During the 2020 session, the Virginia General Assembly enacted several new laws addressing the evolving employer-worker relationship in a gig economy. Although the appropriate classification of workers as independent contractors versus employees has long been important as a matter of tax rules under federal law, health care employers should pay close attention to new Virginia laws requiring companies that engage contractors to pay new penalties for mis-classifying workers.
The most significant legislative changes include: (1) a new private right of action allowing workers to sue employers for misclassification; (2) a new presumption that workers are employees; and (3) a prohibition on employer retaliation against worker misclassification claims. While the private right of action became available as of July 1, 2020, the other provisions are effective January 1, 2021.
Many organizations, including health care organizations, engage workers as independent contractors. Characterization of a worker as an independent contractor is generally intended to recognize the contractor’s independence in how the contractor performs the work. By contrast, an employer retains authority to direct and control employees’ activities. Health care organizations particularly use independent contractor relationships in establishing medical directorship agreements or other arrangements between independently-licensed health care providers. In many such arrangements, the worker maintains control of his or her own schedule and retains independent professional judgment over how health care services are performed. Overtime and minimum wage rules do not apply to appropriately-classified independent contractors, such arrangements provide more flexibility to both parties in setting compensation terms, and they can reduce payroll tax burdens. The IRS has scrutinized independent contractor arrangements due to the reduced worker protections provided by such arrangements.
Prior to 2020, workers who believed they were misclassified as an independent contractor rather than an employee could subject employers to back taxes and penalties imposed by the IRS, escalating to fines and criminal convictions for intentional misclassification. However, under prior Virginia law, workers alleging a misclassification had to take a complaint to the federal government and could not bring a lawsuit against an employer on their own. The 2020 legislation allows workers claiming a misclassification to file claims directly in Virginia courts. The new laws will likely lead to additional litigation and penalties on organizations unable to support a worker’s classification as an independent contractor.
New Private Right of Action (Va. Code § 40.1-28.7:7)
As of July 1, 2020, individuals now have a private right of action to sue if they believe that they have been misclassified as an independent contractor. A Virginia court reviewing a claim will apply IRS guidance in deciding the case. The law favors plaintiffs bringing a suit due to a favorable presumption. Under the law, to initiate a claim, the worker needs only to demonstrate a “good faith reasonable belief” that the company misclassified the worker’s status. The law also creates a presumption (discussed below) that the worker is an employee. To overcome this presumption, the employer must show that the worker is a contractor under IRS guidelines. Discussed below, a determination of whether a worker is appropriately classified as an independent contractor is highly fact-intensive. Because of the presumption in favor of the worker and the fact-intensive nature of any defense, employers will likely shoulder higher litigation costs in suits brought under the new law.
A worker who is successful in proving a misclassification as an independent contractor may receive damage awards including wages, salary, benefits that would have otherwise been covered by insurance, other compensation lost, and reasonable attorneys’ fees and costs.
The Presumption of Employee Status (Va. Code § 58.1-1900)
Effective January 1, 2021, all Virginia workers are presumed to be employees entitled to wages and benefits that other employees are entitled to under federal and state law, unless the employer demonstrates that the worker is an independent contractor under the IRS guidelines. Under IRS guidelines, an individual is generally considered to be an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. In general, an individual is not an independent contractor if the individual performs services that can be controlled by an employer (what will be done and how it will be done). This applies even if the employee is given freedom of action. The central question is whether the employer has the legal right to control the details of how the services are performed. IRS guidelines provide a list of factors for consideration but do not provide any mechanism for a definitive determination, so appropriate classification of any worker is highly-fact intensive and specific to each employee.
The new rule also prohibits employers from requesting that a worker enter an agreement that results in misclassification. Previously, employers and workers might enter into agreements reflecting both parties’ intent to treat the worker as an independent contractor. Under this new rule, the intent of the parties is given less weight in the overall determination, and such agreement could subject the employer to penalties if the worker is misclassified. Under the new Virginia presumption of employee status, the Virginia Department of Taxation will have authority to assess penalties against employers who misclassify their workers and fail to pay required taxes, benefits, and other requirements, including:
An employer may challenge any assessed penalties in Circuit Court.
Prohibition Against Retaliation (Va. Code § 40.1-33.1)
As of July 1, 2020, employers are prohibited from discharging, disciplining, threatening, penalizing, discriminating against, and retaliating against an individual who reports or threatens to report the employer for misclassification or failure to pay required benefits or contributions or against an individual who is subpoenaed or requested to participate in such an inquiry.
Significantly, the anti-retaliation rule does not create a private right of action separate from the right of action for misclassification itself. If workers believe that an employer has retaliated, they may file a complaint with the Commissioner of the Department of Labor and Industry. The Department may then initiate a lawsuit on the employees’ behalf. Damages under the anti-retaliation provision include lost wages and reinstatement. The Department may also assess a penalty against the employer up to the amount of lost wages.
The new laws authorize the Tax Commissioner, the Department of Labor and Industry, the Virginia Employment Commission, the Department of General Services, and the Workers’ Compensation Commission to share information received regarding worker misclassification situations. Thus, a Virginia Employment Commission investigation of an employer for misclassification might also result in referral to the Virginia Department of Labor and Industry for similar investigation.
Practical Applications for Health Care Providers and Organizations
Reflecting a growing national reaction to limited protections for gig employees, these new employment laws greatly restrict who can be considered an independent contractor. Employers should review their agreements with independent contractors to determine if these workers will now be classified as employees under these new regulations, even if the parties had previously agreed to worker classification as an independent contractor. Because of the new changes, there is a much higher risk in classifying workers as independent contractors due to the risk of lawsuits and associated legal expenses and damages.
Independent contractor arrangements are very prevalent in certain health care industry sectors. For example, psychologists, counselors, and social workers are commonly engaged through arrangements with behavioral health practices that allow the individual practitioners to select their own clients, create their own schedules, and work part-time or full-time as they wish. Another example of a common independent contractor arrangement is medical director agreements between a physician and a health care institution such as a nursing facility, home health provider, or other organization. In each of these examples and in others, the parties to such arrangements should carefully scrutinize the IRS guidelines, confirm that the arrangement is reasonably considered an independent contractor arrangement, and ensure that the written independent contractor agreements accurately reflect the arrangement. Health care organizations need to be particularly careful in creating independent contractor arrangements with individual practitioners who work under the supervision of other practitioners. It is likely more difficult to establish that such a practitioner exercises independent control over their behavior and work. Examples of supervised practitioners include nurse practitioners (unless autonomous), physician assistants, and residents in behavioral health fields.
All Virginia employers should review the current status of any independent contractor relationships to determine the level of risk for new financial and legal liability based on the new laws. Should you, your practice, or your business have any questions about the implication of these new rules, please contact Peter Mellette, Nathan Mortier, Harrison Gibbs, Elizabeth Dahl Coleman, or Scott Daisley at Mellette PC.
This client alert is for general educational purposes only. It is not intended to provide legal advice specific to any situation you may have and does not cover all the provisions of the new rules. Individuals desiring legal advice should consult legal counsel for up-to-date and fact-specific advice.