Think Again: Independent Contractor or Employee in the Construction Industry
INTRODUCTION
Classifying workers appropriately as either "independent contractors" or "employees" have been a recent theme of both federal and state enforcement agencies.
This firm was involved in a recent example of a worker who was ultimately determined to be an "independent contractor" because the company did not provide guidance on the day-to-day performance of her activities.
Generally, the Internal Revenue Services test is applied to determine which classification workers should be placed into. The most important factor has been whether or not the company exercised control of the work. Once a worker receives employee status, the worker may benefit from a number of labor and employment laws.
THE NEW LAW
Now Pennsylvania has enacted a new law, The Construction Workplace Misclassification Act, formerly HB 400, PN 4289. This new law (Act 72 of 2010) takes effect on February 10, 2011, one hundred and twenty days after it was signed by Governor Rendell.
For purposes of Unemployment Compensation, an individual who performs services in the construction industry for pay is an independent contractor if and only if the following three factors are met:
(1) The individual has a written contract to perform such services.
(2) The individual is free from control or direction over performance of such services both under the contract of service and in fact.
(3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.
"Independently established" means that the:
(1) individual possesses the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed. (In other words, the individual has all his/Her own equipment to perform the work you are hiring him/her to do.)
(2) arrangement with the person for whom the services are performed is such that the individual shall realize a profit or suffer a loss as a result of performing the services.
(3) services are performed through a business in which the individual has a proprietary interest. (the business must be established at the time you retain the services and cannot be an ‘after-the-fact' contrivance.)
(4) business location maintained is separate from the location of the person for whom the services are being performed.
(5) individual
(i) previously performed the same or similar services for another person in accordance with factors cited above and while free from direction or control over performance of the services, both under the contract of service and in fact; or
(ii) holds himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services in accordance with paragraphs (1), (2), (3) and (4) while free from direction or control over performance of the services.
(6) The individual maintains liability insurance during the term of this contract of at least $50,000.
CLASSIFICATION and JURISDICTION
Classification for workers' compensation coverage of individuals deemed under the Act to be employees will be considered on an individualized basis. Appropriate classification establishes the cost for the workers' compensation coverage.
Improper classification of a worker as an independent contractor when s/he is really an employee may result in a stop-work order and financial penalties as well as the possibility of criminal conviction ranging from a summary offense to misdemeanor of the second degree for a second offense. Administrative penalties under the new law range from $1,000 to $2,500 per offense.
County District Attorneys and the Attorney General have concurrent jurisdiction to enforce the act. The Department of Labor and Industry may also be involved, and has authority to issue rules and regulations under this law.
Employers may not retaliate against any person for exercising rights under this law. There is a rebuttable presumption that any action taken against a person within 90 days of the person's exercise of rights under this law is retaliatory.
THE SIGNIFICANCE OF THE NEW LAW
The distinction between an independent contractor and an employee has been confusing at best. The basic distinction was one of control of the work. If any employer misclassified an individual, then the employer was back-charged by the Workers' Compensation and Unemployment Compensation authorities for the premiums/contributions that should have been provided to the incorrectly characterized individual. Additionally penalties and interest for failure to pay in the first place were added.
Why would an individual performing work for you under contract report you for violating this act? Because employees are eligible for benefits under a number of laws, while independent contractors are generally ineligible.
Example 1: If the individual has injured himself on your job, he may have no health insurance and would be ineligible for workers' compensation. Being characterized as your employee provides worker's compensation coverage for the injury to provide both wage replacement and injury-related medical benefits.
Example 2: The project is completed and there is no more work. As an employee, unemployment compensation coverage will generally be available to the individual. As an independent contractor, it is not.
Example 3: The individual disagrees with the amount of pay he received and the timing of the payment. As an employee, s/he is covered by the Wage Payment and Collection Law and Wage and Hour statutes. As an independent contractor, s/he is not covered.
Example 4: The individual believes s/he suffered from discrimination while providing services. Generally, as an employee s/he is covered by a variety of discrimination statutes, while most independent contractors do not have such coverage.
BOTTOM LINE
Remember there is no legal penalty to you for characterizing someone as an employee and making all the appropriate and required payments for workers' compensation, unemployment compensation, and taxes. There is significant legal liability if an employee is misclassified as an independent contractor under both federal and state law. During these tough economic times, both the federal and state governments are anxious to recover the tax dollars that are often lost when employees are misclassified.
Skarlatos & Zonarich LLP is a full-service law firm with highly skilled professionals dedicated to providing clients with sound advice and aggressive advocacy. For more information, visit skarlatoszonarich.com.
