Construction Industry: Pennsylvania Limits Independent Contractors

Pennsylvania has enacted new legislation that continues a recent trend in law and regulation to limit employers’ classification of individuals as “independent contractors” instead of as employees. The new law is called the “Construction Workplace Misclassification Act” (“CWMA”) and will become effective February 10, 2011.

The new law is limited to the construction industry (see below for an explanation of what is considered the “construction industry”). It is designed to ensure that certain individuals remain eligible for benefits under Pennsylvania’s workers’ compensation and unemployment compensation laws – and that construction industry employers make the necessary payments to provide these benefits for such individuals.

Although limited to the construction industry, all employers should take note of CWMA, for we can expect Pennsylvania courts and administrative agencies to look to CWMA criteria for guidance in determining in other contexts whether a worker should be classified as an employee or as an independent contractor.

What is “Construction”?

CWMA applies to all construction work in Pennsylvania, not just public sector work. It defines construction 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 from public funds.”

Who Is an Independent Contractor?

CWMA strictly limits “independent contractor” status in the commercial or residential building construction industry. Individuals will be considered independent contractors only if they:

  • Personally possess essential tools, equipment and other items needed to perform services independent of the person for whom services are performed.
  • Have an arrangement with the person for whom they perform services that will result in the contractor making a profit or suffering a loss as a result of performing services.
  • Have an ownership interest in a business through which they provide services.
  • Maintain a business location separate from the person/company for whom they perform services.
  • Have previously performed the same or similar services for another person as described above and have done so while free from direction or control over performance of the services – both according to contract and in fact. Alternatively, the contractor holds himself or herself out as able and available to perform services as described above while free from direction or control over the performance of services.
  • Maintains liability insurance during the term of the contract in the amount of at least $50,000.

Non-Factors: The fact that a construction employer does not withhold federal or state income taxes or pay unemployment compensation contributions or workers compensation premiums is not considered in determining whether an individual is an independent contractor under the Workers’ Compensation Act or the Unemployment Compensation Law.

Enforcement

Violations of CWMA occur when an employer (or officer or agent of an employer) does not properly classify individuals as employees for purposes of the Workers’ Compensation Act and/or the Unemployment Compensation Law. A separate offense happens for each individual improperly classified.

The Department of Labor will investigate and may petition a court to issue stop-work orders or assess penalties. There are also provisions for criminal prosecution by the Attorney General. First offenses may be prosecuted as third degree misdemeanors and may result in civil penalties of $1000. Subsequent offenses may be prosecuted as second degree misdemeanors and may result in civil penalties of $2500.

Third parties such as employment agencies or construction clients may also be found to have violated CWMA if they intentionally contract with an employer knowing the employer intends to misclassify workers.

Retaliation Prohibited

CWMA makes it unlawful for employers to discriminate against or take adverse action against any person in retaliation for exercising rights protected under the law, which includes the right to file complaints or inform any person about an employer’s non-compliance with CWMA. CWMA presumes that taking any adverse action within 90 days of a person exercising rights under the law is unlawful retaliation (an employer can rebut that presumption by showing that other facts were the real cause for the adverse action).

Poster

The Department of Labor will create a poster about the CWMA for construction job sites.

What to Do to Prepare for CWMA?

The restrictions established by CWMA regarding independent contractor status will mean that a large majority of Pennsylvania construction industry workers currently classified as independent contractors will have to be reclassified as employees. Employers will no longer be able to point to the fact that they do not withhold taxes as proof that the individuals are independent contractors. Construction industry employers should immediately begin reviewing their practices and procedures for establishing relationships with independent contractors and determining whether individuals should be reclassified as employees or if future contractual relationships will be established as an employer-employee relationship.

For More Information

Questions about CWMA or classification of individuals performing services for your company can be answered by the Stevens & Lee labor and employment attorney with whom you regularly communicate or you may contact Susan R. Friedman at 717.399.6625 or Joseph P. Hofmann at 717.399.6643.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.

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