The Construction Workplace Misclassification Act was signed into law by the Governor of Pennsylvania last week. The law makes construction contractors criminally and civilly liable for misclassifying an employee as an independent contractor to avoid coverage or payments under the workers compensation or unemployment compensation laws.

There is no crime, however, if a contractor believes in good faith that the individual qualified as an independent contractor under the law. In anticipation of this law becoming effective—on February 10, 2011—construction contractors should review their arrangements with all independent contractors to ensure proper classification.

The new law applies only to employers in the construction trades, and, for this purpose, "construction" is "erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work done on any real property or premises under contract."

Criteria for Independent Contractors

To qualify as an independent contractor under this law, an individual must have a written contract to perform services; be free from the control or direction of the contractor who hired him or her with respect to the performance of such services, both under the contract and in fact; and be engaged in an independently established trade, occupation, profession, or business.

To be engaged in an independently established trade, occupation, profession, or business, the individual must meet the following criteria:

  • Possess independently the essential tools and equipment necessary to perform the services
  • Realize a profit or suffer a loss as a result of performing the services
  • Perform the services through a business in which he or she has a proprietary interest
  • Maintain a business location separate from the location of the person who hired him or her
  • Previously have performed similar services for another contractor or hold himself or herself out as available and able to perform similar services
  • Maintain liability insurance of at least $50,000

Criminal and Civil Penalties

The law provides for both criminal and civil penalties. An officer or agent of an employer, as well as the employer itself, may be liable under the law for failing to properly classify an individual as an employee.

An intentional violation is a third-degree misdemeanor for a first offense and a second-degree misdemeanor for subsequent offenses. A negligent violation is a summary offense, punishable by a fine of up to $1,000. Each improperly classified employee is the basis for a separate violation.

Civil penalties for violations may be imposed by the Secretary of Labor and Industry of up to $1,000 for a first violation and up to $2,500 for subsequent violations. Additionally, if the Secretary finds that a misclassification was intentional, the Secretary may seek a stop-work order from the courts. The stop-work order would apply to any improperly classified individuals or to an entire job site if a majority of workers there is misclassified. The law also requires courts to assess a $1,000 penalty for each day business operations are conducted in violation of a stop-work order.

Importantly, the law also creates criminal and civil liability for parties that are not "employers" under the statute but that contract with an employer knowing the employer intends to misclassify employees.

What Should Contractors Do Now?

The new law does not apply to worker classification for purposes of federal income taxes, Social Security taxes, Medicare taxes, Pennsylvania personal income taxes, or Philadelphia wage taxes. However, the law is part of a continued effort by federal and state authorities to raise revenue by cracking down on worker misclassification. All employers should monitor developments in this area and should take steps to ensure that their workers are classified properly.