On October 13, 2010, Governor Ed Rendell signed into law House Bill 400, establishing the Construction Workplace Misclassification Act (CWMA). This new law goes into effect on February 10, 2011, and will have a dramatic impact on all construction companies utilizing independent contractors.
Determining Independent Contractor Status
Under the CWMA, an individual who performs construction work may be considered and paid as an independent contractor only if:
- The individual has a written contract
- The individual is free from control or direction over the performance of such services, both under the contract and in fact
- The individual is customarily engaged in an independently established trade, occupation, profession or business
With respect to the third criteria above, the CWMA states that an individual is customarily engaged in an independently established trade, occupation, profession, or business only if:
- The individual possesses his/her own tools
- The individual’s arrangement is such that he/she can realize a profit or suffer a loss as a result of the individual’s performance of services through a business in which the individual has a proprietary interest
- The individual maintains a separate business location
- The individual previously worked as a bona fide independent contractor (as defined by the CWMA) or holds him/herself out to the public as a bona fide independent contractor.
Compliance With CWMA Will Likely Require Reclassification of Workers
Under the CWMA, there are a lot of hurdles to clear in order to establish that a worker should be classified as an independent contractor. We suspect that the overwhelming majority of workers in the construction industry in Pennsylvania who are currently classified as independent contractors will have to be reclassified as employees in order to comply with the CWMA. Notably, under the CWMA, the failure to withhold federal or state income taxes or pay unemployment compensation contributions or workers compensation premiums will not be considered in determining whether an individual is an independent contractor.
Consequences for Misclassification
Under the CWMA, the consequences for misclassifying an individual as an independent contractor are severe. Administrative penalties may be up to $1,000 for the first violation, and up to $2,500 for each subsequent violation. These penalties can stack up quickly because under the CWMA each misclassified worker is considered a separate offense. In addition, violations of the CWMA can lead to a “stop work” order requiring the cessation of work by misclassified individuals within 24 hours, individual liability, and criminal sanctions.
The CWMA was supported by organized labor, including the Carpenters Union. Although the CWMA deals only with the construction industry, we see this law as part of a nationwide trend by state and federal agencies to crack down on employers who misclassify their workers. For example, there are two currently pending federal bills, the Fair Playing Field Act of 2010 and the Misclassification Prevention Act, addressing the classification of workers as employees or independent contractors.