Top Ten Issues In Employment Law For HR Professionals In Virginia in 2008: #1

We will be posting over the next week the top ten developments in employment law for HR professionals in Virginia in 2008. The list is in no particular order. Topic number 1 is:

“Pay Your Taxes,” and Misclassification Of Employees As Independent Contractors Causes Problems. More after the break.

In George v. Commonwealth (our previous post about the case is here), the Supreme Court of Virginia upheld the conviction of a physician who withheld tax payments from employee paychecks but failed to remit the money to the Commonwealth. The defendant, a physician, owned and operated a medical practice in Luray, Virginia. He withheld funds from his employees’ salaries representing income taxes owed to the Commonwealth and deposited the withheld funds in a bank account that he used for both personal and business expenses. He failed to file quarterly withholding tax returns required by Virginia state law and did not remit the withheld funds to the Commonwealth. After the available balance in his bank account fell below the total amount of funds withheld from his employees to pay the state income taxes, the defendant was charged and convicted of violating Virginia Code § 18.2-111 for embezzling money belonging to the Commonwealth. The Court of Appeals sustained the conviction. The fact that the defendant continued to use the money as if it were his own was a deciding factor in the finding of embezzlement.

The significant part of the case for employers is the Court’s holding that the Virginia Code imposes a statutory trust on funds withheld from employee’s wages for state income tax liability purposes. “When such funds are withheld they are no longer the property of the employer or the employee. . . . Such funds are held in trust for the benefit of the Commonwealth and are not the property of the employer.” The physician here was convicted for four felony counts of embezzlement because he did not remit the withheld funds to the Commonwealth. In fact, he commingled the money in his general corporate bank account with regular funds and the balance fell below the amount he was supposed to be holding in trust.

The entire situation arose because the Virginia Employment Commission concluded that the physician’s nurses should not be treated as independent contractors. The independent contractor misclassification had even more serious repercussions than usual in this case. (Here are some prior posts on independent contractor issues.)

An example of more problems caused by mis-classification of workers can be found in the Sixth Circuit case Grace v. USCAR, where a ruling was issued with respect to the liability of joint employers under the FMLA. The case has implications for staffing firms and those who use them. The case found that a secondary employer – i.e. the company using the staffing firm’s employees – can be liable under the FMLA even if it does not independently meet the requirements for FMLA coverage (i.e. having 50 or more employees). In this case, the court found that the two companies were not an “integrated employer,” primarily because the two companies lacked common management. The court did find, however, that the two companies met the “joint employer” test. The court found that the facts fit the “where one employer acts directly or indirectly in the interest of the other employer in relation to the employee” test in the DOL regulations.

Companies using staffing companies can run into potentially explosive litigation if they do not properly classify independent contractors. These “new” employees can not only seek overtime compensation, but they also may lay claims to certain company benefits (e.g. stock option plans) that are only allowed to be enjoyed by employees, thus lawsuits brought by staffing company employees can result in many unexpected costs beyond litigation.