Federal and State Laws When Classifying Construction Workers

Independent contractors are crucial to having extra hands on deck when your business needs them most, keeping jobs on schedule and producing quality work. Yet, misclassifying someone who does work for you as an independent contractor rather than an employee can have serious consequences. 

For law purposes, “misclassification” refers to independent contractors and employees, although other terms are often used for construction workers and can cause confusion.

There are several methods for determining the correct classification and staying compliant with state and federal laws.

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What’s the Difference Between a General Contractor and an Independent Contractor?

When one thinks of laborer misclassification, they often think of employees and independent contractors. You may also hear terms like “general contractor” and “contractor.” There are clear distinctions between all of these terms, which are relevant when classifying a laborer because many states have laws regarding worker status and liability insurance.

An independent contractor is a worker who a company hires to do specific tasks unrelated to the core business operations. For example, a bank can engage a painter to paint its interior. Under the contract, the bank is the principal, and the painter agrees to perform a specific job outside the scope of what the bank primarily does. This arrangement positions the painter as an independent contractor and not a bank employee. The independent contractor would likely need to carry insurance for themselves and their employees.

There’s also a slight difference when comparing a contractor versus an independent contractor. A company may hire a contract worker — simply called a contractor — through a staffing agency with whom they have signed a contract. In this case, the worker is the staffing agency’s employee and not an independent contractor for the company benefiting from their work. The same distinction exists for a general contractor versus a contractor.

So, what is a general contractor, and what does general contracting mean? A general contractor enters an agreement with a principal and takes responsibility for the project. Their duties include managing the budget, coordinating with subcontractors and completing the project on time. This arrangement is typical in construction, where the general contractor oversees project management.

An independent contractor becomes a general contractor once he subcontracts out part of the work or takes on multiple pieces of a project he’s overseeing. Let’s assume preparation was necessary for our bank-painting scenario, like drywall patching. The painter can include the task in his bid but hire another company to carry it out. He’s now become the project’s general contractor, and the drywall company is a subcontractor. That transition can change the painter’s liability status for employees of the drywall company under laws in many states.

Things can become even more complex depending on the nature of the general contractor’s business. For example, suppose the painter regularly provides drywall patching services but subcontracts this project. Subsequently, the workers he hires to fix the drywall may fit the definition of an employee instead. As a result, the painter would have different legal and tax obligations.

Federal Laws When Classifying Construction Workers

The United States Department of Labor (DOL) and the Internal Revenue Service (IRS) haven’t issued clear, combined guidance on worker classification. Instead, they tend to depend on a business to carry out its due diligence and factor analysis to determine the level of independence retained by the worker or the level of control the business has over the worker. These factors differ slightly between the two agencies.

The IRS examines three elements when defining the employment arrangement, including:

1. Behavior control: How much direction does the employer have over the worker and how they complete their tasks? If the employer can control a worker’s hours or how they perform their duties, it’s likely an employer-employee relationship.
2. Financial control: How much authority does the business have over when workers get paid or receive reimbursement for expenses? If the employer maintains control over the worker’s financial aspects, it’s typically an employee classification.
3. Business and benefit scope: Is the worker performing ongoing or long-term services essential to the primary line of business, and do they receive benefits like health insurance? If so, they’re likely an employee.

The DOL wants to ensure workers who are truly employees are correctly classified and have protections under the Fair Labor Standards Act (FLSA). The agency uses an “economic reality” test with seven factors to determine which status applies to the employment arrangement.

These factors are:

1. The importance of the worker’s services to the overall core business.
2. The length of the relationship between the two parties.
3. The worker’s investments into company equipment and facilities.
4. The control level the employer has over the worker.
5. The worker’s potential to make profits or suffer losses.
6. The worker’s competition level with others with the same or similar skill set.
7. The independence of the worker’s business operation.

Most businesses can combine the two sets of standards for better guidance on classification. Yet, the courts have upheld different interpretations of the laws, and those interpretations have varied as administrations change. Plus, the DOL and IRS have begun focusing on this issue more. If there’s any doubt about the employment relationship, it’s best to get current expert advice during a consultation with an experienced attorney.

Penalties for Violating Federal Law

Employers can face fines for violations. Examples of penalties include a fine of $50.00 for each W-2 the employer should have filed and a penalty amounting to 3% of the worker’s wages, plus 40% of Social Security and Medicare taxes not withheld from the worker’s wages.

If the IRS determines the misclassification was willful or fraudulent, an employer could receive fines of up to $10,000 per worker and a prison sentence of up to five years. The agency can also hold the employer personally liable for uncollected taxes.

State Laws When Classifying Construction Workers

States countrywide have begun to scrutinize construction firms over their worker classifications. Over half of states have passed laws helping end common misclassification practices, many with stiff penalties for firms that willfully do so.

States with legislation specific to worker misclassification include Maine, New Jersey, New York, Illinois, Delaware, Pennsylvania, and Massachusetts.

The Massachusetts Independent Contractor Law

Massachusetts has some of the country’s strictest laws against misclassification, making it vital to understand the employment relationship correctly. Under Massachusetts law, businesses use a three-part test — known as the ABC test — to determine a worker’s unemployment compensation status.

The ABC test is similar to the IRS test and includes:

• A — The nature and degree of employer control: The contractor is free from direction and control concerning their performance of the service, both under contract and in fact.
• B — The importance of the work to the employer’s business: The service the individual performs lies outside the employer’s usual scope of business.
• C — The investments and facilities involved: The employer must prove that an independent contractor is customarily engaged in an independently established occupation, business, profession, or trade of the same nature as the service performed.

Under the C test, there’s some flexibility when a worker primarily works for one employer. They may retain status as an independent contractor if they can demonstrate they continue to seek work from others.

Massachusetts has since enacted the Massachusetts Independent Contractor Law (MICL) to extend the ABC test to worker classification for wages and other employment benefits.

In 2004, the legislature took the law further, declaring all workers as employees unless a business can prove otherwise through the ABC test. A firm must meet all three requirements to classify someone as an independent contractor, regardless of what an employment contract may state.

These amendments had several effects on the ABC test. For example, the B test now also applies to general contractors and their subcontracting practices. A general contractor who performs any services as part of his regular duties can no longer classify a subcontractor as independent when performing that same service. In other words, if a general contractor routinely does electrical work, any subcontractor electrician he brings into a project is now considered an employee.

Penalties for Violating Massachusetts Law

For a willful first MICL offense, misclassification can yield a fine of up to $25,000, a one-year jail sentence, or both. Subsequent violators can receive fines up to $50,000, two years in prison, or both. Unintentional violations carry penalties of up to $10,000 or prison terms of up to six months for an initial misclassification, and fines of up to $25,000, jail time of up to one year, or both.

MICL allows for no exceptions, and a business can also run afoul of other laws when it misclassifies, including:

• Wage, hour, and overtime laws.
• Payroll tax and record-keeping laws.
• Workers’ compensation laws.

Plus, a misclassified employee has the right to sue the employer who misclassified them. Together, these concepts reinforce the need for an expert legal consultation on worker classification from experienced construction attorneys like those at Calabrese Law Associates.

When May a Construction Company Choose to Hire a General Contractor?

Although misclassification refers to the distinction between independent contractors and employees regarding legal purposes and the treatment of laborers, general contractors are also essential in the construction world.

Construction companies often hire a general contractor to oversee and manage the entire project from conception to completion. Having an individual on-site to monitor safety, permits, and progress allows the principal to focus on its core responsibilities.

Typical situations when hiring a general contractor may be the best option include:

• The company wants to take advantage of the general contractor’s network: General contractors usually have relationships with numerous subcontractors who can bring the desired expertise to the project. They also often work with a network of vendors and can negotiate project discounts.
• The company wants a single point of contact: As the project’s point person, the general contractor handles all communication between the principal and the subcontractors. The construction company stays informed and has someone to help resolve any issues.
• The company wants to save time and money: An experienced general contractor can draw on their knowledge to set realistic project time frames and quickly adjust to challenges. Plus, they can lend their expertise to projects that may be outside a construction company’s normal scope, preventing delays and ensuring quality.

Additional benefits of hiring a general contractor include favorable subcontractor pricing and better budget control. A general contractor may refer extensive amounts of business to preferred subcontractors. As a result, the principal can often secure more favorable pricing through the general contractor than they could on their own. The general contractor’s experience can be the difference between a project with spiraling costs or high profitability.

When May a Construction Company Choose to Hire an Independent Contractor?

Construction companies often hire independent contractors to help keep projects on schedule. Some examples of these contractors include:

• Electricians.
• Carpenters.
• Painters.
• Masonry workers.
• Landscapers.
• Drywall finishers.
• Heating, ventilating, and air conditioning (HVAC) professionals.
• Plumbers.

Employees comprise a significant portion of a company’s expenses and can represent its largest source of risk. That results in multiple situations where independent contractors are ideal, including:

• Filling temporary needs: Independent contractors can help a construction company meet short-term demands for additional help.
• Getting skill-specific labor: While multiskilled workers exist, hiring independent contractors allows a construction company to get someone with in-depth trade expertise to perform a particular part of the job.
• Saving money on project costs: Since a properly classified independent contractor manages their own taxes and insurance, a construction company can reduce labor costs for potentially higher project profits.
• Maintaining flexibility: Construction businesses can add workers as demand occurs and end the working relationship when projects terminate to avoid unnecessary overhead.

The primary benefits associated with hiring properly classified independent contractors include:

• Access to a large labor pool.
• Reduced equipment costs since an independent contractor must supply their own.
• Fewer investments in training and an immediate contribution to the project since they already possess the required skills.
• Reduced liability under employment laws.

Our Service Benefits

Calabrese Law Associates proudly serves the Greater Boston area with a passionate commitment to our guiding values. As a result of this dedication, our clients enjoy the benefits of:

• Expertise. We have the legal knowledge and insights to guide our clients accurately and fairly in the competitive construction industry. Our team also boasts the negotiation and litigation skills required to secure our clients the best possible outcomes. Plus, we continually challenge ourselves to acquire in-depth industry knowledge to serve our clients even more effectively.
• Accessibility. We strive for open and regular communication with our clients and remain accessible to them. Our attorneys promptly respond to phone calls, emails, and questions. When you work with us, we keep you informed and stay responsive to your needs.
• Efficiency. We embrace the idea of working together with our clients while focusing on what really matters. As a result, we provide industry-leading representation and advocacy to minimize the “legal.” We also offer reasonable fees to control spending.
• Excellence. We’re dedicated to exceeding our clients’ expectations with first-rate legal services and won’t settle for less. Our legacy of excellence speaks for itself through multiple awards, innovative solutions, and testimonials.
• Service. We believe client service is about more than providing legal advice. It’s about being a responsive advocate and trusted team member. We believe in working together to help achieve our clients’ goals and nurturing long-term relationships.
• Results. We have a consistent track record of results from our passionate and tireless devotion and first-rate legal representation. While we encourage out-of-court solutions to save time and money, we will litigate when necessary to preserve your rights. We aim to secure favorable outcomes through focus, efficiency, and skill.

Contact a Construction Attorney at Calabrese Law Associates

Our construction law professionals serve clients in the Greater Boston area from two convenient locations in Boston and Burlington. We’ll help ensure you’ve correctly classified your workers to stay compliant with federal and Massachusetts laws.

Connect with us by calling 617-340-6623 or submitting our digital contact form.

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This publication and its contents are not to be construed as legal advice nor a recommendation to you as to how to proceed. Please consult with a local licensed attorney directly before taking any action that could have legal consequences. This publication and its content do not create an attorney-client relationship and are being provided for general informational purposes only.