Construction: Implications of Classifying Workers As Independent Contractors

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Article by Debra R. Franklin, Esq., SPHR, VP, HR Solutions, Murray Securus

Attention construction employers – it’s important you know the Construction Worker Misclassification Act (CWMA) and the implications of classifying workers as independent contractors for workers’ compensation purposes in Pennsylvania.

How can an “employer” in the construction industry succeed in not paying workers’ compensation by claiming that the injured person is an independent contractor and not an employee? It’s not as easy as simply saying that the injured person is an independent contractor. The answer is that this is a determination that is a question of law, determined on a case-by-case basis. So, the question then becomes, is the correct test supplied by the CWMA, or common law?

Construction Worker Misclassification Act

The CWMA was enacted by the Pennsylvania legislature in 2010, and establishes the criteria for when a worker in the construction industry can be classified as an independent contractor, as opposed to an employee for purposes of workers’ compensation and unemployment compensation.

When an injured worker petitions for workers’ compensation benefits, they have the burden of establishing the employer-employee relationship. Typically, courts apply a common law test which considers several factors, including:

  • Control over the work completed and the manner in which it is to be performed
  • Terms of the agreement between the parties
  • The nature of the work
  • The skill required
  • Who supplied the tools
  • Payment by the time or by the job
  • Whether the work is part of the regular business of the employer
  • The right to terminate the employment at any time

In contrast to the Pennsylvania Workers’ Compensation Act, the CWMA provides a specific set of statutory requirements that must be met in order for a worker to be properly classified as an independent contractor in the construction industry. These requirements include:

  • Having a written contract
  • Working free from control of direction
  • Customarily engaged in an independent trade, occupation, profession or business.

The CWMA further states that in order to be engaged in an independent trade, profession or business, the following conditions must be met:

  1. The worker possesses the tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed;
  2. The individual shall realize a profit or suffer a loss;
  3. The individual performs the services through a business in which the individual has a proprietary (read: ownership) interest;
  4. The individual maintains a business location that is separate from the location of the person for whom the services are being performed;
  5. The individual previously performed or holds himself as a person who is able, and in fact is able, to perform the same or similar services for another; and
  6. The individual maintains liability insurance during the term of this contract of at least $50,000.

If all of these criteria are met, the individual would be considered an independent contractor and would not be considered an employee for purposes of the Workers’ Compensation Act.
While this sounds like a win for construction employers in Pennsylvania, proceed with caution. While it may be advantageous to avoid paying taxes for these independent contractors to cover workers’ compensation and unemployment compensation insurance, there is a distinct, but corresponding set of implications in the context of personal injury claims, as an exclusivity of the Workers’ Compensation Act prevents an employer from being held liable in tort.

We recommend that you consult with both workers’ compensation and general liability counsel before taking action to establish a worker on your premises as an independent contractor.

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