The Pennsylvania Construction Workplace Misclassification Act
February 6, 2012
Thomas J. Barnes, Esquire
1. Introduction.
There would appear to be a growing trend toward government classification of construction workers as “employees”, even in cases where the general contractor or subcontractor paying for the work and the people performing the labor actually think otherwise. For a building contractor, the unintended result could be the imposition of significant additional cost when the state decides the workers are entitled to workers’ compensation, and the “employer” is obligated to buy workers’ compensation insurance or pay a substantial fine.
In February, 2011, Pennsylvania enacted the Pennsylvania Construction Workplace Misclassification Act. This statute appears designed to enlarge the number of workers covered by both workers’ compensation and unemployment compensation. It applies to all projects in Pennsylvania, whether privately or publicly funded. This article is intended to provide a brief overview of the Act’s requirements as they apply to building and construction contractors. Of course, we do not intend to provide specific legal advice for anyone here, and the reader is encouraged to consult counsel.
2. What is an “Employee”?
The Pennsylvania Workers’ Compensation Act requires all Pennsylvania employers to insure their workers’ compensation liability.[1] Most employers do so with insurance coverage. A few large concerns are self-insured, and the rest use the State Workers’ Insurance Fund. Problems arise when employers try to avoid this requirement by attempting to classify personnel as “independent contractors” when they are really employees.
For most employers operating with Pennsylvania employees, some kind of coverage is mandatory. There are some exceptions in the Workers’ Compensation Act, such as for home and domestic workers.[2]
An “employe” (the Workers’ Compensation Act’s antiquated spelling) is a “servant”, and that term includes all natural persons who perform services for another for a valuable consideration. It does not include people “whose employment is casual in character and not in the regular course of the business of the employer….”[3]
Independent contractors are not employees. The Workers’ Compensation Act does not contain a specific definition for an independent contractor, although it does define the term “contractor”. A “contractor”, for purposes of the Workers’ Compensation Act, is any “employer who permits the entry upon premises occupied by him or under his control of a laborer or an assistant hired by an employe or contractor, for the performance upon such premises of a part of such employer’s regular business entrusted to that employe or contractor”.[4] It does not include “a contractor engaged in an independent business … in which he serves persons other than the employer in whose service the injury occurs, but shall include a subcontractor to whom a principal contractor has sublet any part of the work which such principal contractor has undertaken.”[5]
3. How is an “Employee” Different From an “Independent Contractor”?
Over time, the appellate courts have developed a method for analyzing when a worker is an employee or an independent contractor. Most of these cases have decided workers’ compensation claims, so the courts have used the Workers’ Compensation Act’s definitions as a starting point. The analysis is fact-specific and the results have not always been consistent.
The Workers’ Compensation Act does not specifically say that independent contractors are not required to be covered. Instead, the Pennsylvania courts have developed and refined the concept over the years. “Any employer who permits the entry upon premises occupied by him or under his control of a laborer or an assistant hired by an employe or contractor, for the performance upon such premises of a part of such employer’s regular business entrusted to that employe or contractor, shall be liable for the payment of compensation to such laborer or assistant unless such hiring employe or contractor, if primarily liable for the payment of such compensation, has secured the payment thereof as provided for in this act.”[6]
Courts in Pennsylvania examine the following factors in determining whether an employment relationship exists:
- Control of the manner in which work is to be done;
- Responsibility for the result, only;
- The terms of the agreement between the parties;
- The nature of the work or occupation;
- The skill required for performance;
- Whether one employed is engaged in a distinct occupation or business;
- Which party supplies the tools;
- Whether payment is by the time or by the job;
- Whether work is part of the regular business of the employer, and also
- The right to terminate the employment at any time.[7]
The most important factor is the first one: whether the alleged employer had the right to control the work to be done or the manner in which it is to be performed, regardless of whether that right is actually exercised. Universal Am-Cam, Ltd. v. WCAB (Minteer), 762 A.2d 328 (Pa. 2000).In an employment relationship, the employer controls the way work is performed, while in the independent contractor relationship, the person engaged in doing the work controls the manner in which the result is obtained. Feller v.New Amsterdam Casualty Co., 363 Pa. 483, 70 A.2d 299 (1950).
“[C]ontrol of the result only and not of the means of accomplishment” does not transform an independent contractor relationship into an employer-employee relationship. C E Credits OnLine v. Unemployment Comp. Bd. of Review, 946 A.2d 1162, 1169 (Pa. Commw. Ct. 2008).
4. The Impact of the Construction Workplace Misclassification Act.
The new Construction Workplace Misclassification Act applies to “construction”, which is the “[e]rection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and 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.”[8] It borrows the definition of “employee” (the legislature uses the modern spelling of the word now) from the Workers’ Compensation Act and the Unemployment Compensation Law.[9]
This new Act defines “independent contractor”. A construction worker is an independent contractor only if he is paid for the work, there is a written contract to perform the work, the worker is free from control or direction over the performance of the services both under the contract of service and “in fact” and, as to that work, the worker is customarily engaged in an “independently established trade, occupation, profession or business”.[10]
An individual is “customarily engaged in an independently established trade, occupation, profession or business” in the commercial or residential building construction industry only if each one of the following criteria is satisfied:[11]
(1) The individual possesses the essential tools, equipment and other assets necessary to perform the services in dependent 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 shall 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 arebeing performed.
(5) The individual:(i) previously performed the same or similar services for another person in accordance with paragraphs (1), (2), (3) and (4) while free from direction or control over performance of the services, both under the contract of service and in fact; or(ii) 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 paragraphs (1), (2), (3) and (4) while free from direction or control over performance of the services.
(6) The individual maintains liability insurance during the term of this contract of at least $50,000.
The fact that taxes are not withheld is irrelevant[12].
These requirements raise the bar to independent contractor status quite a ways, so anyone who before was in between employee and independent contractor will now almost certainly fall into the employee category.
5. The Consequences of Failing to Comply with the Construction Workplace Misclassification Act.
An employer who fails to properly classify an employee as such violates the Act.[13] There is an array of powers granted to the Secretary of Labor and Industry to enforce it, ranging from investigations to money fines and referral to the State Attorney General for possible criminal prosecution[14]. There is some relief for the contractor for whom the services were performed: if they believed in good faith that the individual who performed the services qualified as an independent contractor at the time the services were performed, they will be excused. However, proof of “good faith” is not an easy requirement to meet. A proceeding before an administrative agency, as many business owners know, can be an expensive and time consuming process.
Criminal sanctions are triggered when the violation is intentional. A careless or negligent violation is punishable as summary offense, meaning a fine of up to $1,000[15]. Evidence of a first offense, however, can be used in connection with later offenses as proof of actual intent to violate the statute[16].
If the first offense is intentional and not negligent, it is a misdemeanor of the third degree. Third degree misdemeanors are punishable by a term of imprisonment of up to one year[17]. A second or subsequent offense is classified as misdemeanor of the second degree. Conviction carries a punishment of imprisonment of up to two years[18].
6. Some Examples, by Industry.
Sales: documents and tax returns indicated that a worker changed from employee to independent contractor prior to his death. The documents provided that worker was free to engage in business with other companies.[19]
Construction: A “mason tender” who was injured while cleaning a cement machine which was used to mix mortar was not an independent contractor, but, rather, was an employee, because the contractor instructed the “mason tender” about how to clean the mixer at end of the workday, and the contractor supplied most of the tools.[20]
Construction: A sign painter was determined to be an independent contractor and not an employee, for several reasons. He did not specify an hourly charge for his labor, nor were his charges consistent with an hourly rate. There was no agreement between the parties that the sign painter was to be the business owner’s handyman; there was no specific agreement as to the rate sign painter would receive for fixing the roof; the business owner did not have the right to control where the roof repair would be done by sign painter; the sign painter’s tax return for the year in which the accident occurred indicated that he was self-employed, the sign painter provided and used his own tools; and the business owner did not carry the sign painter on his payroll, deduct withholding tax, or pay social security benefits on the sign painter’s behalf.[21]
Construction: A stone installer was engaged by a contractor to install stone as a small portion of the remodeling work being performed by several contractors. The installer was paid by the job rather than by the hour, he used his own equipment, tools and vehicle, he paid and supervised his own workers on the job and the installation of the stone was a specialized job which very few men could perform. Therefore, he was an “independent contractor” and not an “employee” of the contractors, who were not liable for injuries suffered when an automobile driven by a third party collided with the installer’s truck as installer was attempting to execute left turn into driveway of a home undergoing remodeling.[22]
Trucking and transporation: A newspaper carrier was an “independent contractor” rather than an “employee” of the newspaper, and thus was not entitled to workmen’s compensation benefits for injuries sustained when hit by car while delivering papers. The newspaper did not exercise sufficient control over the carrier’s work and the manner in which it was performed to create an employment relationship. The newspaper did not prohibit the carrier from carrying a competing newspaper or to require the carrier to provide it with notice or get prior approval when he wished to substitute another person to deliver the papers.[23]
Trucking and transporation: The claimant was determined to be an independent contractor because he entered into a lease agreement in which he agreed to provide trucking services to the employer, but the employer did not direct claimant to use any particular route but, rather, advised the claimant of where the load was to be picked up and delivered. Also, the claimant’s compensation was based on the load, and the claimant paid for the insurance.[24]
7. Conclusion: Be Careful.
Contractors in Pennsylvania are well advised to carry worker’s compensation insurance for everyone working for them. The relationship with someone who is an independent contractor should be examined carefully, and the particulars of the relationship are often best put in writing, when the cost of such a contract makes sense in light of both its benefits, and of the substantial penalties for failing to comply with the Pennsylvania Construction Workplace Misclassification Act.
For further information, contact Tom Barnes or Jim Egbert at (215) 886-6600.
[1]77 P.S. § 501. All references are to Title 77 of Pennsylvania Statutes.
[2] §§ 463, 484, 676
[3] § 22
[4] § 462
[5] § 25
[6] § 462
[7]Hammermill Paper Co. v. Rust Engineering Co., 430 Pa. 365, 370, 243 A.2d 389, 392 (1968); J. Miller Co. and Selective Insurance Company v. Samuel E. Mixter, 2 Cmwlth. 229 (1971).
[8]43 P.S. § 933.2
[9]Id.
[10]43 P.S. § 933.3(a)
[11]43 P.S. § 933.3(b)
[12]43 P.S. § 933.3(c)
[13] 43 P.S. § 933.4(a)
[14]43 P.S. § 933.4(d)
[15]43 P.S. § 933.5(b)
[16]Id.
[17]18 Pa.C.S. § 106(b)(8)
[18]18 Pa.C.S. § 106(b)(7)
[19] Guthrie v. W.C.A.B.(The Travelers’ Club, Inc.), 854 A.2d 653 (Pa. Cmwlth.2004)
[20] State Auto. Mut. Ins. Co. v. Christie, 802 A.2d 625, (Pa. Super.2002)
[21] Workmen’s Compensation Appeal Bd. v. Phillips, 29 Pa.Cmwlth. 613, 372 A.2d 63 (1977)
[22] Cox v. Caeti, 444 Pa. 143, 279 A.2d 756 (1971)
[23] Johnson v. W.C.A.B. (Dubois Courier Exp.), 158 Pa.Cmwlth. 76, 631 A.2d 693 (1993), appeal denied 537 Pa. 613, 641 A.2d 313 (Pa.)
[24] Kelly v. W.C.A.B. (Controlled Distribution Services, Inc.), 155 Pa.Cmwlth. 313, 625 A.2d 135 Cmwlth.1993
