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Pennsylvania Governor Signs Legislation Creating Construction Workplace Misclassification Act

On October 13, 2010, Governor Edward G. Rendell signed into law House Bill 400 which will be commonly referred to as the Construction Workplace Misclassification Act. The Act provides objective criteria for classifying individuals as independent contractors, versus employees, in the construction industry. The criteria is also intended for use by the Department of Labor and Industry in administering the Workers' Compensation Act and the Unemployment Compensation Law.

Pursuant to the terms of the new Act, an individual who performs services in the construction industry for remuneration is an independent contractor only if:

  • The individual has a written contract to perform such services.
  • The individual is free from control or direction over performance of such services both under the contract of service and in fact.
  • The individual is customarily engaged in an independently established trade, occupation, profession or business.

An individual is considered to be "customarily engaged in an independently established trade, occupation, profession or business" if the individual possesses the essential tools and equipment, may realize a profit or suffer a loss as a result of performing the services, performs services through a business in which the individual has a proprietary interest, maintains a business location that is separate and apart from the location of the person for whom the services are being performed, previously performed the same or similar services for another person or holds himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services. Lastly, the individual must maintain a liability insurance policy of at least $50,000.00.

The Act specifically excludes certain other factors or criteria which were historically considered when classifying an individual as an employee or an independent contractor. These factors include the failure to withhold state or federal income taxes, the failure to pay unemployment compensation contributions, and the failure to obtain and provide workers' compensation insurance coverage.

An employer will be deemed in violation of the Construction Workplace Misclassification Act if it fails to properly classify the individual as an employee for purposes of the Workers' Compensation Act and also fails to provide insurance coverage as required under the Act. An employer is also in violation of the Act if it fails to properly classify an individual for purposes of the Unemployment Compensation Law and further fails to pay the requisite contributions and/or reimbursements. The Act also makes it unlawful for an employer to retaliate or otherwise discriminate against an individual exercising rights protected under the Act.

Penalties under the Act include criminal penalties ranging from a summary offense and fine of not more than $1,000.00, to a misdemeanor of the second degree. Administrative penalties can range from $1,000.00 in civil penalties for the first violation and not more than $2,500.00 for each subsequent violation. The Secretary of Labor and Industry may also petition a court of competent jurisdiction to issue a Stop Work Order.

The Pennsylvania Construction Workplace Misclassification Act is consistent with the federal government's recent campaign against employees being misclassified as independent contractors. This campaign is focused not only the construction industry, but all industries which may improperly categorize employees as independent contractors. Earlier this year, the White House announced plans to begin aggressively pursuing companies that try to characterize regular employees as independent contractors. It is assumed the crackdown will yield at least 7 billion dollars in revenue over the next 10 years. The IRS announced plans for an audit of 6,000 companies over the next 3 years. It is thought that employers avoid higher labor costs through the use of "independent contractors" by not withholding income taxes, not withholding and paying Social Security and Medicare taxes or paying unemployment tax on wages paid to employees. Use of independent contractors also avoids costs associated with vacation or sick leave and concerns over minimum wage and/or overtime payments.

The Pennsylvania Construction Workplace Misclassification Act will take effect in 120 days. The first step in assuring compliance with the Act is to review and update existing contracts with independent contractors and/or establish written contracts with new or existing contractors.

For more information, please contact John Draskovic at jdraskovic@mijb.com or by calling 814-870-7653.