Construction Contractor Employment Classifications
In the construction industry, contractors commonly use tradesman as independent contractors for a specific construction project. With the recent passage of the Employee Classification Act, any contractor that utilizes a subcontractor must be certain that the subcontractor is truly an “independent contractor” and not an employee. The law became effective January 1, 2008, and seriously punishes private sector general and subcontractors that misclassify any worker as an “independent contractor” on construction related projects. Construction work is broadly defined and includes, for example, remodeling, landscaping, decorating, and painting.
According to the Act, an individual performing services for a contractor is deemed an employee of the contractor unless the contractor can prove: (1) that the work performed by the individual is different from the work the contractor performs; (2) that the subcontractor is engaged in an independently established business; (3) that the individual is a legitimate sole proprietor, or a member of a partnership, or an employee of a corporation established for the purpose of furnishing subcontractor services; and (4) that the contractor has no control or direction over the performance of the independent contractor’s services.
The Illinois Department of Labor can enforce this law by means of an investigational audit. A $1,500 penalty can be assessed for the first violation and $2,500 penalties for subsequent violations within a 5-year period. Each person misclassified and each day the misclassification takes place is a separate violation. These penalties are doubled in the case of willful violations. The misclassified individual or other interested party can file a private action against the contractor and seek damages and injunctive relief. A successful employee can recover any unpaid wages, overtime, employment benefits, liquidated damages equal to any compensatory losses, $500 per day for each violation, and attorney’s fees and costs.
How many times have we heard about construction industry employees being willing to work more than 40 hours per week for “straight” time and “waive” their right to time and a half pay for overtime, in violation of the law? This usually comes about because of the present apparent good relationship between the employer and employee and their willingness to cooperate in such an arrangement.
However, when the employer-employee relationship ends, whether on an amicable or hostile note, and regardless of whether the employee previously knew or subsequently learns his rights (often while having a beer with his friends and telling them his story), the employee can assert his right to overtime pay. These claims are often very costly to the employer as they usually result in an audit of the employer’s payroll records and the government’s assertion of additional claims for present or past employees who are not pursuing a claim.
This example involving extra pay for overtime is not covered by the Employee Classification Act, but is analogous of situations that will occur where a person who is hired as an “independent contractor” later decides he wants more money and brings a claim for additional wages and other benefits of employment.
There will be many lawyers out there “chomping at the bit” to file these cases. If you employ individuals as independent contractors, you must become familiar with this law and modify your practices as necessary.
Unless the subcontractor comes within the exceptions of the Act, the consequences can be very serious for you.