In March 2020, Virginia’s Governor Ralph Northam signed into law, a series of employment-related bills that dramatically redefine Virginia’s employment laws with a focus on worker misclassification. This comes in response to a Q4 2019 Virginia Inter-Agency Taskforce report on Misclassification and Payroll Fraud of independent workers that concluded that misclassification is costing the state as much as $28M a year from lost state tax income. In this case (as trite as it may seem), a picture is worth a thousand words. The numbers are in BOLDFACE for a reason. The impacts are large, and employers need to brace themselves and prepare for changes ahead.
The laws are complex and will have stiff repercussions to employers who are cited. But here’s a brief recap that provides color into the intent of each law.
Law #1 (HB984) creates a private cause of action where any individual not properly classified as an employee can bring civil action for damages against their employer for improper classification, if the employer had knowledge of the individual’s misclassification. Not only will this open the door for class action lawsuits, the court may award damages in the amount of any wages, salary, employment benefits or other compensation lost to the individual, if the plaintiff is successful.
Law #2 (HB1199) prohibits retaliation against employees and makes it unlawful for employers to discharge, discipline, threaten, discriminate against or penalize an employee or independent contractor (IC) who reports or plans to report to an appropriate authority that the employer improperly classified an individual as an employee and failed to pay required benefits.
Law #3 (HB1407) creates investigative authority for Departments of Taxation and prohibits improper misclassification agreements. The Department of Taxation can determine whether an individual is an independent contractor by applying the IRS guidelines and prohibits employers from requesting that a person enter into an agreement or sign a document that would misclassify them as an IC that would not accurately reflect the relationship between the two as an employee and employee.
In short, two of the three laws presume that all workers are W-2 employees and cite the IRS 20-factors test to provide IC status.
The effects of Virginia worker misclassification are far-reaching. According to the text of the bill, any employer, or any officer or agent of the employer, that fails to properly classify an individual as an employee and fails to pay taxes, benefits, or other contributions required to be paid with respect to an employee will be subject to a civil penalty of:
- Up to $1,000 per misclassified individual for a first offense
- Up to $2,500 per misclassified individual for a second offense
- Up to $5,000 per misclassified individual for a third or subsequent offense
You can see how very quickly those fines can add up. In anticipation of the July 1 milestone of this legislation going into effect, employers in Virginia should proactively review contracts and employment agreements and conduct internal audits to verify they are safely in adherence with these new laws. In the shadow of COVID-19 and the economic stress all states are facing, employers who are intentionally misclassifying their workers could become targets and seen as a way to help recover strained state budgets and growing deficits. Let us show you how we can help you navigate these news laws.