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On October 14, 2010, Pennsylvania Governor Edward G. Rendell signed into law the Workplace Misclassification Act (the "Act") (House Bill No. 400), which materially restricts the circumstances under which workers in the construction industry can be classified as independent contractors rather than employees for purposes of workers compensation and unemployment compensation benefits. The Act, which takes effect 120 days following enactment, provides for civil fines and criminal penalties for contractors who misclassify employees as independent contractors.

The Act applies to individuals who perform work in the construction industry, which is defined to include the "erection, reconstruction, demolition, alteration, modification, custom fabrication, building fabrication, building, assembling, site preparation and repair work done on any real property or premises under contract, whether the work is for a public body and paid for from public funds."  

To be an independent contractor under the Act, a worker who performs services in the construction industry for remuneration must: (1) have a written contract spelling out the services to be performed; (2) be free from direction over the performance of those services; and, (3) be customarily engaged in an independently established trade, occupation, profession or business.  

Moreover, for a worker to be customarily engaged in an established trade, occupation, profession or business with respect to services performed in the "commercial or residential building construction industry,"1  the worker must:

  • Possess the essential tools, equipment and other assets needed to perform the services.
  • Realize a profit or loss from the services.
  • Perform the services through a business in which the individual has a proprietary interest.
  • Maintain a business location that is separate from the person for whom the services are being performed.
  • Have previously performed the same or similar services for another person in accordance with the foregoing requirements and while free from direction and control, or hold himself out to other persons as available and able, and in fact is available and able, to perform the same or similar services for other persons in accordance with the foregoing and while free from direction and control.
  • Maintain at least $50,000 in liability insurance.

The Act provides for multiple civil remedies. First, if the Pennsylvania Secretary of Labor finds that a person violated the Act, the Secretary may assess and collect civil penalties of not more than $1,000 for the first violation (each misclassified individual constitutes a separate violation), and not more than $2,500 for each subsequent violation, with the amount to be determined based on the employer's history of violations, the seriousness of the violation, the good faith of the employer and the size of the employer's business. Second, if the Secretary determines that the employer or an officer or agent of the employer intentionally failed to properly classify workers, the Secretary can petition a court for a stop-work order that would require the employer to cease using the misclassified workers and, if they constitute a majority of the workforce, to cease all work at that site. Third, if the employer failed to provide workers compensation coverage or pay unemployment compensation taxes for the misclassified workers, the employer can be subject to additional remedies under the Pennsylvania Workers' Compensation and Unemployment Compensation Acts.

The Act also provides for concurrent criminal penalties. Specifically, an employer as well as an officer or agent of an employer that violates the Act will commit a misdemeanor for an intentional violation, or a summary offense for a negligent violation.

Finally, an entity that is not an employer, but which contracts with an employer to provide workers knowing that the employer intends to misclassify the workers, is subject to the same penalties as an employer.

The Act materially changes the independent contractor landscape for the construction industry. Under the Act, construction industry employers must affirmatively determine that a worker can be classified as an independent contractor or face considerable risk.

1 Until such time as the Pennsylvania Department of Labor issues regulations interpreting the Act, it remains unclear whether the six factors apply to construction industry employers generally or a more narrow subset of "commercial or residential building construction industry" employers.