There are no barriers or restrictions preventing a provider from initiating those actions. What is the petitioners purpose for wanting this regulatory amendment?

PROVIDERS nor the DEPARTMENT of LICENSING consider what are the legal definitions of EMPLOYEES or INDEPENDENT CONTRACTORS under federal law or state law even though 12VAC35-105-150. states providers “MUST” comply with ALL APPLICABLE FEDERAL, STATE, LOCAL LAWS and/or REGULATIONS INCLUDING LAWS REGARDING EMPLOYMENT PRACTICES.

The PROVIDERS nor the DEPARTMENT of LICENSING know under federal law

1) that IRS Form SS-8 legally “MUST” be filed with the IRS at which time it will be legally determined whether or not that employer can legally employ workers as EMPLOYEES or INDEPENDENT CONTRACTORS before an employer hires individuals as independent contractors for the purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act and

2) The PROVIDERS nor the DEPARTMENT of LICENSING request that the  Virginia Unemployment Commission determine whether or not an individual should be legally classified as an employee or independent contractor which is discussed under the

§ 60.2-212.(C) of the Virginia Unemployment Act.

Our review of employee misclassification in Virginia found that: 

1. Employers who properly classify workers:

1. pay higher payroll costs and
2. may be less competitive in their respective industries. 

2. Several other states, the IRS, and the U.S. Government Accountability Office have found that misclassification can:

      a. impact government revenues as well as

      b. employers and workers.

3. Misclassified workers are often denied certain legal rights and benefits.   

4. A Virginia Employment Commission (VEC) audit of one percent of Virginia employers found:

       a. 5,639 workers were misclassified in 2010.

5. Based on estimates in other states, Virginia could have on the order of:

1.  40,000 misclassifying employers and
2. 214,000 misclassified workers.   

6. Worker misclassification:

1. lowers Virginia’s state income tax collections, leading to estimated foregone revenues on the order of $1 million for workers identified during VEC audits and
2. $28 million in total based on other states’ findings in 2010. 

Generally, a worker who performs services for an employer is an employee if the employer can control both what will be done and how it will be done.  The key factor is that the employer has the right to control the details of how the services are performed, even if the employee has substantial freedom of action.

By contrast, an independent contractor performs services required by an employer but is not subject to the employer’s control about how the services are performed.

The Virginia Unemployment Compensation Act, § 60.2-212C provides that “Services performed by an individual for remuneration shall be deemed to be employment subject to this title unless the Commission determines that such individual is not an employee for purposes of the Federal Insurance Contributions Act and the Federal Unemployment Tax Act, based upon application of the 20 factors set forth in Internal Revenue Service Ruling 87-41”. 

To help determine whether a worker is an employee, the IRS identified 20 factors that may indicate whether the employer can exercise enough control to establish an employer-employee relationship. Not all the factors must be present to find an employee/employment relationship, but the factors are guides to assess the likelihood as to whether an individual is an employee or an independent contractor.  The 20 factors and Virginia’s exemptions to employee classification can be found here. An employer who misclassifies workers may be subject to penalties under Section 60.2-513 of the Virginia Unemployment Compensation Act.

If you need help determining if you have been classified properly please contact Dona Ellis at 804-786-3004 or by e-mail by clicking here (link sends e-mail). A Tax Representative will review your situation and be able to determine proper worker status.

Why Is Misclassification A Problem?

According to the Virginia Department of Labor and Industry’s June 2, 2015 Policy Memorandum, misclassification of employees as independent contractors is harmful for three major reasons.

First, Misclassification is a form of payroll fraud that deprives the Commonwealth of millions of dollars in tax revenues. The costs to Virginias’ taxpayers, employers and employees are in the tens, if not hundreds, of millions of dollars.

Second, misclassified workers suffer. Employees misclassified as independent contractors are denied legal protections and benefits, including workers’ compensation, medical and family leave, unemployment insurance, minimum wage protections, overtime, health insurance, retirement benefits, and occupational safety and health protections.

Third, Misclassification hurts competition and undermines employers who properly classify workers by giving an unfair advantage to employers who misclassify their workers.

According to VOSH’s 2015 Employee Misclassification brochure, employers who misclassify fail to purchase workers’ compensation insurance, pay unemployment insurance and payroll taxes, or comply with minimum wage and overtime laws, resulting in a forty percent reduction in costs. This places those employers at a competitive advantage in the bidding process for new projects. Additionally, employers who properly classify workers may be liable for additional unemployment tax and workers’ compensation rates, which are adjusted upwards to cover costs avoided by misclassification of workers.

Help with Deciding

To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control:  A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

• Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
• Degree of instruction, more detailed instructions may indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
• Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
• Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:

• Significant investment in the equipment the worker uses in working for someone else.
• Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss is often an indicator of an independent contractor.
• Services available to the market. Independent contractors are generally free to seek out business opportunities.
• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

• Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
• Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
• The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
• Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.

Behavioral Control:  A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

• Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
• Degree of instruction, more detailed instructions may indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
• Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
• Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:

• Significant investment in the equipment the worker uses in working for someone else.
• Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
• Opportunity for profit or loss is often an indicator of an independent contractor.
• Services available to the market. Independent contractors are generally free to seek out business opportunities.
• Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

• Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
• Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
• The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
• Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective customers belong to the dealer. She has to develop leads and report results to the sales manager. Because of her experience, she requires only minimal assistance in closing and financing sales and in other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an employee of Bob Blue.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.

However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.

For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors or Employees.

If workers are independent contractors under the common law rules, such workers may nevertheless be treated as employees by statute (statutory employees) for certain employment tax purposes

§ 60.2-212.2. Obtaining a determination or opinion.

NUMBER SIXTEEN (2018) ESTABLISHING AN INTER-AGENCY TASK FORCE ON WORKER

MISCLASSIFICATION AND PAYROLL FRAUD

Importance of the Issue

The misclassification of employees as “independent contractors” undermines businesses that follow the law, deprives the Commonwealth of millions of dollars in tax revenues, and prevents workers from receiving legal protections and benefits.

A 2012 report of the Joint Legislative Audit and Review Commission (JLARC) found that one third of audited employers in certain industries misclassify their employees. By failing to purchase workers' compensation insurance, pay unemployment insurance and payroll taxes, or comply with minimum wage and overtime laws, employers lower their costs as much as 40%, placing other employers at a competitive disadvantage.

Based on state and national studies, JLARC estimated that worker misclassification lowers Virginia’s state income tax collections as much as $28 million a year. Agencies with relevant enforcement responsibilities, including the Virginia Employment Commission, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, and the Workers’ Compensation Commission each address only one component of this practice and may not fully coordinate their efforts. In its study, JLARC recommended the establishment of a task force with representatives from the agencies listed above.

Establishment of the Task Force

Pursuant to the authority vested in me as Governor under Article V of the Constitution of Virginia, and the Code of Virginia, in order to examine the issue of worker misclassification and payroll fraud, I hereby create an Inter-Agency Taskforce on Worker Misclassification and Payroll Fraud (Taskforce).

Initiatives

The purpose of the Taskforce is to develop and implement a comprehensive plan with measurable goals to reduce worker misclassification and payroll fraud in Virginia. The activities of the Taskforce should include, but not be limited to:

1. Reviewing statutes and regulations related to worker misclassification and payroll fraud;

2. Evaluating current enforcement practices of the agencies involved;

3. Developing procedures for more effective inter-agency cooperation and joint enforcement;

4. Developing educational materials and an outreach strategy for employers;

5. Advising on any technological or other improvements in worker misclassification and payroll fraud detection;

6. Recommending any appropriate changes to relevant legislation or administrative rules;

7. Identifying ways to involve external stakeholders in the Taskforce’s work;

8. Identifying ways to hold companies working on state contracts who commit payroll fraud through misclassification of workers accountable; and

9. Identifying ways to deter such misconduct through incentives and enforcement mechanisms.

The Taskforce will be chaired by the Secretary of Commerce and Trade and will include representatives from the Virginia Employment Commission, the Department of General Services, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, the Workers’ Compensation Commission, and the Office of the Attorney General.

The Taskforce shall develop a work plan by November 1, 2018. The Taskforce shall report to the Governor on its progress by August 1, 2019.

Effective Date of the Executive Order

This Executive Order shall be effective upon its signing and, pursuant to §§ 2.2-134 and 2.2-135 of the Code of Virginia, shall remain in full force and effect for a year from its signing or until superseded or rescinded.

Given under my hand and under the Seal of the Commonwealth of Virginia this 10th day of August, 2018.

The misclassification of employees as “independent contractors” undermines businesses that follow the law, deprives the Commonwealth of millions of dollars in tax revenues, and prevents workers from receiving legal protections and benefits.

A 2012 report of the Joint Legislative Audit and Review Commission (JLARC) found that one third of audited employers in certain industries misclassify their employees. By failing to purchase workers' compensation insurance, pay unemployment insurance and payroll taxes, or comply with minimum wage and overtime laws, employers lower their costs as much as 40%, placing other employers at a competitive disadvantage.

Based on state and national studies, JLARC estimated that worker misclassification lowers Virginia’s state income tax collections as much as $28 million a year. Agencies with relevant enforcement responsibilities, including the Virginia Employment Commission, the Department of Labor and Industry, the Department of Professional and Occupational Regulation, the State Corporation Commission’s Bureau of Insurance, the Department of Taxation, and the Workers’ Compensation Commission each address only one component of this practice and may not fully coordinate their efforts. In its study, JLARC recommended the establishment of a task force with representatives from the agencies listed above.

Classifying a worker as an independent contractor rather than an employee significantly affects an employer’s obligations towards the worker and can result in liability for misclassification. Employees are entitled by law to certain benefits and protections to which independent contractors are not entitled. Therefore, employers who misclassify their employees as independent contractors face potential liability for various unpaid employee expenses such as payroll taxes, workers’ compensation and unemployment insurance premiums, and even minimum wage and overtime payments, which are not owed to independent contractors.  Employees are also protected by various federal and state anti-discrimination and medical leave protections under which independent contractors are not protected. 

In most cases, a worker will be considered an employee if the employer can control two things: what will be done, and how it will be done. Alternatively, independent contractors are not under the employer's control when performing their services.

It isn't uncommon for some businesses -- particularly small businesses -- to use "independent contractors." The reality is that they may not need full-blown employees, and by using independent contractors employers can cut costs significantly because they do not need to pay certain taxes and benefits. In fact, employers can lower their costs by up to 40 percent by using independent contractors instead of regular employees.

However, employers can run into trouble if they misclassify a worker as an "independent contractor" when they are actually considered "employees" under the law. Indeed, the penalties for misclassifying an employee and not paying payroll taxes can be severe -- not to mention the misclassified employees may be able to seek their rightful benefits under the law.

Worker misclassification occurs when an employer improperly classifies a worker as an independent contractor instead of as an employee. Some employers in Virginia are concerned about the unfair competitive advantage gained by those who misclassify workers to avoid paying taxes and benefits (lowering their costs by up to 40 percent).

For worker classification purposes, “contractor” refers to someone working under an employment contract or agreement, NOT only construction-related activities.

• Employees have taxes withheld from their paychecks and have legal protections such as the minimum wage law, unemployment benefits, and workers’ compensation insurance. 
• Independent contractors are generally responsible for paying all of their own taxes and benefits, and are often not eligible for these and other legal protections. 

Employee misclassification undermines those businesses that follow the law by allowing unscrupulous employers to undercut bids because they avoid payroll costs. Virginia is committed to leveling the playing field for employers that play by the rules. 

Although DPOR does not enforce wage, unemployment benefit, or workers' compensation laws, we work in concert with other state agencies (DOLI, VEC, VWC) to protect the public's health, safety and welfare, while promoting our Commonwealth's strong business climate.

KEY FINDINGS

Our review of employee misclassification in Virginia found that:

1. Employers who properly classify workers pay higher payroll costs and may be less competitive in their respective industries.

2. Misclassified workers are often denied certain legal rights and benefits.

3. A Virginia Employment Commission (VEC) audit of one percent of Virginia employers found 5,639 workers were misclassified in 2010.

4. Based on estimates in other states, Virginia could have on the order of 40,000 misclassifying employers and 214,000 misclassified workers.

5. Worker misclassification lowers Virginia’s state income tax collections, leading to estimated foregone revenues on the order of $1 million for workers identified during VEC audits and $28 million in total based on other states’ findings in 2010.

6. A comprehensive approach to the problem of employee misclassification would include strategies to prevent misclassification before it happens, find it when it occurs, and penalize employers who misclassify.

SUMMARY OF RECOMMENDATIONS

The Governor should establish a task force on employee misclassification consisting of VEC, the Virginia Workers’ Compensation Commission, the Department of Labor and Industry, and the Department of Taxation. The agencies should work together to

(1) develop a clear definition of “employee”;

(2) develop procedures to share the information they gather about misclassification; and

(3) produce educational materials for workers, employers, and citizens about what misclassification is, what its consequences are, and how to report it.

Misclassification of employees should be made illegal in Virginia, and employers who misclassify workers should be penalized financially. If misclassifying employers are working on state contracts, they should be issued a stop work order and possibly disbarred from bidding on future state or local contracts for a specified period of time. 

The purpose of the task force is to develop and implement a comprehensive plan with measureable goals to reduce worker misclassification and payroll fraud in Virginia, according to the executive order. The activities of the task force would include:

• Review statutes and regulations related to worker misclassification and payroll fraud;

• Evaluate current enforcement practices of the agencies involved;

• Develop procedures for more effective inter-agency cooperation and joint enforcement;

• Implement a pilot project for joint enforcement;

• Develop educational materials and an outreach strategy for employers;

• Advise on any technological improvements in worker misclassification and payroll fraud detection; and,

• Recommend any appropriate changes to relevant legislation or administrative rules.

Many states have turned their attention to this issue and the loss of social security, Medicare, unemployment and income taxes that are often the result of misclassification. In 2009, Maryland granted similar responsibilities to a Workplace Fraud Task Force. Since its formation, the Maryland Task Force has established education and outreach programs and has created a Worker Misclassification Database to allow agencies to share information, track cases of misclassification and identify areas for audit.

Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces. Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds.

The factors that the Supreme Court has considered significant, although no single one is regarded as controlling are:

(1) the extent to which the worker's services are an integral part of the employer's business (examples: Does the worker play an integral role in the business by performing the primary type of work that the employer performs for his customers or clients? Does the worker perform a discrete job that is one part of the business' overall process of production? Does the worker supervise any of the company's employees?);

(2) the permanency of the relationship (example: How long has the worker worked for the same company?);

(3) the amount of the worker's investment in facilities and equipment (examples: Is the worker reimbursed for any purchases or materials, supplies, etc.? Does the worker use his or her own tools or equipment?);

(4) the nature and degree of control by the principal (examples: Who decides on what hours to be worked? Who is responsible for quality control? Does the worker work for any other company(s)? Who sets the pay rate?);

(5) the worker's opportunities for profit and loss (examples: Did the worker make any investments such as insurance or bonding? Can the worker earn a profit by performing the job more efficiently or exercising managerial skill or suffer a loss of capital investment?); and

(6) the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

1. Receiving a 1099 does not make you an independent contractor under the FLSA.
2. Even if you are an independent contractor under another law (for example, tax law or state law), you may still be an employee under the FLSA.
3. Signing an independent contractor agreement does not make you an independent contractor under the FLSA.
4. Having an employee identification number (EIN) or paperwork stating that you are performing services as a Limited Liability Company (LLC) or other business entity does not make you an independent contractor under the FLSA.
5. Employers may not misclassify an employee for any reason, even if the employee agrees.
6. You are not an independent contractor under the FLSA merely because you work offsite or from home with some flexibility over work hours.
   1099
7. Whether you are paid by cash or by check, on the books or off, you may still be an employee under the FLSA.
8. “Common industry practice” is not an excuse to misclassify you under the FLSA.

Intentionally or not, many workers in the United States are classified as independent contractors (IC). In classifying a worker as an IC instead of an employee, putative employers can eliminate the following expenses:

• The employer’s share of Social Security (FICA) and Medicare taxes
• Overtime and minimum wage payments
• Employee health insurance premiums
• Employee retirement benefits, vacation, holiday, and sick pay
• Other employee fringe benefits, such as stock options
• Federal and state unemployment compensation taxes (FUTA and SUTA)
• Workers’ compensation insurance premiums.

There are agencies paying $27.00-$40.00/hours. 

• Landmark Microsoft case -$97 million

• 5 construction companies -$70,000 each and banned from bidding on public projects for 4 years. State’s attorney (IL) labels act as fraud

• XPO Logistics case –class action lawsuit brought by drivers settles for $2.8 million in Illinois

• FedEx case -$228 million settlement for misclassifying FedEx Ground drivers in California

• Lyft case –Lyft agrees to settle a worker misclassification class action suit for $12.25 million

All of the following must be met for IC classification:

A. The worker is free of control and direction with respect to the means of how the work is performed

B. The worker has his own business providing the same services to others in the market

C. The work is: Outside the usual course of the company’s business 

1. Worker completed an employment application

2. Control

• Company tells the worker what, when, and how to do their job

• Worker is given an employee handbook

• Worker undergoes orientation program ?

3. Pay

• Worker is paid through the company payroll system instead of accounts payable

• Worker does not furnish an invoice ?

4. Hours

• Worker has to punch a clock

• Worker gets paid overtime ?

5. Benefits

• Worker gets paid for company holidays, vacation, and sick leave

• Worker gets a free parking space, meals, etc.

Purpose of Task Force

• Review statutes and regulations related to worker misclassification and payroll fraud

• Gather information on prevalence of misclassification in various industries  

• Evaluate current enforcement practices of the agencies involved

• Develop procedures for more effective inter-agency cooperation and joint enforcement

• Implement project for joint enforcement

• Enhance technology for detection

• Random IRS audit of your business –field agents are now questioning why workers are not on the payroll

• Targeted audits• You terminate the services of your IC and that person promptly files an unemployment insurance claim
• The IC gets hurt and files a workers’ comp claim
• The IC, shocked that he actually has to pay taxes, files form 8919 and/or SS-8 with the IRS to force employee classification

• All of my contractors sign IC agreements. Why is that not good enough?
• Because… – Many agreements are poorly written – The facts on the ground do not correlate with the terms of the agreement
• Employers are not permitted to draft around their withholding and unemployment tax compliance requirements

• Place misclassified workers on payroll right away!

• All payments since the beginning of the year must be run through payroll –do NOT issue a W-2 and a 1099-MISC.

• Back withholding taxes are calculated at the regular rates. You will then need to seek any reimbursement from the employee for the taxes retroactively withheld.

• The taxes are reported on and remitted with form 941-X (amended quarterly federal payroll tax return).

• State unemployment tax returns will need to be corrected as well.

• Determine if 530 relief applies –this may give federal relief, but not state relief.

The DBHDS does not care about payroll fraud! 

This seems to be a Labor Board issue not a DBHDS issue  and there is laws already in place to cover this.