For construction companies, the benefits of utilizing independent contractors instead of employees are tempting. Saving money in benefits and transaction costs can make for a nice quarterly statement, but there are other risks which can more than offset those short-term gains. Recent investigations across the country are attempting to combat worker misclassification, and construction companies should be aware of this movement to avoid the risk of serious liability.
The recent investigations did not arise out of a vacuum. While misclassification of employees can occur in any industry, it is particularly severe in construction. For example, a 2007 study found that one in four construction workers in New York city were misclassified. Misclassification to this degree causes a great deal of revenue loss from payroll taxes for governments at all levels.
Misclassification costs governments at all levels billions in lost revenue. The U.S. Government and Accountability Office estimated misclassification cost the federal government $2.72 billion in 2006, with substantial income losses at the state level as well. This gives regulatory agencies strong incentive to investigate potential cases of misclassification so as to avoid losses in tax revenue.
A few examples of such investigations have given rise to serious liability for misclassification, sometimes arising in criminal liability in addition to fines. In Florida, a construction company owner was arrested last year for failing to properly report the number of employees he had, which allowed him to avoid millions of dollars in workers’ compensation insurance premiums. A New York company and its individual executives were also indicted for a similar scheme last year. Colorado’s governor also announced recently a new task force specifically created to combat misclassification of construction industry employees.
With the construction industry being under more of a microscope regarding their classification of employees, companies need to be extra cautious when dealing with their payroll practices. Companies should review their practices to ensure compliance to avoid the severe penalties seen across the country. Here are some factors to consider when making the classification:
- Is the person being provided a place to work?
- Does the person supply their own tools are do they use company-supplied tools?
- Are they told when they must be at a particular jobsite?
- Are their hours controlled by the company?
- Do they perform work for other companies?
These kinds of questions will determine how a regulatory agency will approach potential misclassification. Whether the employee signed any possible forms waiving their status as an employee is something the agencies will consider in enforcement, but the above factors regarding the reality of the person’s work situation are more important.
Companies should work with their attorneys to ensure their classification practices are in compliance with current law. For any questions regarding these rules, contact our Sioux Falls, Sioux City, or Omaha office today!