If you have more than two employees, Virginia will typically require you to have workers’ compensation insurance coverage. Some employers may attempt to sidestep this obligation and adjust the reported number of employees. Some of these attempts involve only paying their employees/workers through 1099 and/or referring to them as independent contractors. Make no mistake, if you are engaging in this sort of behavior then you playing a very dangerous game. In recent months there have been several changes in a variety of the classification tests that agencies use when it comes to discerning whether a worker is in fact an independent contractor. This includes tests used by the IRS, standards by the Department of Labor, and relevant here, the standard used by the Virginia Workers’ Compensation Commission.
There are several consequences related to the misclassification of a worker as an independent contractor rather than an employee. For our purposes here, this can include a situation where you find your business directly on the hook for the medical bills, medical treatment, and future medical expenses, as well as any lost wages, not to mention a possible civil fine up to $50,000.00 for failing to have necessary coverage. As far as how significant these expenses can become consider your own industry. Identify some of the common injuries that can occur, and look at some of the less common injuries that may simply be attributed to the ordinary working schedule. An employee who is loading a truck or unloading a pallet may feel a pop in their shoulder or back and you may be on the hook for a mild sprain all the way up to a rotator cuff injury or spinal injury. These common injuries can result in weeks, months, or even years of lost work time, and medical bills. Even in a situation where the employee may not be totally forthcoming with their progress, or even malingering, you as the employer will be on the hook for the bill related to this injury even though you tried to call this employee an “independent contractor.”
So the question turns on what makes an employee actually an independent contractor. Virginia Workers’ Compensation identifies several factors for consideration in determining whether a worker is an independent contractor or an employee. These factors primarily focus on: 1) the selection and engagement of the employee; 2) whether they can be dismissed; 3) payment of some form of wage; and 4) the employer exercises control over the individual. It must be pointed out that “control” is given the greatest amount of weight. The extent to which an employer exercises control over the manner, means, method, or any other factor of how the work is completed can lend exceedingly great weight to whether or not a party is going to be considered an employee or an independent contractor. The Commission has also considered other related factors such as the measure of compensation, whether there are deductions from compensation, who supplies the instrumentalities and tools, and how hours of work are determined. Even still, it’s not hard to see how these factors can ultimately relate to the specific issue of “control.”
By way of illustration: consider the following scenario involving an individual engaged as a truck driver. In this scenario the employer is engaged in regularly hauling and moving freight or other supplies. The individual/worker at issue here identifies himself as an independent contractor and says he is an owner/operator and wants to be paid through a 1099. The employer designates what hauls the individual/worker may pick up, identifies where the loads are to go, gives specific direction as to what roads should be avoided and recommends specific routes to take; recommends when the driver should begin and end their shift and that the driver is paid by the hour. Under that scenario, it is highly likely that the employer is likely to have an employee on his hands even though he is paid by 1099 and calls himself an independent contractor.
In this scenario, the fact that the individual is paid by 1099 or initially identified as an independent contractor is all but irrelevant. In the event of an injury, the driver is going to seek workers’ compensation benefits and may very well be entitled to them. The employer controlled what load(s) the driver could take. The employer designates where the loads are supposed to go; it is understood that many deliveries are not controlled by the employer in this situation but by a third-party customer, but for purposes here the end goal is predetermined by the employer, not the worker/employee. The employer identifies preferred routes and directs when the employee should begin and end their drive time. The amount of control exerted would make it difficult to convince the powers that be that the individual should be classified as an independent contractor.
We’ve been evaluating the employer/independent contractor as it is reviewed specifically in Virginia Workers’ Compensation matters. Recently the Department of Labor has adopted an economic reality test under the Fair Labor Standards Act, which identifies six factors for consideration. These factors are: the opportunity for profit or loss depending on managerial skill; investments by the workers and potential employer; degree of permanence of the work relationship; nature and degree of control; extent to which the work performed is integral to the potential employer’s business; and the skill and initiative. This is not a significant departure from the test utilized in workers’ compensation determinations as far as the type of factors to be considered, but it marks what might be a noteworthy change in the weight each factor is afforded. We will provide a more in-depth breakdown and evaluation of these new standards soon.
If you or your business tries to utilize independent contractors, please give us a call and let us help you do so in such a manner that helps you get the full benefit of your hiring practices. Virginia Workers’ Compensation is full of fascinating nuances like the one outlined above, and each situation needs to be properly vetted by an experienced and competent hand. If you find yourself facing these issues or others related to Workers’ Compensation matters, or if you have specific questions related to this article, or if you would simply like a consultation regarding your current practices, please contact John Stacy (jstacy@setlifflaw.com) at (804) 377-1263, or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.
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