Both state and federal level agencies have made a promise to crackdown on the number of construction companies that mislabel their employees as independent contractors. Penalties that could be levied against any company in such a violation, intentional or not, can include increased audits, fiscal penalties exacted by a government agency, and losing lawsuits to misclassified workers. The increased efforts to crackdown on violations comes after a United States Department of Labor (DOL) report estimated more than 3 million employees in the country are misclassified as independent contractor, the majority of which are working within construction industries.
When an employee is misclassified, the employee often suffers by earning reduced wages or becoming ineligible for overtime pay. Independent contractors also typically gain less benefits employment benefits, like the medical plans or the option to start a 401(k). Furthermore, state and federal governments collect considerably less tax revenue on independent contractors than on an employee, which might be why they are decidedly cracking down on violations.
What Does Constitute Being an Independent Contractor?
If you run a construction business, or any other type of business that relies on independent contractors to get work done, you must be carefully aware of what actually does and does not categorize a worker as an independent contractor. The Fair Labor Standards Act (FLSA) established six economic reality factors that serve as guidelines for employers and employees alike.
The six economic reality factors are:
- Integral role: A worker that is performing integral tasks for a company is most likely supposed to be considered an employee, not an independent contractor. For example, an accountant that checks business ledgers once a week is useful to a restaurant, but not as integral as a chef.
- Managerial influence: If a worker can gain or lose money based on his or her own managerial skills, the correct classification is probably an independent contractor. Employees typically only make money based on hours worked.
- Personal investment: Workers that personally invest a great deal of finances and resources into a place of employment may be considered an independent contractor. Small personal investments, like buying a new suit for an office job, relate to being an employee.
- Independent skills: As the name somewhat implies, an independent contractor will usually function independently within a workplace, not relying on the direct input or orders from others to complete a task. Employees generally just follow direction.
- Position permanence: Someone who works permanently or semi-permanently at a worksite is likely an employee. Independent contractors will not have an established, permanent relationship with the employer.
- Employer oversight: If an employer – sometimes called a principal – has majority control over the actions of a worker, that worker will likely be considered an employee.
Are Your Workers Employees?
After reviewing the six economic reality factors mentioned previously, do you think that the construction workers on your jobsite are actually employees, not independent contractors? You must be careful to provide your workers the correct rights and benefits if they qualify as employees, as well as fulfilling your own duties. This can include paying out hourly wages, keeping employee files, tracking payroll, and even attending mandated FSLA-compliance training. If you are not within compliance, you could be fined severely.
Napolitano Law Office and our Santa Clara County business attorney can help you analyze or plan your business structure, review your worker contracts for accuracy, and provide knowledgeable general counsel for your construction company. Call (650) 399-9545 to connect with our law firm and get the most important business matters back in order.