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Virginia Capitol C onnections, Summer 2015 9
What is Worker Misclassification?
Misclassification occurs when an employer improperly classifies
an employee as an independent contractor.
Why is Misclassification So Harmful?
While employees are afforded many protections and benefits
by the federal government and the Commonwealth of Virginia,
individuals designated as independent contractors are excluded for
the most part.
Worker misclassification is a destructive practice—whether
intended or accidental—and costs Virginia›s taxpayers, employees
and employers tens and perhaps hundreds of millions of dollars
annually.
It also denies essential employment protections and benefits to
hundreds of thousands of Virginia workers in such areas as5:
• occupational safety and health protections
• unemployment benefits
• workers’ compensation
• minimum wage and overtime
• health insurance
• retirement benefits, including Social Security
• family and medical leave
• protections from discrimination (e.g., Americans With Disabilities
Act (ADA), Age Discrimination in Employment Act (ADEA))
“Employers who misclassify can save significantly in payroll
costs. Studies in other states reported that these savings can range
from ten to 40 percent. As an example, a Virginia employer in the
construction industry could save an estimated 26 percent of payroll
costs by classifying an average-wage construction worker as an
independent contractor instead of an employee. In industries where
competitive bidding occurs, misclassifying employers may be able to
underbid their competitors due to their lower payroll costs, leaving
employers who properly classify unable to compete. Employers
who properly classify their workers may also face higher costs when
unemployment tax and workers’ compensation insurance rates are
adjusted upwards to cover costs incurred by misclassified workers”.6
What is the Extent of the Problem in Virginia?
In 2012, the Joint Legislative Audit and Review Commission
(JLARC) reported that:
“A Virginia Employment
Commission (VEC) audit of one
percent of Virginia employers found
5,639 workers were misclassified
in 2010. Based on findings in other
states, Virginia could have on the
order of 40,000 misclassifying
employers and 214,000
misclassified workers.”
Misclassification is only
thought to be more widespread and
costly now than when JLARC first
studied the issue three years ago.
Which Virginia Industries are Most Impacted?
The JLARC Study reported on the frequency of misclassification
in Virginia industries based on Virginia Employment Commission
audits conducted in 2010:
What is Virginia Doing About Misclassification of Workers?
By Jay Withrow, Bill Burge, Paul Schilinski, Chris Buisset, Virginia Department of Labor and Industry
The Charlotte Observer calls it an “abuse of workers”. 1 The NewYork Times refers to it as “wage theft”.2
Governor Terry McAuliffe pulls no punches when he classifies it as “payroll fraud”.3
And the Virginia Joint Legislative Audit and Review Commission (JLARC) concludes that it leaves employers
who play by the rules “unable to compete.”4
Commissioner of
Labor and Industry,
C. Ray Davenport:
“Misclassification stifles
competition and directly
harms honest Virginia
companies by allowing
unscrupulous employers
to undercut their bids
on construction projects
and in other procurement
scenarios.”
See Worker Misclassification, continued on page 11
What is the Government’s Response?
Misclassification of workers has garnered considerable attention
over the last several years from the federal government and state
governments, including Virginia.
The U. S. Department of Labor’s Wage and Hour Division has a
Misclassification Initiative which has established multi-jurisdictional
Memorandums of Understandings (MOU) with twenty-one states
with varying political constituencies from Texas to New Hampshire
and Florida to Hawaii.7
A number of states, such as our neighbors to the north in
Maryland, have identified misclassification of workers as not only a
very harmful practice to workers and businesses, but as a significant
cost center in the state’s budget. In 2009, Maryland adopted a statute
to prevent misclassification in the construction and landscaping
industries.8 An in-depth study conducted in Indiana found that lost
state revenues resulting from misclassification was conservatively
estimated to be 246.2 million dollars per year.9 A similar study in
Illinois put the figure at 300.6 million dollars per year.10 Other states
that have enacted laws include Colorado, Illinois, Massachusetts,
Pennsylvania, New Jersey and New Mexico and NewYork.
In response to the 2012 Report of the Joint Legislative Audit
and Review Commission (JLARC), which identified and defined
the problem of worker misclassification in Virginia, Governor
Administrative and Support and Waste Management
and Remediation Services Industry Has Highest
Proportion of Misclassifying Employers (2010)
Administrative and Support and Waste 40 58
Management and Remediation Services
Construction 33 242
Accommodation and Food Services 27 20
Real Estate and Rental and Leasing 27 11
Transportation and Warehousing 26 16
“All Other” Industriesb 24 51
Health Care and Social Assistance 24 30
Retail Trade 23 55
Wholesale Trade 22 23
Other Services (except Public Administration) 19 42
Professional, Scienti c, and Technical Services 19 31
TOTAL 27% 579c
Industrya
% of Audited
Employers
Found to Be
Misclassifying
Within Industry
Number of
Misclassifying
Employers
aNorth American Industry Classi cation System (NAICS) code descriptions.
bIncludes Educational Services; Public Administration; Manufacturing; Finance and
Insurance; Information; Arts, Entertainment, and Recreation; Management of Companies
and Enterprises; Utilities; Agriculture, Forestry, Fishing and Hunting; and Mining, Quarrying,
and Oil and Gas Extraction.
cNAICS industry codes were missing for ve misclassifying employers, so total is less than
the total number of misclassifying employers (584).
Source: JLARC staff analysis of 2010 audit data from the Virginia Employment Commission.