In March 2021, the U.S. House of Representatives passed the Protecting the Right to Organize (PRO) Act. This legislation calls for wide-ranging, union-friendly revisions to the National Labor Relations Act (NLRA). The House initially passed the PRO Act in 2019, but it stalled in the Senate. This go-round, the act is back in the Senate, and it is unclear how it will fare. However, whether it passes or not, some aspects of the PRO Act may eventually become law, and one specific element to consider is worker misclassification.
Independent Contractor v Employee
If you use subcontractors on your jobs, your initial reaction may be to classify them as independent contractors. That may be accurate and legitimate, but before you make that call, you must ensure that you understand the criteria.
In recent years, there was a seven-factor test to help you determine if a worker was an independent contractor or an employee. Under the Trump administration, that test was scaled back to a simpler two-factor standard with an additional three criteria for the Department of Labor to consider in its analysis. Earlier this year, the Biden administration formally reversed those changes.
In addition, Biden has signaled the desire to use the ABC test, a standard which appears in the current version of the PRO Act, a fairly stringent metric that the state of California uses. As listed on the California Labor and Workforce Development Agency website, it reads as follows:
Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In some cases, these conditions can be ambiguous, which may result in more workers having to be classified as employees. The second bullet in particular—performing work “outside the usual course of the hire entity’s business”—may be challenging to satisfy, especially in the construction industry.
Why Classification Matters
When you hire individuals or companies as independent contractors, they are responsible for their well-being. This means they must pay for their own insurance, income taxes, and all applicable Medicare and Social Security taxes. They must also ensure their own OSHA compliance.
On the other hand, if you hire employees, you are required to pay for workers’ compensation insurance and withhold their income, Medicare, and Social Security taxes. You must also pay them at least minimum wage, compensate them for overtime, and offer benefits, such as medical insurance, paid time off, and retirement investment options. In addition, you are responsible for their safety on the job site.
If you misclassify your workers as independent contractors and they do not pay for insurance and other expenses, they are putting themselves at risk. If they get hurt and are unable to work, they may not have a safety net. And in the end, taxpayers will support them.
How Misclassification Hurts the Industry
Over the years, hiring workers as independent contractors has become accepted in the construction industry, but it may not be valid. This process can put workers at risk, and in many cases, they are losing money in the form of regular wages, overtime, and benefits. Also, companies using independent contractors are winning the bids because they are paying less. Unfortunately, that scenario hurts other companies who hire legitimate employees.
The issue is becoming problematic across the nation. Some states are starting to consider making misclassification a felony, with the practice of withholding benefits and proper wages seen as theft. Violators could have to pay fines or even serve jail time.
Classifying Your Workers
When you hire workers, make sure that you are classifying them accurately. For instance, if you sign up 50 workers to install drywall and pay them in cash, you are likely not following the law. It is hardly reasonable to argue that these dozens of workers, all doing the same task, are legitimate independent contractors. In contrast, if you hire one worker to complete intricate carpentry work, and he has own business for that specialization, calling him an independent contractor is likely legitimate.
Adopt a straightforward process when you onboard independent contractors, just as you would for full-time employees. Review what work they will be performing and compare that to the ABC test standards. Ask if they are set up to pay their insurance and protect themselves if they are injured. If you determine they are independent contractors, draft and sign a contract, so all parties understand individual rights and expectations.
If you are unsure about properly classifying your workers, do not hesitate to consult legal counsel. An experienced employment attorney can review your project needs and your workers’ responsibilities to help you determine the correct classification. Using caution in this area is essential to protect your workers and your company.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.