OUR THOUGHTS ON:

Pennsylvania Employers to Face Possible Criminal Charges for Worker Misclassifications

Tax

By Martin DiGiovine

Pennsylvania Governor Ed Rendell recently signed Act 72 of 2010 (previously HB 400), known as the Construction Workplace Misclassification Act, making it a criminal offense for employers in the construction industry to misclassify employees as independent contractors.

Proponents of the new law claim that it will level the playing field in the competition for construction contracts. They cite examples of unscrupulous contractors who have deliberately misclassified employees in order to avoid payroll taxes and overtime laws, allowing them to underbid contractors who play by the rules. They also cite many cases of injured workers who would not qualify for workers’ compensation if they are treated as independent contractors.

Not all construction workers must be classified as employees under the new law. Contractors may still utilize independent contractors, as long as certain assurances are in place, including: 

  1. A written contract to perform the services;
  2. Freedom from control over performance of duties; and
  3. Proof that the individual is customarily engaged in the business of providing the services contracted for.

The law provides criteria for determining whether or not the individual is “customarily engaged” in the particular profession.

Under the new Pennsylvania law, intentional violations constitute second degree misdemeanors (third degree misdemeanor for first violation), while negligent violations constitute a summary offense.

The Pennsylvania Crimes Code provides a maximum sentence of one year in prison for third degree misdemeanors and two years for second degree misdemeanors. The new law imposes a maximum fine of $1,000 for a summary offense. However, evidence of a prior conviction would be admissible as evidence of intent under the statute.

In addition to criminal penalties, the legislation provides that for each misclassified worker, the state may impose civil penalties up to $2,500. Each individual who is not properly classified as an employee will be the basis of a separate violation.

In addition to unscrupulous employers, criminal liability also extends to individuals and businesses that contract with the employer contractor, if the individuals know of the misclassification by the employer. A safe harbor provision has been inserted into the final version of the legislation, providing a defense for a good faith belief that the worker qualified as an independent contractor at the time the services were performed.

We recommend that any employers engaged in construction projects carefully review each worker to ensure that independent contractors they engage meet the requirements of the new statute. Some of the factors that would support a classification as an independent contractor include:

  • The worker owns his/her own tools;
  • The worker is free from direction/control in their performance of services;
  • The worker performs services through a business in which the individual has a proprietary interest;
  • The individual maintains a business location separate from the location of the person for whom the services are being performed;
  • The individual performs (or holds himself out to perform) the same or similar services for others; and
  • The individual maintains liability insurance of at least $50,000.

The new law is confined to the area of “construction”, which the statute defines as: “The erection, reconstruction, demolition, alteration, modification, custom fabrication, building, assembling, site preparation and repair work done on any real property or premises under contract, whether or not the work is for a public body and paid for from public funds.” Future interpretation by the courts will likely be required as to who is encompassed by this broad definition of “construction.”

The Teamsters union pressed for a more broad application of the statute to include transportation (and other) workers. The state legislature, however, chose to confine the legislation to the construction industry, claiming that a more encompassing statute would face insurmountable political opposition. Members of the legislature also mentioned that laws governing transportation workers may be the exclusive province of the Federal government under the Interstate Commerce Clause of the U.S. Constitution.

Pennsylvania joins the ranks of New York, New Jersey, Nebraska, Connecticut, Illinois and Massachusetts in criminalizing misclassification of certain workers by employers. The Obama administration has shown a keen interest in the passage of such statutes by state legislatures.

Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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