Kentucky construction contractors who misclassify employees as independent contractors may be penalized, according to a bill recently introduced into the Kentucky House (15 RS BR 819).

  • The first violation would result in a civil penalty of up to $1,000.
  • A penalty of up to $5,000 per occurrence could be assessed for each subsequent violation within a five year period.
  • Willful violations could result in a doubling of those fines.

In addition, any violations would also be reported to the Department of Revenue, the Department of Workers’ Claims and the Division of Unemployment, and other penalties may lie within their jurisdiction.

One-quarter of Kentucky construction employees are improperly classified as independent contractors

A recent study of Kentucky’s unemployment insurance audits from 2007-2010 found that about one-quarter of construction employees are improperly classified as independent contractors. The bill notes that these misclassifications have allowed offending contractors to pay less into Kentucky’s Workers’ Compensation Insurance system and has caused a negative financial impact on individual workers, the state government and private sector employers.

The Kentucky General Assembly estimates this misclassification allows the offending employers to reduce their payroll by thirty percent, giving them an unfair advantage over the employers who correctly classify under state law. As a result, the bill states that these misclassifications have cost Kentucky’s unemployment insurance system an average of $1.75 million each year and the state $6.13 million in annual tax revenue.

The bill would create a presumption that a person who performs services for a contractor is an employee. To rebut this presumption, the contractor must show that the person:

  • Is a separate business entity;
  • Has freedom of control from the contractor;
  • Makes its services available to the general public and not just for the contractor;
  • Hires employees without contractor approval,
  • Has a capital investment of tool and equipment used to perform the services; and
  • Is not held out to the public as an employee of the contractor.

Additional requirements for Kentucky contractors

The bill would also require that all Kentucky contractors be required to post a statement, in English, Spanish and possibly other languages, that all independent contractors are required to pay state and federal taxes and to post the rights of employees to workers’ compensation insurance, unemployment benefits, minimum wage protections, overtime pay, federal and state workplace protections and a threat against retaliation for reporting any misclassification.