In previous articles and blog entries, we have written on the growing peril for businesses that misclassify employees as independent contractors, as federal and state governments adopt new laws and increase penalties for worker misclassification and ratchet up enforcement through audits and proceedings. For those who do (or should) track government activity in the area of worker misclassification, New York State has just enacted the Construction Industry Fair Play Act, which will become effective on October 27, 2010.

Specifically targeted at the construction industry, the Fair Play Act establishes a presumption that a construction worker is an employee (not an independent contractor), unless the hiring contractor can establish that the worker (1) qualifies as a “separate business entity” under a specific twelve-factor test; or (2) is an independent contractor otherwise under a version of the well-known, three-factor “ABC” test (see the three factors here).

As previously reported, earlier versions of the Fair Play Act legislation included the notoriously difficult ABC test as the only means to overcome the presumption of employee status, but now, under the enacted law, contractors may avoid this presumption and the ABC test entirely by establishing as an initial matter that the worker functions as a “separate business entity” under twelve specific factors relating to the entity’s business and operational status and practices (see the twelve factors here). While this alternative “entity” test has some similar control elements of the ABC test, it is mostly a laundry list of objective factors that any contractor may (and should) require be met when engaging workers with the intent of establishing an independent contractor relationship.

Contractors should also be aware that, in addition to redefining misclassification analysis, the Fair Play Act also (i) requires contractors to give written notice to workers of the respective rights and obligations of independent contractors and employees, (ii) includes an anti-retaliation provision, and (iii) provides for civil, criminal, and other penalties for statutory violations, including debarment from public works contracts.