of Relationship

“Type of relationship” refers to how the worker and business perceive their relationship to each other. The IRS guidelines identity several categories of facts bearing on this assessment, including:

• Written contracts: Although a contract may state that the worker is an independent contractor, this is not sufficient to make the worker an independent contractor. How the parties work together, considering all factors of control and independence, determines whether the worker is an employee or an independent contractor.
• Employee benefits: Employee benefits include things like health insurance, pension plans, paid vacation, and disability insurance. Businesses usually do not grant these benefits to independent contractors.  However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
• Permanency of the relationship: If a business hires a worker with the expectation that the relationship will continue indefinitely, instead of for a specific project or period, this is generally considered evidence of an employer-employee relationship.
• Services provided as key activity of the business: If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. This would indicate an employer-employee relationship.

The key questions on the “type of relationship” factor include whether there are written contracts or employee-type benefits, whether the relationship continues, and whether the work performed is a key aspect of the business. The IRS’s guidelines on this factor are available here.

Notably, under the guidelines, an agreement stating that the worker is an independent contractor does not make him or her an independent contractor. At most, it is just one factor to consider. And when determining whether a worker is an employee or independent contractor, all of the above factors — behavioral control, financial control, and type of relationship — must be weighed.

Available Relief for Misclassified Workers

Under Virginia’s misclassification law, if a worker is misclassified as an independent contractor, the court may award the worker “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,” plus reasonable attorneys’ fees and costs. VA Code § 40.1-28.7:7(A).