• Employers vs. Independent Contractors: Know the New Law
  • February 16, 2011 | Author: Ronald H. Pollock
  • Law Firm: Barley Snyder - Lancaster Office
  • On October 13, Governor Rendell signed into law the Construction Workplace Misclassification Act which makes it both a civil and a criminal offense for a contractor to knowingly misclassify an employee as an independent contractor. Pennsylvania joins several states that have taken similar measures to penalize employers that improperly classify workers as independent contractors to avoid paying certain taxes and other employee benefits.

    The Act establishes criteria particular to the construction industry under which employees can be classified as independent contractors, including a requirement that the independent contractor maintain liability insurance. The Act also imposes both civil and criminal penalties for misclassification of workers, and requires employers to post notices in the workplace.

    Which Employers Are Covered Under the Act?

    Employers in the construction industry that are already subject to the Pennsylvania Workers’ Compensation Act and the Pennsylvania Unemployment Compensation Act are covered by this new Act. The Act also extends liability to individual officers or agents of the employer. Construction is defined broadly as the “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.”

    What Are The Criteria For Independent Contractor Status?

    The Act establishes a three-part test that an individual must meet to be properly classified as an independent contractor:

    1. The individual must have a written contract to perform construction services;
    2. The individual must be free from control or direction over the performance of those services, both under the contract and in fact; and
    3 .The individual must be customarily engaged in an independently established trade, occupation, profession or business.
    The Act also sets forth the six specific criteria that will determine whether an individual meets the third part of the test of being “customarily engaged in an independently established trade, occupation, profession or business.”

    The Act also sets forth the six specific criteria that will determine whether an individual meets the third part of the test of being "customarily engaged in an independently established trade, occupation, profession or business."

    1. The individual must possess the essential tools, equipment and other assets necessary to perform the services, independent of the employer.
    2. The individual arrangement with the employer is such that the individual must realize a profit or suffer a loss as a result of performing the services.
    3. The individual must perform the services through a business in which the individual has a proprietary interest.
    4. The individual must maintain a business location separate from the location of the employer.
    5. The individual must:

    a. Have previously performed the same or similar services for another person, meeting the criteria 1 through 4 above, and while free from direction or control over the performance of the services; or
    b. Hold him or herself out to others as available and able to perform the same or similar services meeting the criteria of 1 through 4 above, and while free from direction or control over the performance of the services.

    6. The individual must maintain liability insurance of at least $50,000 during the term of the contract.

    What Penalties May Be Imposed For Violations Of The Act?

    The failure to properly classify an individual subjects employers to civil penalties of up to $1,000 per misclassified employee for a first violation, and up to $2,500 per misclassified employee for each subsequent violation. Importantly, the Act also allows the Secretary of Labor and Industry to petition a court for a stop-work order requiring the cessation of work by those individuals who are misclassified, or if a majority of individuals at a worksite are misclassified, to petition for a cessation of all business operations of the employer at each site where a violation occurred. The stop-work order remains in effect until the court issues a release order.

    In addition, the Act provides for criminal penalties for employers that violate the act and those who intentionally contract with such an employer knowing the employer intends to violate the Act. An intentional violation is a misdemeanor of the third degree for a first offense and a misdemeanor of the second degree for a subsequent offense. A negligent violation is a summary offense subject to a fine of not more than $1,000.

    Does The Act Prohibit Retaliation?
    Yes, the Act prohibits an employer from discriminating or taking an adverse action against any person who in good faith files a complaint or informs any person about an employer’s non-compliance with the Act. An adverse action within 90 days of the person’s complaint raises a rebuttable presumption of retaliation.