Employee (Mis)Classification: What’s Old is Still New

Every time we give a presentation on Workers' Compensation, or contracting, or employer liability, or a similar subject, someone comes up to one of us and asks some question about how they have no employees, only independent contractors, and their contract includes terms X and Y, or some contractor got injured while working, etc. Each time these people seem to believe they have come up with an iron-clad way to reduce expenses, avoid the need for insurance (or even foist responsibility for that insurance onto someone else), and avoid liability. They invariably have not.

We’ve issued various articles and warnings about independent contractor classification numerous times over the years, including as far back as 2017. Put simply, the mere existence of a contract does not make someone working for an “employer” a contractor or “independent contractor,” nor does a leasing agreement for necessary heavy equipment, or an insurance policy that is explicitly intended to replace Workers’ Compensation under the theory that a worker is not an “employee.”

Moreover, states are actively policing “misclassification” of employees. The Virginia Department of Professional and Occupational Regulation website has a page dedicated to “Worker Misclassification Prevention,” as does the Maryland Department of Labor, the US Department of Labor, and frankly most states and sovereigns are concerned with the concept. Worse, misclassification of employees can now be penalized.

For instance, Va. Code Va. Code § 58.1-1900 essentially flips the burden to the party making payments to prove contractor status: “[I]f an individual performs services for an employer for remuneration, that individual shall be considered an employee of the party that pays that remuneration unless such individual or his employer demonstrates that such individual is an independent contractor.” In Virginia Va. Code § 40.1-28.7:7 allows an employee to sue for damages caused by misclassification, including “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, a reasonable attorney fee, and the costs incurred…” Va. Code § 40.1-33.1 provides for fines, lost wages, and reinstatement in the event of retaliation for reporting of misclassification. In some cases in Virginia disputes over contractor status may lead to claims of wage theft, which can be a crime (possibly a felony), and for which there is a private right of action. Likewise, Maryland provides for penalties between $5,000 and $20,000 for misclassification, and provides for a cause of action.

Whether a person is an employee or contractor is highly fact specific. Maryland’s Labor and Employment §3–901 specifies factors for consideration, including whether the worker is a family member, who controls the work, and consideration of locus of taxes, profit and liabilities, among others. As noted above, Virginia law has flipped the burden. Generally, who controls the work, who provides the input of the work, and the right of the “contractor” to accept, modify, or reject the work are instructive even if not dispositive. Regardless, having someone sign a contract and then paying them by 1099 is almost certainly insufficient to shield a company from liability, even under the best of circumstances. In fact, in the context of Workers' Compensation the Commission may hold each contractor along the chain of contractors responsible for a claim, jointly. Worse, if a lawsuit or Workers’ Compensation claim is filed, the putative employer still has to defend, even if they ultimately win. A company may find itself liable and uninsured based on a flawed conception of employee classification.

If your business model relies on independent contractors, now may be a good time to consult with counsel to discuss that. If you have questions, contact Dov Szego (dszego@setlifflaw.com) at 804-377-1263, or Steve Setliff (ssetliff@setlifflaw.com) at 804-377-1261.