On August 27, 2010, New York Governor David Paterson signed the New York Construction Industry Fair Play Act, which seeks to curtail the misclassification of employees as independent contractors in the construction industry. The Fair Play Act may have the effect of eliminating most independent contractors in the construction industry by imposing a restrictive definition of “independent contractor,” as well as rigid corporate and personal civil and criminal liability and penalties associated with a willful misclassification.
A 2007 Cornell University Study found that misclassification of independent contractors was about 50% higher in the construction industry as compared to all industries in New York State. This misclassification cost New York substantial amounts of lost income taxes, unemployment, and Worker’s Compensation premiums, and also had the effect of placing construction industry businesses that classified its employees properly at a competitive disadvantage. In September 2007, then-Governor Elliot Spitzer signed an executive order creating an employee misclassification task force, which was implemented to conduct sweeps primarily in the construction industry. Nearly half of the initial business entities evaluated by the task force were found to be misclassifying employees.
The Fair Play Act, now passed and codified in Article 25-b of the New York Labor Law, states that the construction industry has been experiencing dangerous levels of employee misclassification fraud, and that some employers in the construction industry are intentionally reporting employees as independent contractors. A hearing conducted by the Labor Committees of the State Assembly and Senate offered testimony that focused on the harm to workers who have no Worker’s Compensation coverage, the economic costs to the state for unpaid taxes and unpaid premiums, and the difficulty that other businesses in the construction industry have in competing on bids with firms that misclassify workers.
Included in the Fair Play Act is a change to the New York’s Labor Law that creates a presumption of employment in the construction industry found in § 861-c. This presumption indicates that any person performing services for a contractor shall be classified as an employee unless the person is a separate business entity, or unless the three (3) following criteria are all met: 1) the individual is free from control and direction in performing the job either under contract or in fact; 2) the service must be performed outside the usual course of business for which the service is performed; and 3) the individual is customarily engaged in an independent establishing trade, occupation, profession, or business that is similar to the service at issue. All criteria must be met in this three-part test in order to qualify for independent contractor status.
The new test enacted under the Fair Play Act represents a significant departure from the current legal test for determining whether a worker is an independent contractor or employee. Prior to the Fair Play Act, the determination of whether one was an independent contractor in New York was based on the common law test, involving the analysis of factors addressed to whether the hiring party retains or exercises the right to control the manner or means in which the worker/employee performs his or her services. The courts have stated that no single factor or group of factors will conclusively define an employer-employee or independent contractor relationship. All factors must be examined to determine supervision, direction, and control.
Civil and criminal penalties may ensue for a violation of the Fair Play Act if any contractor willfully fails to classify an individual as an employee. Civil penalties for a first violation may be a $2,500 fine per misclassification, with fines increasing up to $5,000 per misclassification for subsequent violation. As for criminal penalties, willful violations are misdemeanors and may expose the contractor to fines and possible imprisonment. Officers of a corporation or shareholders owning 10% or more of the corporation who knowingly permit a willful violation will be subject to all of the civil and criminal penalties, as well as possible debarment and ineligibility to bid on public works projects if convicted.
Construction industry businesses that engage independent contractors should ensure that they are in compliance with the law. To ensure compliance, businesses may conduct an internal audit to determine the number of individuals retained as independent contractors; review business agreements, records, and actual practices related to the factors in the new test; restructuring current agreements and relationships to ensure current legitimate independent contractor relationships; reclassifying workers and groups of workers previously classified as independent contractors under the old common law test; and ensuring that all workers are reporting to the unemployment insurance division and covered by the contractor’s Workers’ Compensation policy, and that income taxes are withheld and payroll taxes are reported and paid to federal, state and applicable local government tax agencies.
Both houses of Congress have introduced the Employee Misclassification Prevention Act, which if enacted would create a federal misclassification law with enhanced penalties and private rights of action. Furthermore, Massachusetts has essentially outlawed independent contractors in the state by statute, resulting in businesses moving out of state and eliminating a viable working option for consultants in the state who wish to have flexible hours or offer specialized talents to businesses that need their services. New Jersey limited the type of tests found in the Fair Play Act for independent contractors to those select industries where misclassification is widespread and cannot be reduced by increasing enforcement and establishing stiffer penalties. The Fair Play Act is a response to the inclination of a large segment of the construction industry to willfully misclassify workers and independent contractors or pay workers off the books. While many businesses in New York have been found to comply with the Fair Play Act, too many of the businesses in the construction industry have been found to willfully misclassify their workers/employees, resulting in new legislature that may have unintended effects that place legitimate businesses at a disadvantage because they cannot comply with the new standards.