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Lack of Clarity Surrounding Classification of Workers in the “Gig Economy” Drove the West Virginia Legislature to Redefine What Constitutes an Independent Contractor
On March 22, 2021, Senate Bill 272 was passed and Governor Jim Justice signed into law the West Virginia Employment Law Worker Classification Act. The bill will prevent worker misclassification and defines the differences between employees and independent contractors. As expressed in the bill: “Clarity in a worker’s classification allows businesses to comply with applicable laws, provides workers with certainty as to their benefits and obligations, and minimizes unnecessary mistakes, litigation, risk and legal exposure laws concerning workers’ compensation.”
Concerned with the lack of clarity in the legal standards used to differentiate employees from independent contractors, especially in the context of the “so-called ‘gig’, ‘entrepreneurial’, [and] ‘sharing’ economy,” the West Virginia Legislature drafted W. Va. Code §21-5I-1 et seq. to provide an objective method of making that distinction. Additionally, the Legislature wanted to bring cohesion to the definition of independent contractor, as it can be defined differently depending on the law at issue. In bringing cohesion to the law, the Legislature partially succeeded. W. Va. Code §21-5I-4 will only apply “for the purpose of classifying workers” under the workers’ compensation laws in Chapter 23, unemployment compensation in Chapter 21A, the Human Rights Act in §5-11-1 et seq., and wage payment and collection in §21-5-1 et seq., it will not apply in any other area of law.
In order to qualify as an independent contractor, a worker must sign a written contract with the principal that makes it clear that the principal’s intent it to employ them as an independent contractor. The contract must also contain five different acknowledgments for the worker to sign which help make it clear that the intent at the beginning of the relationship was to form a principal-independent contractor relationship. For example, the worker must acknowledge that he or she is providing services as an independent contractor and that he or she will be responsible for all federal and state taxes. The terms of the contract must “substantially comply” with all of the statutory requirements, although the statute does not define what constitutes substantial compliance. Until there is case law on the issue, it will be impossible to determine if a contract containing 80% of the contractual requirements will be considered to be in substantial compliance.
In addition to the contract requirements, the worker must also meet certain criteria. The independent contractor must either file, or be contractually obligated to file, an income tax return for the fees earned from the work in question or the independent contractor must provide their services through some type of business entity, even a sole proprietorship as long as it is registered with a “doing business as.” Further, the independent contractor must “actually and directly control[] the manner and means by which the work is to be accomplished,” which does not require that the contractor control “the final result of the work.” This control does not extend to control necessary to ensure compliance with federal or state laws and regulations. It also does not extend to contractually required measures regarding general safety concerns.
Finally, in addition to the requirements above, persons may either satisfy at least three of the enumerated requirements in W. Va. Code §21-5I-4(a)(4) to be classified as an independent contractor or be considered a direct seller under the Internal Revenue Code §3508(b)(2). The requirements of W. Va. Code §21-5I-4(a)(4), are similar to the test used in other areas of the law to determine whether a worker is an independent contractor. For example, an independent contractor is someone who controls the amount of time they spend providing services, controls where services are being performed, and is free to hire or solicit help. Any combination of three requirements will be enough to satisfy the requirements of W. Va. Code §21-5I-4(a)(4) and no requirement holds more weight than the others do.
In conclusion, in order to be classified as an independent contractor the contract between the contractor and the principal must satisfy the writing requirements of W. Va. Code §21-5I-4(a)(1). From there the contractor must either be required to file income taxes for the fees earned or do business through some business entity and must control how the work is to be performed. Finally, the contractor must either meet three of the requirements of subsection W. Va. Code §21-5I-4(a)(4) or be considered a direct seller under IRC §3508(b)(2). If the contractor does not meet these requirements, the classification test set forth in Internal Revenue Service Revenue Ruling 87-41 will determine whether the person is an independent contractor.
By:
Dill Battle
304-340-3823
dbattle@spilmanlaw.com
Kellen M. Shearin
304.340.3892
kshearin@spilmanlaw.com
Spilman Thomas & Battle, PLLC
300 Kanawha Blvd, E.
Charleston, WV 25301