On October 13, Pennsylvania Governor Edward G. Rendell (R) signed the Construction Workplace Misclassification Act (H.B. 400), which sets forth a number of prerequisites for classifying construction industry workers as independent contractors as opposed to employees. Under the Act, the consequences for misclassifying a worker as an independent contractor are severe. The Act is part of a large trend, as similar legislation has been enacted or is being considered in a number of other states.

Under the Act, an individual who performs services in the construction industry for pay is an independent contractor for purposes of workers’ compensation, unemployment compensation, and improper classification of employees only if: (1) the individual has a written contract to perform such services; (2) the individual is free from control or direction over the performance of such services both under the contract of service and in fact; and (3) as to such services, the individual is “customarily engaged in an independently established trade, occupation, profession or business.” An individual fits this last category only if:

1.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;  

2.the individual’s arrangement with the person for whom the services are performed is such that the individual will realize a profit or suffer a loss as a result of performing the services;  

3.the individual performs the services through a business in which the individual has a proprietary interest;  

4.the individual maintains a business location that is separate from the location of the person for whom the services are being performed;  

5.the individual previously performed the same or similar services for any other person in accordance with criteria (1) through (4) while free from direction or control over the performance of the services, or, the individual 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 with criteria (1) through (4) while free from direction or control over performance of the services; and  

6.the individual maintains liability insurance of at least $50,000 during the term of the contract.  

The Act broadly defines “construction” as erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation, or repair work done on any real property or premises under contract, whether or not the work is for a public body and paid for from public funds. Under the Act, each misclassified worker is considered a separate offense, and administrative penalties may be up to $1,000 for the first violation, and $2,500 for each subsequent violation. The Act also makes it a misdemeanor for a contractor to intentionally misclassify an employee as an independent contractor, and violations of the Act can lead to stop-work orders requiring the cessation of work by misclassified individuals within 24 hours. The Act will take effect 120 days after enactment.

The passage of this Act is part of a growing movement by states to crack down on what is perceived by lawmakers to be widespread worker misclassification, particularly in the construction industry, but also more generally. Employers should pay close attention to pending and proposed state legislation and seek the advice of counsel in order to determine how such legislation might affect their worker classification practices.