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The New Construction Workplace Fraud Act
Raises Scrutiny Over the Classification of Employees and Independent Contractors

What is the Construction Workplace Fraud Act?

On October 13, 2010 Governor Ed Rendell signed House Bill 400 into law officially enacting the “Construction Workplace Fraud Act.” This new law was created in response to complaints that employers in the construction industry are improperly classifying employees as independent contractors in order to avoid the taxes and expenses of hiring employees. Proponents alleged that such practices deprived employees of important benefits such as Unemployment Compensation, Social Security, and overtime pay redirecting the higher business costs to only those employers who are following the law.

The Act states that a worker will be presumed an employee unless certain criteria are met. This means that the employer must be able to prove that their independent contractors are not actually employees. The Act clearly defines the criteria to use when determining whether a worker could be classified as an independent contractor, and the documentation necessary to prove the worker has met the criteria of being an independent contractor. Penalties for misclassifying an individual as an independent contractor include fines of up to $1,000 for the first violation, and up to $2,500 for each subsequent violation with each misclassified worker considered a separate offense. The state may also issue a "stop work" order, and impose individual liability, and criminal sanctions.

What are the criteria for classifying a worker as an Independent Contractor?

The Act lists more than 10 criteria that must be met for a worker to be classified as an independent contractor. One criteria for a worker to be classified as an independent contractor would be his/her business location; which must be a separate business location from the employer. Another stipulation for being classified as an independent contractor is that the worker must also operate under written contracts that explicitly detail the terms of payment and the work to be performed. Additionally, the worker must be free from direction and control over performance of the services and engaged in an independently established trade or profession. This is further proven by showing that the individual has his/her own tools, can realize a profit or suffer a loss as a result of their work, and holds him/herself out to the public as a bona fide independent contractor to others.

What does this mean for contractors?

Given the detailed and numerous criteria for being classified as an independent contractor, and the documentation necessary to evidence the classification, it is likely that many construction workers will need to be re-classified as employees. As noted above, violations of the new Act could result in harsh penalties.

With this new Act, it is evident that employers should take a fresh look at current workers and respective classifications. Clear job descriptions, written and signed subcontractor agreements, and appropriate documentation is critical to determining and filing the appropriate worker classifications and providing a strong defense if actions alleging violations are filed against you.

 

For information about this topic contact RC Kelly Law Associates at
215-896-3846 or via e-mail at
help@rckelly.com

 



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