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Worker classification

Worker classification in Virginia

Many business owners are quick to realize that they might save a lot of money by hiring independent contractors instead of full-time employees.

If you stop and look around, you might be wondering why most small businesses owners haven't caught on.  Why do they hire so many employees?

The answer is that whether a worker is classified as an employee or an independent contractor is determined by law.  Contractors pay their own payroll taxes, federal and state income taxes, and the employer and employee portion of Social Security taxes.  Contractors carry their own Workers Compensation Insurance.

The rule of thumb is that workers should be classified as employees if their employer controls what and how a job is to be done.  On the other hand, independent contractors have more much more latitude.  The IRS has twenty factors that employers should consider when making the classification determination.

(1) Instructions. 
(2) Training. 
(3) Integration. 
(4) Services rendered personally. 
(5) Hiring, supervising and paying assistants. 
(6) Continuing relationship. 
(7) Set hours of work. 
(8) Full time required. 
(9) Work done on premises.
(10) Order or sequence set. 
(11) Oral or written reports. 
(12) Payments by hour, week or month. 
(13) Payment of expenses. 
(14) Furnishing of tools and materials. 
(15) Significant investment.
(16) Profit or loss. 
(17) Working for more than one firm at a time.
(18) Making services available to the general public. 
(19) Right to discharge.
(20) Right to terminate. 

Because of the pandemic, many workers work from home, making employees appear to be contractors.  It is tempting to convince oneself that a worker who works from home should be classified as an independent contractor, but this can prove costly.

Employers can be liable for failure to pay overtime and minimum wage under the federal Fair Labor Standards Act (FLSA) and applicable state wage laws.  They will have to pay back taxes as well as penalties for failing to withhold state and federal payroll taxes, including failure to make matching social security and Medicare tax payments.  They may be liable for I-9 (immigration) violations. They may have to pay penalties for failure to pay into the state unemployment insurance funds.  They may have to pay penalties for violation of state worker's compensation insurance laws and liability for unpaid workers' compensation premiums.

They may have to pay retroactive employee benefits, including pension and other retirement plans, health insurance, paid leave, severance pay, etc.  They may be held liable for failure to provide leave and reinstatement to eligible employees under the federal Family and Medical Leave Act (FMLA) and other leave entitlement laws.  They may also be found liable for violations of reinstatement and leave rights for military personnel under USERRA.  These are just some of the possible costly consequences of misclassification.

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