On October 13, 2010, Pennsylvania Governor Edward G. Rendell (D-Pa) signed into law the Construction Workplace Misclassification Act (“the Act”), H.B. 400, which amends the Pennsylvania Workers’ Compensation Act and the Pennsylvania Unemployment Compensation Law for determining an individual’s status as an employee or independent contractor in the construction industry. It also creates enforcement mechanisms, imposes civil and criminal penalties for violations, and contains an anti-retaliation provision. The law becomes effective on February 11, 2011.
The Construction Industry
The Act applies only to the construction industry. It defines “construction” as “erection, construction, 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.”
Standard for Qualification as an Independent Contractor
The Act states that one who performs services in the construction industry for renumeration is properly classified as an independent contractor only if the following three elements are met:
- 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.
- As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.
For these purposes, an individual is “customarily engaged in an independently established trade, occupation, profession or business with respect to services the individual performs in the commercial or residential building construction industry” only if:
- The individual possesses the essential tools, equipment, and other assets necessary to perform the services independent of the person for whom the services are performed.
- The individual’s arrangement with the person for whom the services are performed is such that the individual shall realize a profit or suffer a loss as a result of performing the services.
- The individual performs the services through a business in which the individual has a proprietary interest.
- The individual maintains a business location that is separate from the location of the person for whom the services are being performed.
- The individual:
- Previously performed the same or similar services for another person in accordance with paragraphs (1), (2), (3), and (4) and while free from direction or control over performance of the services, both under the contract of service and in fact; 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 in accordance with paragraphs (1), (2), (3), and (4) while free from direction or control over performance of the services.
- The individual maintains liability insurance during the term of this contract of at least $50,000.
The Act also specifies certain factors that are not considered when determining whether an individual is an independent contractor for these purposes: failure to withhold federal or state income taxes or pay unemployment compensation contributions or workers’ compensation premiums with respect to an individual’s renumeration.
Violations, Penalties, and Enforcement
The Act provides that an employer, or an officer or agent of an employer, can be subject to civil and/or criminal sanctions if the employer, officer or agent of the employer:
- Fails to properly classify an individual as an employee for purposes of the Workers’ Compensation Act and fails to provide the coverage required under the Workers’ Compensation Act; or
- Fails to properly classify an individual as an employee for purposes of the Unemployment Compensation Law and fails to pay contributions, reimbursements or other amounts required to be paid under the Unemployment Compensation Law.
Each individual who is not properly classified as an employee constitutes a separate violation of the Act.
Civil Violations
The Act imposes civil monetary penalties for violations of the Act. For the first violation, the penalty is up to $1,000. For each subsequent violation, the penalty can be up to $2,500. The Secretary is permitted to consider the following nonexclusive list of factors when determining the penalty amount:
- The history of previous violations by the employer;
- The seriousness of the violation;
- The good faith of the employer; and
- The size of the employer’s business.
Criminal Violations
The Act also provides that an employer, or officer or agent of an employer, who intentionally misclassifies a worker as an employee is guilty of a misdemeanor of the third degree for a first offense and a misdemeanor of the second degree for the second and subsequent offenses. Negligent misclassifications constitute a summary offense, with a fine of up to $1,000 upon conviction.
Investigations
The Secretary of Labor and Industry (“Secretary”) is authorized to investigate matters after receiving information that any person has violated the Act, and the Secretary may also issue an order to show cause. An individual who receives an order to show cause has twenty days from service to file an answer in writing. Failure to respond results in the Secretary’s ability to petition for a stop-work order or immediately assess penalties as provided in the Act.
If the Secretary finds probable cause that an employer has committed a criminal violation, the Secretary must refer the matter to the Attorney General for investigation or administrative penalties.
Stop-Work Orders
If, after an order to show cause, the Secretary finds an intentional failure to properly classify individuals, the Secretary is authorized to petition a court to issue a stop-work order to require cessation of work by the misclassified individuals. The stop-work order can require the cessation of work by the misclassified individuals within twenty-four hours of the effective date of the order. If a majority of individuals working at the site are improperly classified, the stop-order can require cessation of all business operations of that employer at each site at which a violation occurred within twenty-four hours of the effective date of the order.
Stop-orders remain in effect until the court issues an order of release or upon a finding that the employer, or officer or agent of the employer, is no longer in violation of the Act. An order releasing a stop-work order may require the employer to file periodic reports with the Department of Labor and Industry (“Department”) over a probationary period demonstrating the employer’s continued compliance. This probationary period cannot exceed two years. Penalties for a violation of a stop-work order are $1,000 per day for each day that the employer conducts business operations in violation of a stop-work order.
Scope of Liability: Parties Acting in Concert and Successor Organizations
As described above, an officer or agent of an employer that violates the Act is subject to its penalties. In addition, a party that does not strictly meet the definition of employer, but “intentionally contracts with an employer knowing the employer intends to misclassify employees in violation of this Act, shall be subject to the same penalties, remedies or other actions as the employer found to be in violation of this Act.”
The Act specifies that stop-work orders and penalties are enforceable against successor corporations or business entities that have one or more of the same principals or officers as the employer against whom the stop-work order or penalty was initially issued, as long as the successor organization is “engaged in the same or equivalent trade or activity.”
Good-Faith Defense
The Act provides a good faith defense to alleged violations of the Act “if the person for whom the services are performed in good faith believed that the individual who performed the services qualified as an independent contractor at the time the services were performed.”
Prohibited Agreements
The Act prohibits requiring or demanding that an individual enter into an agreement that results in the improper classification of that individual as an independent contractor. Violations result in a fine of no less than $1,000 and no more than $2,500.
Anti-Retaliation
The Act makes it a violation for an employer, or an officer or agent of an employer, to “discriminate in any manner or take adverse action against any person in retaliation for exercising rights protected” under the Act. The protected rights include, but are not limited to, “the right to file a complaint or inform any person about an employer’s noncompliance with this Act.” Those who make good faith allegations are also protected from retaliation, even if the claim ultimately fails. The Act creates a rebuttable presumption of retaliation if the employer takes an adverse action against a person within 90 days of a person’s exercise of rights protected under the Act.
Department of Labor and Industry Duties
The Department must create a poster for use on job sites which outlines the requirements and penalties under the Act. The poster must be made available on the Department internet website. The Secretary may establish a toll-free hotline telephone number to receive calls regarding alleged violations.
The Department must also submit an annual report to the Pennsylvania General Assembly detailing data on the previous calendar year’s administration and enforcement of the Act.
DISCLAIMER
The foregoing is intended solely as general information and may not be considered tax advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.
