VA Dept of Labor & Industry: Addressing Misclassification of Employees

Posted on 06.15.15

VA Dept of Labor & Industry: Addressing Misclassification of Employees

By Doug Nickerson, CPA, CGFM, CFE, CIA | Business Assurance & Advisory Services Partner | Real Estate & Construction Industry Team

On June 2, 2015, Commission C. Ray Davenport of the Virginia Department of Labor and Industry (DOLI) announced that the DOLI was adopting a new Virginia Occupational Safety and Health (VOSH) policy intended to stop companies from incorrectly classifying workers as independent contractors instead of employees. The new policy will go into effect July 1, 2015.

The new policy is in response to the June 2012 Joint Legislative Audit and Review Commission Report to the Governor and the General Assembly of Virginia: Review of Employee Misclassification in Virginia. The Report studied the current state of misclassifications of employees as independent contracts, the financial impact on the Commonwealth of Virginia and its local governments; and recommendations to alleviate occurrence and impact on the Commonwealth.

The Report indicates that the Virginia Employment Commission (VEC) is the only entity that gathers information regarding misclassifications of workers and annually audits only one percent of the employers who pay unemployment taxes. Based on the results of VEC’s 2010 audits of the 2,120 employers audited; more than one quarter of them had misclassified workers. It was also noted in the report that in 2011, more than one third of all audits were conducted on Virginia employers in the construction industry; as there is a perception that misclassifications are more frequent with construction employers.

Determination of a worker’s classification as independent contractor or employee is not a simple task; there are numerous tests, factors, and possible exemptions that have to be considered in determining the proper classification of employee or independent contractor. However, it is commonly viewed as determining who has the right to control what will be done and who has the right to control how the work will be completed.

Classification Determination Guidelines:

In general, if the employer possesses the rights to control the details of how the work will be completed; the worker is an employee.

  • However, a worker is generally classified as an independent contractor if he is not subject to the controls of the employer over the details of how the work will be completed.

Effects of Misclassifying of Employees vs. Independent Contractors:

  • Employers who properly classify workers may be faced with higher unemployment taxes and workers’ compensation insurance rates to subsidize the costs incurred by misclassified workers.
  • Misclassified workers as independent contractors are denied certain benefits and protection that employees are entitled to.

The following are just a few examples:
-Workers’ compensation
-Unemployment benefits
-Minimum wage and over-time pay
-Protection from workplace discrimination
-Occupational safety and health

With the DOLI’s new policy and their increased scrutiny in employers’ determination and classification of workers as employees vs. independent contractors; it is increasingly more important for employers to be diligent in the determination and documentation of such classification to ensure continued compliance with both federal and state requirements.

Questions on classification of employees for your business? Contact our Real Estate & Construction Industry team. We can help.| 804.747.0000

The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.

Posted by: Doug K. Nickerson, CPA, CGFM, CFE, CIA, CCA

Doug shares his real estate and construction accounting insights with his clients to help them achieve their financial goals. He is a member of Keiter’s Real Estate and Construction team. Doug has over 18 years of experience in corporate accounting and public accounting providing audit and consulting services. Read more of Doug’s insights on our blog.