Many construction companies use independent contractors. It is a standard industry practice. However, there has always been a tug of war between contractors and lawmakers debating exactly when a worker is considered an independent contractor rather than an employee. That's driven in part by the concern that some employers will use misclassification to cheat workers out of benefits to which they would otherwise be entitled — i.e. health insurance, workers’ compensation and unemployment compensation, overtime pay and contributions to their Social Security accounts via employer payroll taxes.
Earlier this year, the United Brotherhood of Carpenters brought attention to the issue when it reported that there are approximately 300,000 construction-industry workers currently misclassified as independent contractors, all working without benefits and without the protections afforded those with employee status.
But some states are making an effort to combat worker abuse. For instance, legislation is making its way through the California legislature that would require employers to use a narrow, three-part test known as ABC to determine which workers are legitimate independent contractors.
In general, the ABC method mandates that:
(A) the workers in question direct and control their own work;
(B) the worker’s trade is not one that the hiring contractor typically performs; and
(C) the worker is engaged in the business of the trade being performed.
When contractors do engage in misclassification, though, they are putting themselves at risk, especially with tax agencies like the Internal Revenue Service (IRS).
“If you misclassify a worker under the tax laws and you don’t, as the employer, withhold any taxes,” said D. Albert Brannen, partner at the law firm of Fisher Phillips in Atlanta, “even if the worker pays their taxes in a timely manner and does everything right, if the IRS concludes [that the employer] should have treated that person as an employee, they will assess the amount of taxes that you should have withheld … and penalties and interest.”
A 'more reasonable approach'
But another federal agency has weighed in on the issue of independent contractor misclassification, and the response to the ruling shows just how far the pendulum of opinion swings for those in and affiliated with the construction industry.
On Aug. 29, as part of its consideration of a case involving Velox Express Inc. alleging the violation of labor laws in the transportation industry, the National Labor Relations Board determined that the misclassification of employees as independent contractors does not violate the National Labor Relations Act. NLRA was enacted in 1935 in order to protect employer and employee rights, including the right of workers to organize and engage in collective bargaining. The government also uses the act to prevent private employers from harming workers through harmful labor and management practices.
So what does this mean for contractors? Not much, according to Brannen.
“On a scale of one to 10, this is about a one or a two,” Brannen said. “It is good in that it demonstrates a more reasonable approach by the labor board. It’s more employer-friendly. It’s more practical. It is good that [if you make] a mistake you’re not going to be cited, but under the NLRA … there are no punitive damages. The remedy is you post a notice for 60 days [stating], ‘Employees have these rights, and we won’t violate them.’”
Employers, he said, still need to be able to prove their independent contractors are truly independent or else reclassify them as employees. The ruling is not “a get out of jail card” and won’t provide relief for those who, for instance, use misclassification as a way to get around their obligation to withhold taxes or violate the act in other ways.
“It gives [employers] more latitude to be wrong,” Brannen said, “but I would still give the advice [to employers] to treat them like employees. Enjoy the limited liability of workers’ comp, and don’t build up the potential contingent liability of back taxes with penalties and interest, et cetera.”
The problems with misclassification
Workers compensation laws in many states limit an employer’s financial liability in the case of employee injuries, but there are no such safeguards when it comes to independent contractors.
But not all industry insiders took the ruling in such relative stride.
“Misclassification has always been a problem in the building industry,” said Dan Langford, executive secretary treasurer of the Southwest Regional Council of Carpenters. “It has been used as an effort to circumvent Davis-Bacon, commit tax fraud and insulate developers and contractors from taking responsibility for the workers on their jobsites.
“With this NLRB ruling, you are going to see the already critical cash pay culture in some construction markets accelerated along with a decline in project quality and long-established safety standards eliminated because of this misguided policy.”
Also speaking out against not making misclassification a violation was the Wall and Ceiling Contractors Alliance, which represents more than 300 framing, drywall and other interior construction companies, most of them in the commercial sector. In an amicus brief to the NLRB, the alliance said that misclassification lowers operational costs and makes it hard for contractors that correctly classify their workers to be competitive against those that do not. Just by not paying workers’ compensation premiums and unemployment taxes, contractors, the group said, can reduce costs by at least 10%.
And there’s the skilled labor shortage, which has had a significant impact on the construction industry during the last several years. According to Langford, the NLRB’s decision doesn’t help the situation.
“The industry is already experiencing a shortage of qualified craftsman,” he said. “These [misclassified] independent contractors are only going to further that problem as the low-bid, bottom-line mentality of the builders that use them certainly won’t include training apprenticeships or giving local residents a chance at a skilled middle class career path.”
Consider the options
While the industry debate around the issue of independent contractors is sure to continue, the NLRB, said Brannen, is proposing rulemaking pertaining to the issue.
The effort, he said, is meant to help employers “navigate the independent contractor morass” and will likely establish criteria such as who controls the work, how much entrepreneurial opportunity those classified as independent contractors have and their ability to profit or lose money on their business enterprises.
In the meantime, Brannen has some advice for contractors who hire independent contractors.
”When in doubt,” he said, “make them employees.”