ARE YOU HIRING
EMPLOYEES, INDEPENDENT CONTRACTORS OR SUBCONTRACTORS?
A MISTAKE COULD BE
COSTLY
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.
DETERMINING WHETHER EMPLOYEE OR INDEPENDENT CONTRACTOR
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.
FINES AND PENALTIES
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.
WHAT ABOUT MY SUBCONTRACTORS?
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.
WRITTEN CONTRACT FOR EACH PROJECT
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.
PROOF OF INSURANCE
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 stevenrsnyderesq@gmail.com
Steven R. Snyder
Attorney at Law
635 Glenbrook Drive
Harrisburg, PA 17110
(717) 975-7799 Voice and Text
Fax: 717-526-2044
stevenrsnyderesq@gmail.com
www.steveonyourside.com
Kathy Snyder, Paralegal
(717) 991-5375 Voice and Text
Fax: 717-526-2044
kathysnyder31@gmail.com
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