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Contract Issues, Independent Contractors, Wage and Hour Issues

The Legal Risks of Misclassifying Employees as Independent Contractors

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Mis­clas­si­fy­ing employ­ees as inde­pen­dent con­trac­tors is one of the biggest pit­falls in employ­ment law, and it’s an issue that both employ­ers and work­ers need to under­stand. Get­ting it wrong can mean seri­ous legal and finan­cial con­se­quences. So, what’s the dif­fer­ence, why does it mat­ter, and how can busi­ness­es avoid cost­ly mistakes?

Employee vs. Independent Contractor: What’s the Difference?

At its core, the dis­tinc­tion between an employ­ee and an inde­pen­dent con­trac­tor comes down to con­trol. Employ­ees are sub­ject to their employer’s con­trol over how, when, and where they work. Inde­pen­dent con­trac­tors, on the oth­er hand, typ­i­cal­ly oper­ate their own busi­ness­es and con­trol how they com­plete their work.

The Inter­nal Rev­enue Ser­vice (IRS) and the U.S. Depart­ment of Labor (DOL) use dif­fer­ent tests to deter­mine work­er classification:

  • IRS Test: Focus­es on three pri­ma­ry factors—behavioral con­trol, finan­cial con­trol, and the rela­tion­ship between the par­ties (IRS Pub­li­ca­tion 15‑A).
  • DOL’s Eco­nom­ic Real­i­ties Test: Eval­u­ates fac­tors such as the degree of con­trol, the worker’s oppor­tu­ni­ty for prof­it or loss, and the per­ma­nen­cy of the work rela­tion­ship (29 C.F.R. § 800.110).
  • West Vir­ginia Law: The state fol­lows the com­mon law test sim­i­lar to the IRS approach, but courts may also con­sid­er eco­nom­ic depen­dence when decid­ing cases.

Requirements in West Virginia for independent contractors

West Vir­ginia law man­dates that cer­tain terms be includ­ed in con­tracts with inde­pen­dent con­trac­tors to ensure prop­er clas­si­fi­ca­tion and com­pli­ance with state employ­ment laws. The West Vir­ginia Employ­ment Law Work­er Clas­si­fi­ca­tion Act out­lines spe­cif­ic cri­te­ria for deter­min­ing inde­pen­dent con­trac­tor sta­tus (W. Va. Code § 21–5i‑4).

Required Con­trac­tu­al Terms:

To clas­si­fy a work­er as an inde­pen­dent con­trac­tor, a writ­ten con­tract must be exe­cut­ed between the prin­ci­pal and the indi­vid­ual, con­tain­ing acknowl­edg­ments that the per­son under­stands they are:

  1. Pro­vid­ing ser­vices as an inde­pen­dent contractor.
  2. Not to be treat­ed as an employ­ee of the principal.
  3. Not enti­tled to work­ers’ com­pen­sa­tion or unem­ploy­ment com­pen­sa­tion ben­e­fits from the principal.
  4. Oblig­at­ed to pay all applic­a­ble fed­er­al and state income tax­es on earn­ings, with no tax with­hold­ings made by the principal.
  5. Respon­si­ble for the major­i­ty of sup­plies and oth­er vari­able expens­es incurred in con­nec­tion with per­form­ing the con­tract­ed ser­vices, unless: 
    • The expens­es are for non-local travel.
    • The expens­es are reim­bursed under an express pro­vi­sion of the contract.
    • The sup­plies or expens­es reim­bursed are com­mon­ly reim­bursed under indus­try practice.

Addi­tion­al Criteria:

Beyond the con­trac­tu­al acknowl­edg­ments, the indi­vid­ual must sat­is­fy at least three of the fol­low­ing cri­te­ria to be clas­si­fied as an inde­pen­dent contractor:

  • Con­trol over the amount of time per­son­al­ly spent pro­vid­ing services.
  • Con­trol over where the ser­vices are per­formed, except for ser­vices that can only be per­formed at spe­cif­ic locations.
  • Not required to work exclu­sive­ly for one prin­ci­pal, unless pro­hib­it­ed by law or a license/permit requirement.
  • Free­dom to exer­cise inde­pen­dent ini­tia­tive in solic­it­ing oth­ers to pur­chase their services.
  • Free­dom to hire employ­ees or to con­tract with assis­tants, helpers, or sub­sti­tutes to per­form all or some of the work.
  • Not required to per­form addi­tion­al ser­vices with­out a new or mod­i­fied contract.
  • Obtain­ing a license or oth­er per­mis­sion from the prin­ci­pal to uti­lize any work­space of the prin­ci­pal in order to per­form the work.
  • The prin­ci­pal has been sub­ject to an employ­ment audit by the Inter­nal Rev­enue Ser­vice (IRS) and the IRS has not reclas­si­fied the per­son to be an employ­ee or has not reclas­si­fied the cat­e­go­ry of work­ers to be employees.
  • Respon­si­ble for main­tain­ing and bear­ing the costs of any required busi­ness licens­es, insur­ance, cer­ti­fi­ca­tions, or per­mits required to per­form the services.

Includ­ing these spe­cif­ic terms in the con­tract and ensur­ing that the indi­vid­ual meets the addi­tion­al cri­te­ria are essen­tial steps in estab­lish­ing an inde­pen­dent con­trac­tor rela­tion­ship under West Vir­ginia law. Fail­ure to com­ply with these require­ments may result in the indi­vid­ual being clas­si­fied as an employ­ee, sub­ject­ing the prin­ci­pal to oblig­a­tions under work­ers’ com­pen­sa­tion, unem­ploy­ment com­pen­sa­tion, human rights, and wage pay­ment and col­lec­tion laws.

Why Misclassification Matters

Mis­clas­si­fy­ing an employ­ee as an inde­pen­dent con­trac­tor isn’t just a minor paper­work mistake—it has major legal and finan­cial impli­ca­tions. Employ­ers who mis­clas­si­fy work­ers may be liable for:

  • Unpaid wages: Inde­pen­dent con­trac­tors aren’t enti­tled to min­i­mum wage or over­time pro­tec­tions, but mis­clas­si­fied employ­ees can sue for back pay (Fair Labor Stan­dards Act, 29 U.S.C. § 201 et seq.).
  • Tax penal­ties: Employ­ers who fail to with­hold pay­roll tax­es may owe back tax­es, penal­ties, and inter­est (26 U.S.C. § 3501).
  • Work­ers’ com­pen­sa­tion and unem­ploy­ment insur­ance: Mis­clas­si­fied work­ers may be enti­tled to ben­e­fits, and employ­ers can face penal­ties for fail­ing to pro­vide cov­er­age (W. Va. Code § 23–2‑1 et seq.).

Recent Crackdowns on Misclassification

Both fed­er­al and state gov­ern­ments have been ramp­ing up enforce­ment efforts. The DOL announced a pro­posed rule in 2023 to clar­i­fy and strength­en employ­ee clas­si­fi­ca­tion stan­dards under the Fair Labor Stan­dards Act, mak­ing it hard­er for busi­ness­es to clas­si­fy work­ers as inde­pen­dent contractors.

West Vir­ginia has also been aggres­sive in address­ing mis­clas­si­fi­ca­tion, par­tic­u­lar­ly in con­struc­tion and gig econ­o­my jobs. Employ­ers found to be in vio­la­tion can face sig­nif­i­cant fines and be required to pay back wages and benefits.

How Employers Can Avoid Misclassification Issues

To ensure com­pli­ance and avoid cost­ly penal­ties, employ­ers should:

  1. Use Writ­ten Con­tracts: Clear­ly define the scope of work and the lev­el of inde­pen­dence the work­er has.
  2. Eval­u­ate Job Duties: If the work­er is per­form­ing the same tasks as employ­ees, they may be misclassified.
  3. Keep Records: Doc­u­ment rea­sons for clas­si­fi­ca­tion deci­sions in case of audits or legal disputes.
  4. Con­sult Legal Coun­sel: If unsure about clas­si­fi­ca­tion, seek guid­ance from an employ­ment law attorney.

What Employees Should Do If They Believe They Are Misclassified

Work­ers who think they’ve been mis­clas­si­fied should:

  • Review their job duties and work arrange­ment: If they func­tion like an employ­ee but are clas­si­fied as a con­trac­tor, they may have a claim.
  • Keep track of work hours and pay­ments: This doc­u­men­ta­tion can help if they file a complaint.
  • File a com­plaint with the DOL or IRS: Fed­er­al agen­cies have process­es for work­ers to chal­lenge mis­clas­si­fi­ca­tion and recov­er lost wages and benefits.

Conclusion

Employ­ee mis­clas­si­fi­ca­tion is a seri­ous issue with legal, finan­cial, and rep­u­ta­tion­al risks. Employ­ers need to be dili­gent in prop­er­ly clas­si­fy­ing work­ers, while employ­ees should be aware of their rights. With stricter reg­u­la­tions and increased enforce­ment, now is the time for busi­ness­es to ensure com­pli­ance and avoid cost­ly litigation.

Drew M. Capuder
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