A 2012 report of the Joint Legislative Audit and Review Commission (JLARC) shed light on a costly and pernicious problem hurting Virginia’s construction industry: worker misclassification. To address the problem, Governor Terry McAuliffe established an inter-agency taskforce to examine worker misclassification and payroll fraud. The establishment of this taskforce led to a new Virginia Occupational Safety and Health (VOSH) policy, aimed at preventing the misclassification of workers. The policy went into effect on July 1, 2015 and has significant implications for anyone involved in construction in Virginia.
Misclassification occurs when an employer improperly classifies an employee as an independent contractor. According to the JLARC Report, Virginia could have as many as 40,000 misclassifying employers and 214,000 misclassified workers. These misclassifications have serious negative impacts on Virginia and its construction industry, and the new VOSH policy puts its inspectors on the lookout for worker misclassification and improper licensing.
What Is The Difference Between An Employee And An Independent Contractor?
VOSH guidelines point to seven factors to determine whether a worker is an employee or an independent contractor: (1) who has responsibility to control the worker; (2) who has the power to control the worker; (3) who the worker considers his or her employer; (4) who pays the worker’s wages; (5) whether the alleged employer has the power to hire, fire, or modify the worker’s employment conditions; (6) whether the worker’s ability to increase his or her income depends on efficiency rather than initiative, judgment or foresight; and (7) how the worker’s wages are established. Signed releases, tax forms, or other documents do not necessarily determine whether a worker is an employee or an independent contractor.
The most important factors in this test are the first two set forth above: responsibility and power. If an employer can control what a worker does and how he or she does it, that worker should be classified as an employee rather than an independent contractor.
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, there are serious tax implications of misclassification. 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, the construction industry suffers. 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.
What Will This New Policy Do?
Every year, VOSH conducts thousands of workplace inspections. Beginning in July, 2015, if VOSH finds “reasonable cause” to believe that an employer has misclassified its employees, the following actions may be taken:
- If VOSH imposes penalties or citations, it will not grant penalty reductions for an employer’s size or good faith efforts to properly characterize workers;
- In multi-employer worksites, VOSH will ask each contractor to provide proof of their Department of Professional and Occupational Regulation (DPOR) contractor’s license and proof of the DPOR license for any of its subcontractors;
- VOSH will make a written referral to DPOR if a construction employer has contracted with an unlicensed subcontractor. DPOR may sanction the contractor and subcontractor with fines, probation, suspension or license revocation;
- VOSH will make a written referral to the Virginia Employment Commission and/or the Virginia Workers’ Compensation Commission for a potential audit of employment practices in instances where the contract value for a specific subcontractor’s job is less than $1,000 (or in some instances, over $1,000).
Additionally, misclassification issues will now be tracked in the OSHA Information System using the code “Misclassification.” Employers should be aware that VOSH offers On-Site Construction Services to help employers better understand and voluntarily comply with VOSH standards at no cost.
What Should Employers Do?
The new VOSH policy means that all contractors should utilize the seven-factor VOSH test to ensure that they are properly classifying their workers as either employees or independent contractors to avoid giving VOSH inspectors “reasonable cause” to pursue actions under the new policy. Additionally, contractors and subcontractors must take care to ensure compliance with DPOR licensing requirements. Maintaining vigilance in employee classification and licensing requirements must be a priority for all involved in the Virginia construction industry.