Pennsylvania Ups the Ante on Employee Misclassification

by Martin J. Saunders

Proper classification of workers as employees or independent contractors is an issue which frequently confronts employers. Failure to properly classify a worker can result in the employer being liable for the worker's portion of income and payroll taxes which the employer should have withheld. Additionally, workers have used the Fair Labor Standards Act, and other laws, to challenge their classification; claiming that misclassification as an independent contractor has resulted in denial of wages and benefits they properly were owed.

The consequences for misclassification have been almost exclusively monetary, regardless of whether the challenge came from a taxing authority or a worker. The risk of such challenge was low. The rewards for misclassification were a reduction in the employer's tax obligations and a savings in its wages and benefits costs.  Criminal liability was not a consideration for an employer.

Effective February 1, 2011, Pennsylvania increased the price employers in the construction industry might be required to pay for misclassification of workers.

The Construction Workplace Misclassification Act defines its scope of coverage to include the erection, demolition, alteration, custom fabrication, building, assembly, site preparations and repair work on any real property or premises - broad enough to encompass pad development etc. in the oil and gas fields. This Act provides that for purposes of unemployment compensation law and workers' compensation, an individual who performs services in the construction industry for rumination may be classified as an independent contractor only if the individual has a written contract to perform such services, is free from direction over performance of such services, and is customarily engaged in an independently established trade, occupation, profession or business of providing such services.  Individuals only will be deemed to be engaged in an independently established trade, occupation, profession or business in the commercial or residential building construction industry if they:

• Possess the essential equipment needed to perform such service,
• Realize a profit or loss from performing the service,
• Perform the service through a business in which they have a proprietary interest,
• Maintain a location separate from the person for whom the services are being performed,
• Maintain $50,000 liability insurance, and
• Previously performed similar services for another while free from their direction and control or holds themselves out as available to and performs the same services while free from direction and control.

The failure to withhold taxes or pay workers' compensation or unemployment compensation contributions, moreover, will not be considered in determining whether an individual is properly classified.

An employer, its officer or agent, failing to properly classify an individual, provide coverage or pay contributions for unemployment or workers' compensation, violates the Act unless they, in good faith, believe that the individual qualifies as an independent contractor. Similarly, a person who is not an employer violates the Act by contracting with an employer knowing that the employer intends to misclassify a worker.

Intentional violation of the Act constitutes a misdemeanor.  Negligent violation of the Act constitutes a summary offense.  Alleged violation of the Act will be referred to the Secretary of Labor and Industry for investigation, who may issue an order to show cause why a violation should not be found. After a hearing, the Secretary may impose civil penalties of $1,000 to $2,500, seek a stop work order, or refer the matter to the Attorney General or District Attorney for criminal prosecution.

Finally, the Act prohibits retaliation for making a good faith complaint about misclassification or providing information on non-compliance.  Adverse action taken within 90 days of protected activity creates a rebuttable presumption of retaliation.

This Act attempts to level the playing field between contractors who have followed the rules and those who have not. In light of this statute, Pennsylvania construction contractors now have civil and criminal incentives to review and ensure that their workers are properly classified.

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