Criminal and Civil Penalties Now Possible for Misclassification of Independent Contractors

The Pennsylvania Construction Workplace Misclassification Act (the Act) went into effect on February 10, 2011. The Act includes criminal penalties for those who misclassify their own employees, or those who contract with a company while knowing that company's intent to misclassify its employees as independent contractors. Other penalties for violation include fines, incarceration, stop-work orders and administrative penalties.

The Act applies to all public and private projects, and virtually all types of construction. It defines construction to include, “erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work done on any real property or premises under contract….” 43 P.S. §933.2. This broad definition appears to include all aspects of vertical and heavy highway construction.

In order to be considered in compliance under the Act, an independent contractor must (1) have a written contract, (2) be free of control or direction of the work, and (3) be customarily engaged in an independently established trade, business or profession. The third element includes the following criteria: ownership of one’s own tools, realization of profit or loss from that business, prior work as an independent contractor, and a separate business location and maintenance of at least $50,000 of liability insurance. If the above elements are not satisfied, the purported independent contractor will be considered an employee under the Act and the above listed penalties may be imposed upon the employer (or an officer or agent of the employer) and, in certain circumstances, upon those who contract with the employer.

Each misclassified employee is considered a separate violation of the Act. There are criminal and civil fines up to $1,000 for a first violation and up to $2,500 for each subsequent violation. The other criminal penalties include a third degree misdemeanor for a first violation and second degree misdemeanor for subsequent violations. It is easy to see that if an entire workforce has been misclassified, the civil and criminal penalties would be substantial.

The back benefits and taxes owed under the Act may far outweigh the other monetary penalties. Liability for unpaid unemployment and/or workers’ compensation benefits, state and local taxes, and other remittances for multiple employees could reach into the hundreds of thousands of dollars.

However, the Act’s reach does not stop at the employer. Just as troubling is the concerted action provision under the Act. That section provides that a contracting party “which intentionally contracts with an employer knowing the employer intends to misclassify employees in violation of this act, shall be subject to the same penalties, remedies or other actions as the employer….” 43 P.S. §933.4(e) (emphasis added). Thus, the Act extends liability from the non-compliant employer to the contracting party when the contracting party enters into the contract knowing of this problem. The language of this section raises several obvious issues. How is a contracting party supposed to know of the non-compliant employer’s intent? What is the proof required to establish this knowledge of another’s intent? Further, would the liability of the contracting party under the concerted action provision also extend to the officers or agents of that contracting party? The Act has only been in effect since February 10th; therefore, there are no reported cases addressing the Act, and the Department of Labor & Industry (Department) has not yet issued regulations under the Act to provide guidance for compliance as of the time of this article’s publication.

Because of the lack of regulatory guidance, it may be that a contracting party will stand in the shoes of the non-complying employer. A finding of concerted action treats the concerted actor as the employer for purposes of the “penalties, remedies or other actions” under the Act. Could a general contractor found to be a concerted actor and liable for civil and/or criminal penalties also be held liable for its subcontractor’s employees’ back benefits and taxes? Could pursuit of such recovery only occur when a subcontractor is insolvent? These and other questions are not answered in the text of the Act as it presently exists.

The Act does include a good faith defense, which provides “it shall be a defense to an alleged violation of this section if the person for whom the services are performed in good faith believed that the individual who performed the services qualified as an independent contractor at the time the services were performed.” 43 P.S. §933.4(f). It seems obvious that all persons alleged to have violated the Act will attempt to assert this defense. Because the Act does not define good faith and there are no regulations, it is not possible to fully understand the interplay of the good faith defense at present.

The Act also addresses two other types of violations. A party may not require or demand an agreement or document, which results in a misclassification under the Act. Monetary penalties for violation of this provision are in the same amounts as those set forth above. It is also a violation to retaliate against any person for exercising one’s rights under the Act.

Finally, even if it is possible to avoid the civil and criminal penalties when there is evidence of non-compliance, there still remains the Department’s ability to issue a stop work order. 43 P.S. §933.4(c). If the employer does not respond to an investigation by the Department, the Department has the option of petitioning a court for a stop work order, or immediately assessing penalties. The stop work order is effective 24 hours after the date of issuance. The order can be tailored to stop the work of only those misclassified employees, or, if the majority of the company’s employees are misclassified, the stop work order applies to all business operations of that employer at that job site. 43 P.S. §933.7.

The impact of a stop work order would be devastating to an employer’s cash flow, current contractual relationships and future attempts to obtain work. It would also disrupt job progress, most likely cause delays and impact all parties up the contractual chain.

To avoid possible non-compliance, all companies should review their current independent contractor and subcontractor relationships under the Act. Furthermore, contractual provisions regarding the Act should be included in all forthcoming contracts and independent contractor agreements. All project sites should also be posted with the Act requirements poster. The Department has provided a work site poster, a guidance statement and a misclassification complaint form on its website, http://www.dli.state.pa.us/portal/server.pt/community/l_i_home/5278 .

Source: Ericson P. Kimbel and Marc Furman
For further information, please contact Ericson P. Kimbel or Marc Furman at Cohen Seglias Pallas Greenhall & Furman, PC at ekimbel@cohenseglias.com or mfurman@cohenseglias.com respectively.
Ericson P. Kimbel is senior counsel at Cohen Seglias Pallas Greenhall & Furman, PC. He focuses his practice on construction litigation, arbitration and mediation, representing subcontractors, contractors, design-builders and construction managers on public and private projects.
Marc Furman is chair of the Labor & Employment Group at Cohen Seglias Pallas Greenhall & Furman, PC. He focuses his practice on representing and counseling both union and non-union employers throughout the United States, in all aspects of labor and employment law.