Effective July 1, 2013, the Tennessee Department of Labor and Workforce Development (TN DOL) will be authorized to impose penalties on construction companies that avoid paying workers' compensation premiums by misclassifying workers as independent contractors rather than employees.
Specifically, the new law, to be codified at Tenn. Code Ann. § 50-6-411, prohibits “any person or entity engaged in the construction industry” from:
- concealing any information pertinent to the computation and application of an experience rating modification factor;
- materially understating or concealing the amount of the payroll;
- materially understating or concealing the number of employees; or
- materially understating or concealing any of the employee’s duties.
Violations can result in fines of up to the greater of $1,000 or 1.5 times the average yearly workers’ compensation premium which should have been paid on the workers who are found by the TN DOL to have been improperly classified as independent contractors rather than employees.
Misclassifying an employee as an independent contractor is a common mistake that could result in the above penalties (in addition to federal wage and hour law violations if the misclassified workers are hourly and should have been paid overtime for all hours worked over 40 each workweek).
As a general rule, independent contractors are characterized as being free from the employer’s direction and control. They typically:
- have their own business with a business tax ID number which is different from their own individual social security number;
- perform services for multiple companies;
- pay their own travel and other expenses;
- set their own hours;
- have their own employees;
- do not receive training on-the-job;
- are contracted to perform work on specific jobs based on submitting a bid which may cause them either to make or lose money based on the amount of labor and materials they estimate to be required for the job versus the amount of each they actually end up using to complete it;
- cannot walk off the job/quit without incurring a financial penalty; and/or
- provide their own equipment and tools to complete the job.
“True” independent contractors also pay their own self-employment taxes and are not eligible for employee benefits, including workers’ compensation coverage or unemployment, through any of the companies for whom they perform work.
Although these general guidelines are helpful, distinguishing between an employee and an independent contractor can be difficult, as no one factor is determinative. The TN or federal DOL (and the IRS for taxation purposes) would look at the working relationship as a whole in order to determine whether it should be treated as an employment relationship or not.