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Measure Twice, Cut Once: Understanding the Construction Workplace Misclassification Act

Thursday, August 9, 2018  
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The Legal Intelligencer

by Susan Nanes

 

Measure Twice, Cut Once: Understanding the Construction Workplace Misclassification Act

 

Measure twice, cut once. It’s a carpenter’s motto reminding us that it is better to spend a little more effort up front to be certain about what we’re doing than to have to spend time, money, and energy trying to fix a mistake after the fact. This article provides some background and basics of the Construction Workplace Misclassification Act (CWMA) so that attorneys practicing in the construction field will be aware of the pitfalls: should a construction employer seek to cut corners and avoid paying workers’ compensation premiums (and other required taxes), or even just err by calling its workers independent contractors, they may be subject to civil and even criminal penalties. It is better to take the time, do the due diligence and measure twice. This article will briefly explain the rationale for the CWMA’s enactment, address the previous legal approach, present the contours of the CWMA, and finally touch on Pennsylvania cases evaluating and applying the CWMA.
The CWMA (Construction Workplace Misclassification Act), 43 P.S. Secction 933.1-17, is a 2010 enactment (effective February 2011). In proposing the bill, the Pennsylvania House Labor Relations Committee sought to curb construction employers’ common practice, intentional or otherwise, of deeming workers to be independent contractors rather than employees. This approach not only put workers in dangerous jobs at risk, but burdened public coffers with lost revenue and compliant employers with the cost of workers’ compensation benefits and medical costs for uninsured employers who did not similarly prepare (or who intentionally chose to skate by).

Since about 2004, over 20 states have addressed this problem and either created new laws or tightened up their construction workplace classification statutes. This was to some degree out of concern for the plight of injured or laid off workers, but also, to be sure, to coax tax (payroll, unemployment, workers’ compensation) revenue from employers. It is a win-win in theory: compliant employers don’t have to bear weight of noncompliant employers, and there is protection (UC and WC) for workers classified as employees. As scholars note: “Unlike other budget balancing tactics, such as tax increases or service reduction, enforcing and strengthening misclassification laws appear to have garnered broad political support,” Anna Deknatel & Lauren Hoff-Downing, ABC on the Books and in the Courts: An Analysis of Recent Independent Contractor & Misclassification Statutes, 18 Univ. of Pa. J. of Law & Social Change 53. Of interest to construction employers and legal practitioners, Deknatel and Hoff-Downing point out that the IRS has enacted several initiatives and incentives to encourage voluntary compliance, which are worth seeking out.
Prior to enactment of the CWMA, there was a traditional “common law” test for analyzing employment relationships that set out a number of factors, not all of which had to fit or be met. Some could go one way or the other, like does the employee wear company uniforms or drive a company truck; the main factor was, of course, the extent to which the alleged employer has right of control over claimant’s activities. This approach had been in place for decades and was part of the claimant’s burden in a workers’ compensation claim petition.

By contrast, the CWMA sets out three specific criteria, all of which must be met in order for the employer to validly claim an individual is an independent contractor rather than an employee. The overall burden of establishing an employment relationship remains with the claimant, but the CWMA makes it somewhat less onerous for those in the construction field. “For purposes of workers’ compensation, unemployment compensation and improper classification of employees provided herein, an individual who performs services in the construction industry for remuneration is an independent contractor only if”:

The individual has a written contract to perform such services.
The individual is free from control or direction over performance of such services both under the contract of service and in fact.
As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.
Subsection (a)(3) is fleshed out in subsection (b), which explains that an individual will be found an independent contractor only if they: possesses the essential tools, equipment and other assets necessary to perform the service; can realize a profit or loss from the service; perform the service through a business in which the individual has a proprietary interest; maintain a separate business location; have previously engaged in and hold themselves out as engaging in similar services as set forth above while free from direction and control; and maintain liability insurance of at least $50,000.
The first factor, the written contract stating that the worker is an independent contractor, is a new and distinct requirement that takes the CWMA away from the traditional common law test. Also unlike the traditional approach, how the individual is paid, whether in the context of a W-2 or a 1099, is not relevant to the CWMA inquiry. The second factor replicates the common law “right of control” approach. The third factor gives teeth to the other two: merely signing an agreement will not be enough to immunize an employer from liability. While the burden remains with the claimant, if they can show even one element is not met, such as the $50,000 insurance aspect, they will be deemed employees rather than independent contractors.

So in essence and effect, the CWMA puts the onus on the construction employer to comply. The potential liabilities for failure or refusal to do so are real: if an employer violates the CWMA, they can face a civil fine of $1,000 for a first violation and $2,500 for subsequent violations. If the violation is intentional, a summary offense or misdemeanor may be charged. In the case of serious ongoing intentional violations, the Secretary of Labor & Industry is empowered to seek a stop-work order, violation of which will result in penalties of $1,000 per day. Annual reporting indicates the Department is taking on enforcement with some seriousness: in 2016, nearly 200 cases were investigated and administrative penalties exceeded $600,000, see Kathy M. Manderino, Secretary, Department of Labor & Industry, “Administration & Enforcement of the [CWMA] in 2016.”

Since its enactment, the CWMA has been the subject of a handful of case decisions. Generally, our courts have found in individual claimants’ favor. The first such decision set the tone. Scott Staron, a painter, might have qualified as an independent contractor based on the facts, but he had not signed a written agreement to that effect until the employer presented it to him after he was injured and no longer working. The Commonwealth Court held he was an employee under the CWMA: “No written contract existed between claimant and employer at any point during claimant’s work for employer and, thus, claimant could not be considered an independent contractor under the CWMA,” see Staron v. Workers’ Compensation Appeal Board, 121 A.3d 564 (Pa. Cmwlth. 2015).

That said, our courts have as yet been reluctant to view the CWMA as having broad applicability beyond an individual case or context, see D&R Construction v. Workers’ Compensation Appeal Board, 167 A.3d 837 (Pa. Cmwlth. 2017), declined to apply the CWMA retroactively to a worker injured before its enactment, either formally as a positive statement of law, or informally, which would have allowed use of the worker-friendly CWMA factors as supplemental to the traditional common law factors.

If D&R Construction cabins the CWMA in time, Department of Labor & Industry v. Workers’ Compensation Appeal Board (Lin & Eastern Taste), 27 EAP 2017 (Pa. June 26, 2018) confines it to construction industry employers. The Supreme Court of Pennsylvania held unanimously that the CWMA will not apply to protect a worker hired directly by a restaurant for a remodeling project and seriously injured—he is now paraplegic. The court looked to the legislative origins and deliberations of the CWMA and concluded that it was only intended to apply to construction entities and not to any entity that takes on a construction project, like a restaurant or a homeowner. Thus, the injured worker could not be considered under the CWMA and was ultimately found to be an independent contractor.

The CWMA is still relatively young, but its outlines are quickly becoming clear. While it has so far been treated as primarily a workers’ compensation enactment, it must be of interest to practitioners in construction law, who would be wise to familiarize themselves and their construction clients with it before a problem or violation arises. It is not a particularly complicated statute to understand and implement, and on the back end, the penalties for failing to comply are real and the department and the judiciary seem motivated to enforce it. Measure twice, cut once.


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