Recently, Governor Ed Rendell signed into law an Act which is aimed at limiting construction companies’ ability to avoid taxes and costs by labeling workers as “independent contractors”. While most of you have nothing to worry about, the law now gives the Secretary of Labor and Industry, as well as District Attorneys and the Attorney General the ability to impose criminal penalties. Previously, when such misclassification was discovered, the only exposure of an employer was to pay the shortfall to the unemployment compensation funds. Additionally, the new law gives the Secretary the ability to issue a stop-work order to the violating employer and potentially the entire project if the violations are found to involve a majority of the individuals working at the site.
While consideration was given to apply the law to all employers within the Commonwealth, there was a concern by the bill’s sponsors that such a broad application would have had too many opponents. Thus, despite potential violations occurring in other industries, the new Act only applies to construction workers.
Construction is defined as “erection, reconstruction, demolition, alteration, modification, custom fabrication, building assembling, site preparation and repair work done on any real property or premises under contract whether or not the work is for a public body and paid for from public funds.” Based on this broad definition, the Act extends to all construction, public and private, commercial or residential, and also potentially extends beyond the project site to include those employers performing custom fabrication work for a particular project. For example, the cabinet company providing custom casework or millwork for a project may potentially fall within this definition even if no labor is provided on the project site. Enforcement and case law will further define the scope of the Act.
The Act also provides for a definition of an “independent contractor”. To be an independent contractor under the Act, that individual must have a “written contract” to perform such services; must be free from control or direction over performance of the services provided; and must be customarily engaged in an “independently established trade”. Criteria to be considered in determining what an “independently established trade” actually is includes a determination of whether the individual possesses the essential tools, equipment and assets necessary to perform the services; whether the individual will realize a profit or loss as a result of performing the services; whether the services are provided through a business in which the individual has a proprietary interest with a different business address from the employer; whether the individual has performed similar services for others; and whether the individual maintains liability insurance during the term of the contract.
The Act also allows enforcement of violations against those parties that contract with an employer who misclassifies its employees. Such enforcement is limited to situations in which the entity contracts with an employer knowing that the employer intends to misclassify employees in violation of the Act. It is a defense if the person in good faith believed that the individual who performed the services was an independent contractor at the time services were performed. The Act also allows the enforcement of penalties against any successor corporation or business entity that has one or more of the same principals or officers as the employer who was assessed penalties if they are engaged in the same trade activity. Therefore, an entity contracting with a new business organization may be careful to inquire whether the principals of that entity were previously found in violation of the Act. This inquiry may eliminate the imposition of a stop-work order causing project disruptions.
It remains to be seen if the enforcement of the Act will increase scrutiny in the construction industry or whether the Act was merely a first foot in the door by the legislature in order to expand the Act’s application to all business in the Commonwealth. Please contact David Raves at [email protected] if you have any questions.