My landscaping business had several workers found misclassified in the same audit -- doesn't Virginia's '72-hour single offense' rule mean I only owe one penalty total, not one per worker?

Plain-English summary

A Virginia landscaping business was audited for the taxable periods January 2021 through December 2022. The Department found that a number of workers the business had classified as independent contractors should instead have been classified as employees, and issued withholding tax and civil penalty assessments. By the time the case reached the Tax Commissioner, the business had accepted the reclassification itself -- the only remaining fight was over how the civil penalty should be calculated.

The 72-hour rule sets the offense TIER, not the number of penalties. Effective January 1, 2021 (2020 Acts of Assembly, Chapters 681 and 682), Virginia added a new worker-misclassification chapter to Title 58.1. Va. Code § 58.1-1900 C provides that "all occurrences of misclassification of employees ... made by the same employer at the same time, or within 72 hours, shall be deemed to be a single offense." The business read this to mean that misclassified workers hired within the same 72-hour window should generate only ONE penalty, shrinking its bill to a handful of 72-hour "batches" instead of one penalty per worker.

Why that reading failed. As a practical matter, the Department administers "offense" as everything a single audit engagement turns up -- if one audit finds any number of misclassifications, that whole audit counts as a single offense (see the Department's Guidelines for the Classification of Workers, P.D. 21-133). But Va. Code § 58.1-1901, the penalty statute itself, imposes the fine "per misclassified individual" -- up to $1,000 per worker for a first offense, up to $2,500 per worker for a second offense, and up to $5,000 per worker for a third or subsequent offense, with debarment also possible starting at the second offense. Reading the two provisions together, the "single offense" concept only controls which PENALTY RATE applies (and how long any debarment period runs) -- it doesn't change the fact that the fine is computed worker-by-worker. So during a business's first audit that turns up misclassifications, it faces up to $1,000 for EACH misclassified worker (no debarment); only a later, separate audit that finds more misclassifications triggers the higher per-worker rates and debarment exposure.

Outcome. Because the penalty was correctly computed per worker rather than per 72-hour hiring window, the Department denied the requested reduction and upheld the assessment, with an updated bill (including accrued interest) due within 30 days. The Department also noted that for audits completed after July 1, 2023, its Guidelines were revised to use graduated penalty rates based on the employer's total number of workers (P.D. 23-88) -- but even though this audit was completed before that date, the Department noted the business would still have faced the full $1,000-per-worker rate under the revised guidelines too.

What this means for you

Any business facing a first-time worker misclassification audit

Expect the civil penalty to be computed per misclassified worker (up to $1,000 each on a first audit), not as one lump sum for the whole audit or for each batch of hires -- the 72-hour "single offense" language only affects which penalty tier and debarment exposure applies to a LATER audit, not how many workers' penalties get charged in this one.

Businesses that have been through more than one misclassification audit

A second audit that turns up new misclassifications is a separate "offense" from the first, triggering the higher $2,500-per-worker rate (and potential debarment); a third or later audit reaches $5,000 per worker. Fixing your worker classifications after a first audit materially reduces exposure if a later audit occurs.

Common questions

Q: If several of my misclassified workers were all hired within 72 hours of each other, does that mean I only owe one penalty for all of them?
A: No. The 72-hour rule groups those misclassifications into a single "offense" for purposes of setting the penalty rate tier and debarment risk -- but the penalty itself is still charged per misclassified worker.

Q: How much is the penalty per worker?
A: Up to $1,000 per misclassified worker for a first offense (i.e., the first audit that finds misclassifications), up to $2,500 per worker for a second offense, and up to $5,000 per worker for a third or subsequent offense -- with debarment also possible starting at the second offense.

Q: Does it matter that my audit was completed before the Department's 2023 guideline revision?
A: Not necessarily in your favor. The Department noted that even under the post-July 2023 graduated-rate guidelines (P.D. 23-88), a business in this situation would still have faced the same full per-worker penalty rate.

Citations and references

Statutes:

• Va. Code § 58.1-1900 C -- misclassifications by the same employer at the same time, or within 72 hours, are deemed a single offense
• Va. Code § 58.1-1901 -- civil penalty imposed per misclassified individual, with rates rising for a second or third/subsequent offense, plus potential debarment

Guidance the Department relied on (described here, not linked): P.D. 21-133 (9/30/2021) -- the Department's Guidelines for the Classification of Workers, including its practice of treating one audit engagement's findings as a single offense; P.D. 23-88 (7/31/2023) -- revised Guidelines applying graduated penalty rates based on an employer's total worker count, for audits completed after July 1, 2023. This ruling addresses how the misclassification PENALTY is computed once misclassification is conceded; a related ruling, P.D. 24-60, addresses the underlying question of whether workers were properly classified as employees in the first place under the common-law factor test.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-55

Original ruling text

May 22, 2024

Re: § 58.1-1821 Application: Withholding Tax

Dear *:

This will respond to your letter in which you seek correction of the assessment of civil penalties issued to * (the “Taxpayer”) for the misclassification of workers for the taxable periods January 2021 through December 2022. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer, a landscaping business in Virginia, was audited for the taxable periods January 2021 through December 2022. The Department concluded that a number of the Taxpayer’s workers who were classified as independent contractors should have been classified as employees. As a result, assessments were issued for withholding tax and penalties. The Taxpayer filed an application for correction, contesting a number of audit adjustments.

After the application was filed, additional adjustments were made to the audit assessment and the Taxpayer is in agreement with the number of workers who were recategorized as employees. The only remaining issue is the application of the civil penalty.

DETERMINATION

Effective January 1, 2021, under legislation enacted by the 2020 General Assembly (Chapters 681 and 682 of the 2020 Acts of Assembly), Virginia added Chapter 19 to Title 58.1 of the Code of Virginia , relating to misclassification of employees as independent contractors. Within this chapter, Virginia Code § 58.1-1901 imposes civil penalties and potential debarment on employers that fail to properly classify an individual as an employee.

The Taxpayer contends that workers who were hired during the same 72-hour period should be considered one misclassification resulting in a single civil penalty. Based on this rationale, the Taxpayer seeks to reduce the amount of the civil penalty based on the number of distinct 72-hour periods during which the misclassified workers were hired.

Virginia Code § 58.1-1900 C provides that “all occurrences of misclassification of employees . . . made by the same employer at the same time, or within 72 hours, shall be deemed to be a single offense .” [Emphasis added]. As a practicality, the Department administers an “offense” as the discovery of one or more misclassification occurrences during one audit engagement. See the Guidelines for the Classification of Workers, issued as Public Document (P.D.) 21-133 (9/30/2021) (the “Guidelines”). If an audit uncovers any misclassifications of workers, such misclassifications are treated collectively as a single offense. In general, subsequent offenses will only be identified if occurrences of misclassification are found in subsequent engagements.

In addition, Virginia Code § 58.1-1901 imposes a civil penalty on employers that fail to properly classify their workers of “up to $1,000 per misclassified individual for a first offense , up to $2,500 per misclassified individual for a second offense , and up to $5,000 per misclassified individual for a third or subsequent offense .” [Emphasis added]. For purposes of computing the penalty, this statute clearly imposes the penalty on each worker that was misclassified as an independent contractor.

Thus, during a first audit, which includes a misclassification occurrence, the employer would be subject to a penalty of up to $1,000 for each misclassified worker, but would not be subject to debarment. Only during a subsequent, separate audit would the higher penalty rates and debarment sanctions apply. In accordance with this interpretation, an offense under Virginia Code § 58.1-1900 C is limited in its application to the determination of the rate of the civil penalty imposed and the duration of any potential debarment.

Based on the aforementioned statutory structure, the Department correctly imposed the civil penalty per misclassified individual and the Taxpayer’s request for relief cannot be granted. The Taxpayer will receive an updated bill that will include accrued interest to date. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collection actions.

In addition, effective for audits completed after July 1, 2023, the Guidelines were revised to provide graduated penalty rates that would be determined based on the employer’s total number of workers. See P.D. 23-88 (7/31/2023). While the audit of the Taxpayer was completed before July 1, 2023, the Department notes that the Taxpayer would be subject to the full $1,000 per worker penalty under the revised penalty rates.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4621.X

Related Documents

21-133

23-88