Employee v. Independent Contractor: Now It Really Matters

Following a long series of amendments in the legislature, Governor Rendell recently signed House Bill 400, to be known as The Construction Workplace Misclassification Act (CWMA) which will go into effect February 10, 2011. Under the CWMA, the legislature has sought to bring about clear guidelines for contractors when classifying workmen as either employees of the contractor or independent contractors. Under the CWMA, a workman who performs construction work may only be considered to be and paid as an independent contractor if the following is true:

1)         the individual has a written contract;

2)         the individual is free from control or direction over performance of such services, both under the contract of service and in fact;

3)         as to such services, the individual is customarily engaged in an independently established, trade, occupation, profession or business.

Whether a workperson categorized by the contractor as an “independent contractor” can meet the third element set forth above, the following criteria must be met:

1)         the individual must posses his or her own tools;

2)         the individual’s arrangement is such that he or she can realize a profit or suffer a loss as a result of performing the services;

3)         the individual performs the services through a business in which the individual has a proprietary interest;

4)         the individual maintains a business location that is separate from the location of the person for whom the services are being performed;

5)         the individual either 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;

6)         the individual maintains liability insurance during the term of this contract of at least $50,000.

In determining whether a particular individual is a bonafide independent contractor as opposed to an employee, the Courts will not consider the failure to withhold federal or state income taxes or to pay unemployment compensation contributions or workers compensation premiums with respect to the individual’s remuneration for work.   

An employer or officer or agent of an employer can be found to be in violation of the law if it fails to properly classify an individual as an employee for purposes of the Worker’s Compensation Act and fails to provide the coverage required under the Worker’s Compensation Act, or fails to properly classify an individual for purposes of the Unemployment Compensation Act and fails to pay contributions, reimbursements, or other amounts required to be paid under the Unemployment Compensation Law.

Violations of the CWMA come with potential criminal penalties in addition to administrative penalties, including substantial fines. In addition, the Secretary of the Pennsylvania Department of Labor and Industry may petition a court of competent jurisdiction to issue a stop work order requiring all misclassified individuals to cease working on a particular project or, in the event that the majority of individuals on the project are misclassified, requiring the cessation of all business operations of that employer at each worksite.

Now that the legislature has more clearly defined what constitutes misclassification of workers and has enacted serious penalties, contractors have fair warning of this impending change. Contact the attorneys in our construction group if you have any questions concerning the new law and how it will impact your business.

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