In the emerging economy, the line between independent contractors and employees is blurring.  It’s happening in a host of industry sectors, especially construction, manufacturing, energy and service.

State and federal agencies charged with the task of regulating employment continually wrestle with worker misclassification.  That is especially true for the Occupational Safety and Health Administration (“OSHA”) and its state counterpart, Virginia Occupational Safety and Health (“VOSH”).  Inspectors can’t lift a finger unless they first deem workers to be employees under the law.  It is not a simple issue.  The multifactor tests used to determine worker status varies, often from one state or one agency to another.

In 2012, the Joint Legislative Audit and Review Committee (“JLARC”) commissioned a study on employee misclassification in Virginia.  It projected that over 200,000 self-described independent contractors should be designated as employees.  That’s more than twenty percent of Virginia’s workforce.  JLARC also estimated that state agencies could collect upwards of $28 million annually in tax revenues from businesses.  Agencies would also reap additional fines and penalties.

JLARC estimated that over forty percent of the workers it deemed misclassified were in the construction industry.  It also found high misclassification rates in service industries, such as waste management and remediation, hospitality and food services, real estate, transportation and warehousing.  Other industries on VEC’s radar included health care, social assistance, and retail and wholesale trade.

Among other recommendations, JLARC called for a multiagency task force to sweep hundreds of thousands of workers into workers’ compensation, payroll taxation, and a broad array of state and federal regulatory regimes.

As Virginia’s Labor Commissioner, I had the opportunity to direct OSHA enforcement before the formation of the task force.  The experience lent insight as to how the task force might affect the private sector.

Ordinarily, VOSH reduces penalties for OSHA violations for business size, demonstration of good faith and a history of workplace safety.  Without penalty reductions, businesses cited for OSHA violations can be fined up to $7,000 for each serious infraction.  Fines can rise up to $70,000 for failing to abate a hazard or for willful or repeated infractions.

Under the new policy, inspectors who determine that companies are misclassifying workers as independent contractors can take penalty reductions off the table.  Inspectors can also require licenses for all contractors on site to ensure compliance with the Department of Professional and Occupational Regulation (“DPOR”).  Use of unlicensed contractors may expose companies to additional fines, probation, suspension and license revocation.  Inspectors also have begun to refer small contractors to the Virginia Workers’ Compensation Commission for further audits.

Targeted companies need to understand how decisions are made in many of the 3,000-plus OSHA inspections that occur in Virginia every year.  Non-attorney inspectors commonly make snap decisions on complex, multi-factor legal issues, including whether workers at the site are actually employees.  When I was Labor Commissioner, and now as a business attorney, companies have reported to me occasions when the inspector fails to recognize newer technology or systems and gets it wrong.  Increased automation and worker autonomy have redefined work roles, especially in the manufacturing and service industries.  These forces have created an expanded role for legitimate independent contractor relationships.  An agency auditor who lacks the time or background to appreciate business models may declare workers “misclassified,” with all of the penalties and regulations that come with the label.

Virginia’s misclassification task force is in its infancy, and it will soon release a study on its initial effects.  The task force would be wise to address industry impact.  If enforcement agencies shift thirty-one percent of self-identified independent contractors into the workers’ compensation, wage protection, payroll tax and Affordable Care Act regimes, they should consider the potential cost increases for labor and services.  Agencies should also address the potential strain on their own resources if the effort to reclassify such a large segment of Virginia’s workforce leads to additional legal contests.

Because they rely so heavily on independent contractors, many businesses may need to defend their business practices through legal contests.  Policymakers and business leaders alike would be well advised to keep a watchful eye on the implementation of the new policy to ensure Virginia businesses do not wind up in the crosshairs of OSHA or other regulatory agencies.

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Courtney Malveaux is a regulatory, government affairs and employment attorney who defends companies cited by OSHA at ThompsonMcMullan, P.C. in Richmond, Virginia.  An experienced litigator, he served as Virginia’s Labor Commissioner through October 2013, and as President of the National Association of Government Labor Officials.  Malveaux represents industrial employers on the Virginia Safety and Health Codes Board, and serves as Counsel to the new Safety and Health Subcommittee of the Virginia Manufacturers Association.  He can be (804) 698-6242 or at CMalveaux@t-mlaw.com.