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INDEPENDENT CONTRACTOR OR EMPLOYEE? THERE’S A BIG DIFFERENCE.

National studies indicate that 10% to 40% of businesses misclassify employees as independent contractors. Sometimes this is inadvertent. Sometimes it’s intentional. Regardless, the misclassified employee always pays a price in the form of denied access to critical benefits and protections such as minimum wage, overtime compensation, family and medical leave, and unemployment compensation.

Businesses which properly classify workers are disadvantaged by those who don’t. They bear the costs which accompany compliance with labor standards and responsibilities.

Misclassification also leads to lost tax revenue and funding for programs such as state unemployment insurance and workers’ compensation funds.

Worker Misclassification in the Construction Industry

Misclassification has long been associated with the construction industry. The prevalence of that practice led to several states enacting legislation designed to address the problem. Pennsylvania’s Construction Workplace Misclassification Act (CWMA), which went into effect in 2011, prohibits employers from improperly classifying their workers as independent contractors to avoid their obligation to provide workers’ compensation benefits.

CWMA sets forth a number of prerequisites for classifying construction industry workers as independent contractors.

  • Among those prerequisites:
  • the individual has a written contract to perform such services;
  • the individual is free from control or direction over the performance of such services both under the contract of service and in fact; and
  • as to such services, the individual is “customarily engaged in an independently established trade, occupation, profession or business.”

Other industries where misclassification is common

  • food services
  • day care
  • janitorial/cleaning services
  • garment production
  • temp services
  • trucking

In the Department of Labor & Industry., Uninsured Emp’rs Guar. Fund v. W.C.A.B., 187 A. 3d 914 (Pa. 2018), the Pennsylvania Supreme Court ruled that the CWMA is applicable only where the putative (presumed) employer is in the business of construction. This case involved a restaurant which contracted an individual to perform remodeling work. While repairing a chimney, the worker fell from a beam and landed on a cement floor, suffering serious injuries which rendered him paraplegic. The Supreme Court held that the injured worker could not recover worker’s compensation benefits because the requirements of the CWMA did not apply to the restaurant and the worker did not meet any of the other conditions to establish an employment relationship. It is always important to analyze the specific facts in each case involving a dispute over the employment relationship to determine whether the employee is properly classified.

Factors Considered In Determining Worker Classification

In the past, the Internal Revenue Service used a 20-factor test to determine classification. These factors have been consolidated into three general categories for IRS review:

Behavioral control - examines whether or not the business has the right to direct and control the work performed by the worker

Financial control - Considers the nature of the financial and business aspects of the worker's job

Relationship of the parties - explores how the worker and business perceive the business relationship.

Earlier this year, the U.S. Department of Labor (DOL) published a regulation containing a multifactor test for determining worker classification. Among other things, the new test evaluates the “economic reality” of the working relationship at issue, namely whether the worker is, as a matter of economic reality, in business for him- or herself as opposed to being economically dependent on the potential employer for work.

In classifying workers, Pennsylvania courts consider a number of factors which include:

  • control and manner in which work is to be done
  • terms of agreement between the parties
  • the nature of the work or occupation
  • skill required for the performance of the work
  • which party supplies tools/equipment
  • whether the payment is made by the job at a regular timed interval
  • whether the work is part of the regular business of the putative employer
  • whether the putative employer can terminate the worker at any time
  • responsibility for result only

Hourigan, Kluger & Quinn Attorney Don Ligorio notes that “all of the factors need not point to the same conclusion. A recent Commonwealth Court of Pennsylvania case illustrates this”.

In Berkebile Towing & Recovery v. Workers' Comp. Appeal Bd., No. 220 C.D. 2020 (Pa. Cmmw. Ct. May. 10, 2021), the tow truck driver had signed an independent contractor agreement with the towing company. However, when weighing all the factors, the Court determined that the driver was an employee at the time he was fatally struck by a vehicle.

If you believe that you were denied any benefits as a result of worker misclassification, call Hourigan, Kluger & Quinn at (800) 760-1529 to speak with one of our experienced attorneys.

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