The Utah House approved on February 10, 2011 a bill (S.B. 35) targeting construction companies that classify individuals as owners in order to avoid paying for workers’ compensation insurance and unemployment insurance or withholding taxes.  The bill, called the Construction Licensees Related Amendments, seeks to make ineffective a tool apparently used by an increasing number of construction firms to classify individuals as owners that would otherwise be regarded as employees.  This practice allows construction firms to avoid the need to cover such “owners” under the state workers compensation and unemployment laws.

Publisher’s Note:  This bill was enacted into law.

Under the bill, an unincorporated business is presumed to be the employer of all individuals who own less than eight percent of the business.  A business can rebut that presumption with “clear and convincing evidence” that the individual “(i) is an active manager of the unincorporated entity; (ii) directly or indirectly holds at least a 8% ownership interest in the unincorporated entity; or (iii) is not subject to supervision or control in the performance of work by: (A) the unincorporated entity; or (B) a person with whom the unincorporated entity contracts.”

The proposed law would include penalties for misclassifying employees and require construction firms to file an annual ownership status report identifying individuals at the company who are owners and those classified as employees.

The Utah Senate had passed the bill with a 20% cutoff for “owners” to be considered “employees,” and the bill is now back before the Utah Senate for consideration of the amendments passed by the Utah House.  Although there has been opposition to the bill from some Republicans, the bill has been supported by legislators generally on a non-partisan basis.  Final passage, therefore, is likely.  If a final bill is passed by both Utah legislative bodies and signed by Governor Gary Herbert (R), the bill would take effect July 1.

Commentary:  This effort to challenge companies that allegedly misclassify employees as non-employees is reminiscent of the challenge in Massachusetts against a cleaning company by nominal “franchisees” who were recent immigrants and persons with limited education.  They alleged in a class action lawsuit in federal district court in Massachusetts that they were not really franchisees but rather misclassified cleaning employees who had been denied, and were entitled to damages for, lost benefits, improper deductions of earnings, and violations of minimum wage and overtime.  See Awuah v. Coverall North America, Inc., 554 F.3d 7 (1st Cir.2009).

Here, the proposed bill would eliminate “nominal ownership” in an LLC as a means to avoid payment of the costs of workers compensation, unemployment compensation, and payroll taxes for some construction workers.  Whether or not this practice is prevalent in other states, it would not be surprising if state attorneys general argued that any practice of classifying workers as nominal owners is prohibited by existing laws barring misclassification of employees for purposes of state labor, unemployment, workers compensation, and the tax laws.

Written by Richard Reibstein.