By Robert A. Korn, Esq. – Kaplin Stewart

House Bill 400, known as the “Contractor Work Place Misclassification Act” (the “Act”) was signed into law on October 13, 2010. While it is too early to feel the impact of this Act, there is little doubt that it is a game changer which will eventually impact the construction industry in Pennsylvania. No longer can contractors, with impunity, classify workers as independent contractors in order to avoid paying payroll taxes, worker’s compensation insurance costs and unemployment compensation expenses. Violators of the Act are now exposed to civil penalties, stop work orders and sanctions.

Effective February 10, 2011, the Act applies to employers engaged in the “construction” industry. “Construction” is broadly defined as erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work performed on real property or premises under contract, and covers both public and private work. Pennsylvania joins the ranks of 17 other states that have enacted similar laws, including, but not limited to, Colorado, Connecticut, Indiana, Massachusetts, Maryland, Nebraska, New York, Utah and Washington. Like Pennsylvania, some of the states’ laws focus solely on the misclassification of employees in the construction industry, while the laws of other states have a broader application.

In Pennsylvania, one is classified as an independent contractor only if the following criteria are met:

  • The work is performed pursuant to a written contract;
  • Contractually, the individual must be free from the control and direction over his or her performance;
  • The individual must in fact be free of control and direction over his or her performance;
  • The individual must be customarily engaged in an independently established trade, occupation, profession or business providing services in commercial or residential building construction. To meet this standard the individual must:
  • Possess the essential tools, equipment and other assets necessary to perform the services;
  • The contract must provide that the individual performing the services is subject to a profit or loss as a result of performing the services;
  • The individual must perform the services through a business in which that individual has a proprietary interest;
  • The individual must maintain a business location separate from the location of the person for whom the services are performed;
  • The individual must perform similar services for others, free of direction and control over the performance of such services;
  • The individual must hold himself or herself out to others who might avail themselves of his or her services; and
  • The individual must maintain liability insurance during the term of the contract in an amount no less than $50,000.

The failure to meet any of the above-stated criteria exposes a contractor to the civil and criminal sanctions under the Act. The penalties, remedies and actions under the Act apply not only to an employer, but also to officers or agents of an employer. If an individual is improperly classified, the Act is violated if the employer, or officer or agent of an employer, fails to provide coverage required under the Workers’ Compensation Act or fails to pay contributions, reimbursements or other amounts required to be paid under the Unemployment Compensation Act. Each individual who is not properly classified exposes an employer, or an officer or agent of an employer, to a separate violation of the Act. If an employer, or an officer or agent of an employer, intentionally violates the Act, the first offense would be a misdemeanor of the third degree and the second and subsequent offenses would be misdemeanors of the second degree.

If an employer, or officer or agent of an employer, fails to properly classify an individual as an employee, the Act provides for an imposition of a summary offense subjecting the violator to a fine not to exceed $1,000. A conviction of a summary offense is admissible in any subsequent proceeding to establish an intentional violation of the Act.  A party who is not an “employer” under the Act, but intentionally enters into a contract with an employer knowing that that employer intends to misclassify employees in violation of the Act, shall be subject to the same penalties, remedies and other actions as an employer including the criminal sanctions and civil penalties.

The civil penalties range from not more than $1,000 for a first violation to not more than $2,500 for each subsequent violation. The following factors are taken into consideration when determining the amount of the penalty:

  • History of previous violations by the employer;
  • The seriousness of the violation;
  • The good faith of the employer; and
  • Size of the employer’s business

The Secretary of Labor can also seek and obtain a “stop work order” on any project where the improperly classified individuals are working. The stop work order would take effect upon service being effectuated upon the employer or when served at the work site itself and the order will remain in effect until a court issues an order releasing the stop work order.

Beyond the civil and criminal sanctions under the Act, an employer who intentionally violates the Act exposes itself to penalties under the Fair Labor Standards Act for failure to pay overtime. There are other risks of misclassifying employees as well, the most significant of which is exposure to personal injury suits that might otherwise be barred if the employer had worker’s compensation insurance coverage in place.

To date there have been no civil penalties assessed against employers nor have there been any criminal prosecutions. It remains to be seen how vigorously the Act will be enforced.

The Act also contains an anti-retaliation provision, which bars punitive action against an individual who alleges that an employer has not complied with the Act. If “adverse action” against an employee occurs within 90 days of the exercise of an employee’s rights under the Act, there is a rebuttable presumption that the action is retaliatory. The burden of proof would then shift to the employer to show that its actions against the employee were not retaliatory.

About the Author

Robert A. Korn is a partner in the law firm of Kaplin Stewart and serves as Co-Chair of its Construction and Surety Practice Group. He represents clients in all aspects of construction law and also serves as a mediator and arbitrator in complex construction disputes. He can be reached at [email protected].

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