Virginia Governor Ralph Northam recently signed an Executive Order establishing a task force charged with examining payroll fraud and worker misclassifications, which is when employers classify workers as “independent contractors” when they are really “employees.”

As reported by the Claims Journal, Gov. Northam has said, “Every employer in the Commonwealth should be playing by the same rules and this task force will come up with a comprehensive plan to make sure workers aren’t missing out on the protections and benefits they would receive if properly classified.”

The ultimate goal of the recently-created task force is to develop and implement a strategy for holding companies accountable when they commit payroll fraud through worker misclassification, and to identify ways to deter future misconduct.

Why is worker misclassification an issue?

It isn’t uncommon for some businesses — particularly small businesses — to use “independent contractors.” The reality is that they may not need full-blown employees, and by using independent contractors employers can cut costs significantly because they do not need to pay certain taxes and benefits. In fact, employers can lower their costs by up to 40 percent by using independent contractors instead of regular employees.

However, employers can run into trouble if they misclassify a worker as an “independent contractor” when they are actually considered “employees” under the law. Indeed, the penalties for misclassifying an employee and not paying payroll taxes can be severe — not to mention the misclassified employees may be able to seek their rightful benefits under the law.

So how do you know if a worker an ‘employee‘ or an ‘independent contractor?’

In most cases, a worker will be considered an employee if the employer can control two things: what will be done, and how it will be done. Alternatively, independent contractors are not under the employer’s control when performing their services.

When making this assessment, Virginia courts may apply a list of several factors. However, it is important to note that these factors are merely guides to use when assessing how to classify an employee, meaning not all factors must be present for a worker to be considered an employee. Some of these factors include:

• Instructions: Must the worker comply with instructions provided by the employer regarding when, where and how to work? If so, the worker is more likely to be considered an employee.
• Pre-set hours of work: If a worker has set hours pre-determined by the employer, then the worker is generally an employee.
• Full time work: If the worker works full time for one employer, they are often an employee. Conversely, an independent contractor is free to work when they want and for whom they choose.
• Payments: If the worker is paid by the hour, week or month, they are more likely to be considered an employee.
• Expenses: If the employer covers the worker’s business and/or travel expenses, the worker is often an employee.
• Furnishing tools: If the employer provides significant tools and materials, the worker may be an employee.
• Right to terminate: If the worker can quit whenever they want (and not incur any liability), then the worker is an employee

In many cases, the line between independent contractor and employee is a grey one. But since the costs for getting it wrong can be high, it is vital to contact an experienced attorney should you have any questions about whether a particular worker should be classified as an employee or an independent contractor.