Perhaps you've caught a few news stories about the "gig economy" and its reliance on independent contractors. Tech startups such as Uber, Lyft, Handy, and others have faced lawsuit after lawsuit from their workers alleging that these companies have wrongfully classified them as contractors when they should be employees. If you've missed the headlines, catch up with Fast Company's article "The Gig Economy Won't Last Because It's Being Sued to Death."
That racket may seem a mile away from the construction industry, a field that's built on physical labor and ardent regulations. But your construction business may have one thing in common with these burgeoning tech startups: a reliance on contract work.
You know the score: you may be hired on as a subcontractor to fill a need in a larger project. If you're a general contractor, you hire these workers. But recently, the US Department of Labor's administrator of the Wage and Hour Division released new guidance on how to distinguish between an employee and an independent contractor.
The big takeaway? Most workers – including construction contractors and subcontractors – are employees based on this model, not independent contractors.
Let's take a closer look at why these new guidelines matter and explore some tips so you can properly classify your workers.
Contracts, Contractors, and the High Price of Worker Misclassification
To clarify, your contractor agreements don't eradicate the need to comply with new interpretations of labor laws. If the DOL says your subcontractors are employees, your contract doesn't change that reality.
And if the DOL or workers' comp board decides your independent contractors are employees, you may be responsible for paying…
- Overtime wages.
- Minimum wage.
- Half their employment taxes.
- Workers' Compensation Insurance benefits.
- Fines for not having adequate Workers' Comp in the first place.
- Fines for not paying appropriate wages and overtime.
- Interest on payroll taxes.
- Health insurance premiums, retirement contributions, and other benefits.
If you're hit with these liabilities all at once for multiple workers, the total price tag can be enough to level your construction business. In other words, you have a lot of financial incentive to classify your workers properly from the outset.
The DOL Guidelines for Worker Classification
According to JD Supra Business Advisor, to comply with the Department of Labor's suggested guidelines, consider the following questions when classifying a worker:
- Is the work performed central to the employer’s business? If so, the worker is more likely to be considered an employee.
- Does the worker's profit or loss depend on their managerial skills? If the worker has the skills and ability to take advantage of profit opportunities or to steer clear of losses, the worker may be an independent contractor.
- Who has the risk and has made the investment? If risk is evenly spread between the employer and worker and both parties have similar investment in their respective businesses, the worker may be an independent contractor.
- Does the worker use special skills in an independent way? A worker can be skilled regardless of their classification. This question essentially asks if the worker uses those skills to be in business for themselves. If so, they may be an independent contractor.
- How permanent is the relationship? An indefinite work relationship may suggest the worker is an employee.
- How much control does the employer have over the work? An independent contractor controls the meaningful aspects of their work (e.g., the manner in which it is done).
In summary: if the worker is economically dependent on the employer, that worker is an employee, according to the DOL's guidance. And as you may already know, you must carry Workers' Compensation Insurance for each of your employees.
Playing by the Contractor / Subcontractor Classification Rules
According to the Daily Journal of Commerce, as a general contractor or construction business owner, you can reduce the risk of misclassifying workers by:
- Identifying all independent contractors you do business with. If you send a person a 1099 at the end of the year, they belong on this list.
- Assessing those relationships. Once you compile a list of all 1099 workers, ask yourself whether or not those workers are in business for themselves. Do they rely on you for most or all of their gigs? If so, they are probably too economically dependent on your business to qualify as independent contractors. By contrast, if they are an established business, complete with their own subcontractors insurance or contractors insurance and a stable of other projects, they may indeed be independent contractors.
- Reclassifying workers as needed. If you realize you have accidentally classified an employee as an independent contractor, take immediate steps to correct the situation. That may mean offering them a position as an employee and making some back payments to avoid fines and lawsuits.
To learn more about worker classification and what that means for your Workers' Compensation Insurance obligations, read "Contractors, Subcontractors, and Employees: Why Worker Classification Matters."