On October 13, 2010, Pennsylvania Governor Ed Rendell signed into law the Construction Workplace Misclassification Act, joining a growing number of states that have targeted an industry where misclassification of employees as independent contractors is believed to be most prevalent.

The law, which takes effect in 120 days following enactment, creates a strict definition of “independent contractor.”  No individual can be classified as an independent contractor unless he/she meets a three-part test where the individual:

(A)  has a written contract to perform services with the construction industry business;

(B)  is free from control or direction over the performance of such services under the contract and in fact; and

(C)  is customarily engaged in an independently established trade, occupation, profession or business.

This type of three-part standard is commonly called an “ABC” test – but the Pennsylvania standard is less onerous than the “ABC” laws governing independent contractors in the construction industry in New Jersey and New York, for example.   (Click “More” for link to “Steps to Ensure Compliance” below.)

The new law contains a six-criteria requirement in order to satisfy the third prong of the “ABC”  test.  Under this “ABC-6” standard, an individual is not “customarily engaged in an independently established trade, occupation, profession or business” with respect to services performed in the construction industry unless all six of the following criteria are met:

  • the individual must possess the essential tools to perform the services independent of the business for whom the services are performed;
  • under the individual’s arrangement with the business, the contractor must realize a profit or suffer a loss;
  • the worker must have a proprietary interest in his/her business;
  • he/she must have a business location separate from the company for whom the services are being performed;
  • the individual must have previously performed the same services for another person, or “holds himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services”; and
  • the contractor must maintain liability insurance during the term of the contract of at least $50,000.

Section 4 of the new law provides that a company or its “officer or agent” is in violation of the Act if the business “fails to properly classify” an individual as an employee under the Pennsylvania Workers Compensation Act or Unemployment Compensation Act or fails to provide coverage or make contributions on behalf of an individual who should be classified as an “employee” under those laws.

Each individual misclassified by an employer is a separate violation of the law.   Thus, construction industry businesses that retain a significant number of independent contractors will face substantial liability for misclassification in Pennsylvania.

Violations are enforced in a variety of ways. The Pennsylvania Secretary of Labor may seek a stop-work order from a court, assess penalties of up to $1,000 for the first violation and up to $2,500 for each subsequent violation, and/or refer intentional or negligent violations of the Act to the Attorney General for criminal prosecution.  An intentional violation of the law is a criminal misdemeanor; a negligent misclassification is a criminal summary offense.

The new law provides for what appears to be two groundbreaking provisions.  First, in an effort to avoid the imposition of penalties for mistaken misclassifications, the new law provides that it “shall be a defense to an alleged violation of this Section [4] if the person for whom the services are performed in good faith believed that the individual who performed the services qualified as an independent contractor at the time the services were performed.”

Second, the new law provides that a party that does not meet the definition of employer but “intentionally contracts with an employer knowing the employer intends to misclassify employees” is subject to the same penalties and remedies as an employer found to be in violation of the new law.  This provision may well cover employment agencies and other providers of labor for the construction industry.

Another unusual provision of the law is a section that makes it a violation of the Act for a business to require or demand that an individual enter into an agreement or sign a document which results in the improper classification of that individual as an independent contractor.  It is unclear if the “good faith” defense applies to this provision of the law.  If not, it is conceivable that merely directing a worker to sign a Form W-9 (“Request for Taxpayer Identification Number and Certification”), which the IRS requires businesses to obtain from independent contractors, could be a violation of the new law even if the business mistakenly believes the individual is an independent contractor.  Hopefully, the new law will never be enforced in that manner.

The new law includes a non-retaliation provision; retaliation is prohibited against any person who exercises rights under the law, including the right to file a complaint or inform another about an employer’s noncompliance with the Act.

Finally, the law provides that the Pennsylvania Labor Department shall create a poster for job sites and make the poster available on its website.  The Act seems to have overlooked the typical statutory language that employers in the construction industry must post a copy of the Labor Department’s notice.

By enacting the Construction Workplace Misclassification Act, Pennsylvania joins 16 other states that have enacted legislation in the past three years seeking to curtail misclassification of employees as independent contractors in a particular industry or in all industries.  The laws in those other 16 states, as well as Massachusetts, which has had an independent contractor law since 1992), can be found at the left in the Resources/Links pages under “State IC Laws and Selected Bills.”  The two pending federal bills (the Employee Misclassification Prevention Act and the Fair Playing Field Act of 2010) can also be found at the left under “Federal IC Laws and Bills.”

Written by Richard Reibstein.