United States: West Virginia Enacts Legislation To Clarify Worker Classification

Governor Jim Justice recently signed into law Senate Bill 272, the West Virginia Employment Law Workers Classification Act (the "Act"), which goes into effect on June 9, 2021.  The legislation provides standards for determining who is an employee and who is an independent contractor under certain West Virginia statutes.  The Act states, "[c]larity 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 worker's compensation, ... unemployment compensation,... Human Rights Act rights, and wage payment and collections."¹  The Act applies only to workers' compensation, unemployment compensation benefits, Human Rights Act rights, and wage payment and collection provision of the West Virginia Code.²  The Act has a specific exception as it does not apply to on-demand drivers, which are governed by W.Va. Code §17-29-11.

The Act outlines specific standards for determining whether someone is an independent contractor.  Specifically, a person shall be classified as an independent contractor if there is a written contract between the principal and the individual that states the principal's intent to engage the services of the person as an independent contractor and contains acknowledgments that the person understands: (1) they are providing services as an independent contractor; (2) they will not be treated as an employee; (3) they will not be provided either workers' compensation or unemployment benefits; (4) they are obligated to pay all applicable federal and state income taxes and that no tax withholdings from payments will be made by the principal; and (5) they are responsible for the majority of the supplies and other variable expenses incurred in connection with the contracted services unless the expenses are for non-local travel, the contract specifically provides for reimbursement, or they are commonly reimbursed under industry practice. 

The Act further requires that in order to be classified as an independent contractor the person must file or be contractually obligated to file an income tax return in regard to the fees earned from the work; or the person provides their services through a business entity and directly controls the manner and means by which the work is to be accomplished and the person satisfies three or more  of the following nine criteria:

1. the person has control over the amount of time personally spent providing services;
2. the person has control over where the services are performed;
3. the person is not required to work exclusively for one principal;
4. the person is free to exercise independent initiative in soliciting others to purchase their services;
5. the person is free to hire employees or to contract with assistants to perform all or some of the work;
6. the person cannot be required to perform additional services without a new or modified contract;
7. the person obtains a license or other permission from the principal to utilize any workspace of the principal in order to perform the work;
8. the principal has been subject to an employment audit by the IRS and the IRS has not reclassified the person to be an employee; or
9. the person is responsible for maintaining and bearing all costs of any required business licenses, insurance, certification, or permits required to perform the work.

Additionally, the Act provides that a person will be classified as an independent contractor if they satisfy the definition of direct seller under the Internal Revenue Code. 

Classification of workers who do not satisfy these criteria will be determined by the test set forth by the IRS.  The definitions provided under the Act could increase the number of individuals classified as independent contractors instead of employees.  The legislation notes, however, that a principal is always free to hire a worker as an employee even if they meet the criteria for an independent contractor. 

This Act creates a uniform test for determining whether an individual can be classified as an independent contractor under West Virginia law and makes it easier for business owners to classify workers and determine if they are entitled to benefits such as workers' compensation and unemployment insurance.