Wednesday, March 23, 2016

A Mistake That Can Put Your Company Out of Business



Steven R. Snyder, Esquire

If you are classifying individuals that do work for your company as independent contractor instead of employees in order to cut down on your employee payroll costs, you may be making a costly mistake.  Moreover, if you are legitimately hiring individual subcontractors, or at least you believe you are, and not taking very specific precautions, you may be making the same costly mistake, a mistake that could put your company out of business.

Nearly every state has started to crack down on companies, particularly in the construction business, who hire individuals to work for the company and classifying them as independent contractors, issuing them a 1099 at the end of the years. Most of these states are now performing audits to ensure that your workers are not improperly misclassified and the results of misclassifying an employee as an independent contractor can expose your company to civil and criminal penalties, stop-work orders, and potential law suits.

A new, “Construction Workplace Misclassification Act” (43 P.S. §§ 933.1 - 933.17) went into effect in Pennsylvania on February 10, 2011. However, the new law had not been aggressively enforced under the then, Republican administration.  Under the current Democratic Administration, beginning in 2015, the Department of Labor and Industry has been auditing construction companies and strictly enforcing the law.


In the past, the determination as to whether a worker was an employee or an independent contractor was decided by weighing a number of factors handed down by the courts of years of case law.  Under the new Pennsylvania law, that system is completely replaced.  Under the new Law, an individual who performs services in the construction industry for remuneration will only be considered an independent contractor for purposes of workers' compensation, unemployment compensation ALL of the following criteria are met:

(1)       The individual has a written contract to perform such services.

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

(3)       The individual is customarily engaged in an independently established trade, occupation, profession or business providing the same construction services.

(4)       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.

(5)       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.

(6)       The individual performs the services through a business in which the individual has a proprietary interest.

            (7)        The individual either:

                        (a)        previously performed the same or similar services for another person in
                accordance with the new law, while being free from direction or control over performance of the services, both under the contract of service and in fact; or

(b)       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 the new Law while being free from direction or control over performance of the services; and

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

(7)       The individual maintains a business location that is separate from the location of the person for whom the services are being performed.

The Pennsylvania Law provides for Civil Penalties for Failing to Properly Classify an Employee of up to $1,000 for the first violation and up to $2,500 for each subsequent violation and in Pennsylvania, misclassifying multiple employees would be treated as multiple violations to the Act. In addition, in certain cases, a court may issue stop-work orders.  Criminal Penalties for Failing to Properly Classify an Employee Employers, officers or agents who intentionally violate the Act can be convicted of a misdemeanor of the third degree for the first offense and a misdemeanor of the second degree for a second or subsequent offense, which can be punishable by imprisonment. Similarly, employers, officers or agents who negligently violate the Act can be convicted of a summary offense and be sentenced to pay a fine of up to $1,000. 


The Pennsylvania law affects your hiring of subcontractors when the subcontractor is an individual. As a result you must meet the same criterial as above.  And it will be you, the contractor, who will have the burden of proof that your subcontractors are in fact subcontractors, and not another of your employees.

First, you will want to have a written contract with each and every subcontractor…FOR EACH PROJECT. Yes that’s right, a blanket contract with a subcontractor collecting dust in a file will not cut it.  And that contract, while not being the only requirement, will want to be very specific in the requirements the subcontractor must meet in order to be considered a subcontractor and in order to work for your company.


You will want to verify that your subcontractor has the required insurance, not just the first time you use him or her, but that the insurance is in effect each year and has not lapsed. 

As you can see, the Pennsylvania Construction Workplace Misclassification Act is extremely onerous on the Contractor, and the law in other states are equally as onerous.  In spite of your best efforts, you may not be 100% sure you are in compliance. The best way to be in as good a position as possible is to (1) take the opportunity to review both your Subcontractor Agreements and your actual practices with a knowledgeable employment law attorney, and (2) keep good records.

If you would like to review your employment and subcontract agreements and your operation, for Pennsylvania or other states where you do business please feel free to give Attorney Steve Snyder a call at (717) 975-7799 or email Steve at

Steven R. Snyder
Attorney at Law
635 Glenbrook Drive
Harrisburg, PA 17110
(717) 975-7799 Voice and Text
Fax: 717-526-2044

Kathy Snyder, Paralegal
(717) 991-5375 Voice and Text
Fax: 717-526-2044

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