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Your “Construction” Business Under State Employee Classification Laws

After a brief (but mandatory) operational pause, the blog is back!  I can’t promise daily posts going forward, but I will be active from here on out.  Back to our regular programming…

Have you ever dreamed of being in “waste management” or having your very own construction business.  No?  Does your business have janitors? Maintenance workers? Tower climbers? Installers? Service technicians? Engineers? Anyone doing manual labor of any type? If so, no matter what your primary business is, you might already be in the construction business, too…at least if you operate in Illinois, NebraskaPennsylvania, or the handful of other states that have enacted construction industry-specific employee classification statutes that attempt to address perceived abuses in that industry. However, as drafted, these statutes are often the proverbial sledgehammer used to crack a nut.

We’re a [fill-in-the-blank] Company. We Don’t Do Construction…Right?

Do I have you worried? If so, it is for good reason. Employee classification laws are bet-the-company traps for the unwary, particularly in this environment of heightened scrutiny of worker classification by the DOL and other agencies.  Take the Illinois Employee Classification Act, for example. That statute, which went into effect January 1, 2008, explains that an individual performing any “construction” services for a “contractor” (any entity engaging in “construction”) is deemed to be an employee of the contractor-employer. That seems simple enough, but before you go back to your day, let’s look at what “construction” means to the Illinois legislature.  Although ostensibly targeted at the construction industry, Illinois and other states have defined “performing services” so broadly as to encompass most types of hands-on work on any real or personal property:

“Construction” means any constructing, altering, reconstructing, repairing, rehabilitating, refinishing, refurbishing, remodeling, remediating, renovating, custom fabricating, maintenance, landscaping, improving, wrecking, painting, decorating, demolishing, and adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement, or to do any part thereof, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise. Construction shall also include moving construction related materials on the job site to or from the job site.

If you pay any of the kinds of workers I listed above as independent contractors, give them a Form 1099, or just pay them cash by the day or the job, your “construction” business might have a wage and hour problem.

Acts like the Illinois ECA create a presumption that all workers covered by the (expansive) statutory definitions are employees rather than independent contractors.  Determining that a worker is a contractor for purposes of the Fair Labor Standards Act, the Internal Revenue Code, or other federal laws and regulations is not the end of your inquiry.  Even if you can give these workers a Form 1099, state employee classification laws can put you in the “construction” business, making these contractors your employees. Most of these state laws provide both civil and criminal penalties and give misclassified workers the right to sue to recover lost wages and benefits, liquidated damages, compensatory damages and attorneys’ fees. Of course, as we discussed last week, those damages are in addition to damages under the FLSA (if a court determines you have misclassified employees for federal law) or other state law violations you might incur for misclassification if the problems are not limited to a state employee classification statute.

Upshot for Employers

Employee classification statutes are a great reminder of why you can’t simply rely on the FLSA (or your CPA) when classifying your workers. If you use any workers on a cash, per-job, per-diem, 1099, or other “independent contractor” basis, make sure you’re not in the “construction business.” Depending on the specific facts, state law might automatically classify these workers as your employees instead.

All is not lost if your contractors fall within the vast definition of “construction” under statutes like the one from Illinois above. In each of the states with these laws, businesses can overcome the presumption that these workers are employees by meeting statutory tests to show that the workers are actually independent of your business.  These tests are very fact dependent and differ from state to state.   Unless you have always wanted to tell people you are a “waste management consultant,” and maybe even then, the new year is a great time to reevaluate how you use contractors.

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