On October 13, 2010, Pennsylvania Governor Edward Rendell signed HB 400, known as the “Construction Workplace Misclassification Act.”  The purpose of the Act is to clarify when a construction worker can be classified as an independent contractor, rather than an employee.

The Act narrowly defines which circumstances warrant classification of an individual as an independent contractor.  Generally speaking, the following factors must be present in order to establish a contractor/independent contractor relationship, rather than an employer/employee relationship:

  • There must be a written contract;
  • The individual must be free to control and direct his or her own performance of services;
  • The individual must be engaged in business which is customarily performed by independent contractors in the construction industry;
  • The individual should use his or her own tools to perform the work;
  • The written contract should provide for payment to the independent contractor based upon work performed; thereby allowing the independent contractor to make a profit or suffer a loss.  If the contract is based upon hours worked, with no potential for profit or loss, then it will be deemed to indicate an employer/employee relationship;
  • The individual must perform his or her work through a business in which he or she has a proprietary interest;
  • The business in which the individual maintains a proprietary interest must have a location that is different than that of the person for whom services are being performed;
  • The individual should have previously performed similar services for another person, and should hold himself or herself out as being available for independent contracting; and
  • The individual should maintain liability insurance of at least $50,000.

If any of these factors are absent, there is the greater likelihood that the individual will be classified as an employee.

The Act goes on to set penalties for misclassification of persons as independent contractors, rather than employees.  If misclassification is intentional, the employer can be charged with a misdemeanor.  If misclassification is negligent, the employer can be charged with a summary offense, and may be sentenced to pay a fine.  In addition to the fine, the Secretary of Labor may seek civil penalties for violations of the Act.  Also, the Secretary of Labor may seek a “stop work order” on any project where the individual has been performing work.

Even before this Act was passed, employers in all industries who stretched the limit by aggressively classifying as many people as possible as independent contractors faced the risk of liability.  Now, there is even more risk of that danger in the construction industry.  Moreover, because the Act provides some form of clearer guidance on how to distinguish employees from independent contractors, those who fall on the wrong side of the line will not only face penalties under the Act, but will likely also face penalties under the Fair Labor Standards Act for failure to pay overtime.

It is worth noting that this Act will not go into effect until February 11, 2011.  Between now and then, employers potentially subject to this Act would be well-advised to review their relationships with independent contractors to ensure that none of the people identified as such are actually employees.

“Jack” Merinar is the leader of the firm’s NLRA team. He got his introduction to labor law in the early 1990’s seeking injunctions of picket line misconduct and handling arbitrations. By the mid 1990’s he was advising employers through union campaigns and elections. His experience with campaigns led Jack to develop a focus on advising employers how to avoid campaigns where possible.
» See more articles by John R. Merinar, Jr.
» Read the full biography of John R. Merinar, Jr. at Steptoe & Johnson

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