Construction Companies Beware of Misclassifying Independent Contractors
On February 11, 2011 the Construction Workplace Misclassification Act went into effect in Pennsylvania. The Act is designed to prevent construction employers from labeling certain employees as independent contractors and, thus, avoiding unemployment compensation and workers compensation compliance for those laborers. To be properly classified an independent contractor under the Act a construction worker must: (1) have a written contract to perform services; (2) be free from the hiring party’s control or direction when performing such services; and (3) be customarily engaged in an independently established trade, occupation, profession or business.
As you can see it is not too difficult to meet the first criteria as an employer can certainly get a person eager for work to sign just about anything. The next two items, however, are not as clearly defined and are likely to only be tested during an employee challenge. To understand these two prongs the construction employer needs to step back and consider the purest form of independence. For example, if the Pennsylvania employer contracts with an HVAC specialist to perform work on a project it is quite obvious that that subcontractor is not within the construction company's control. The HVAC specialist will plan its work to fit within its own schedule and other projects. The HVAC specialist is also contracting with other construction companies on unrelated projects.
The Act specifically sets forth the third prong and leaves little, if any room, for doubt as to who is independent.
For the hired party to be “customarily engaged in an independently established trade, occupation, profession or business,” the hired party must: (1) possess the essential tools for the job, independent of the person for whom the services are performed; (2) realize a profit or loss as a result of performing the services; (3) perform the services through a business he owns, at least in part; (4) maintain an independent business location; (5) either perform similar services for another hiring party while meeting the first four requirements or credibly hold himself out as able to perform similar services; and (6) maintain individual liability insurance during the term of the contract of at least $ Construction companies who ignore the Act are taking quite a risk. Employers who misclassify workers and fail to provide coverage or make required payments or contributions under the Workers’ Compensation Act or the Unemployment Compensation Law may be penalized with fines or incarceration. The Act also subjects company officers and supervisors to the same penalties, where those individuals are found to have intentionally assisted the employer in violating the law.
As with most employer violations, these cases will most likely come from disgruntled and laid off workers looking for some recourse. The Act includes a provision that prohibits retaliation against the whistleblowers.
Construction companies would do well to take a hard look at the payroll roster and determine if all workers could meet the stringent classification test of the Act.
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