Are you calling your employees independent contractors?

Fifteen years ago, on October 13, 2010, Governor Ed Rendell signed into law House Bill 400, establishing the Construction Workplace Misclassification Act (CWMA). This new law went into effect on February 10, 2011, and had a dramatic impact on all construction companies utilizing independent contractors.  For years a heated and debated issue in Workers’ Compensation law has been the treatment of workers as independent contractors under the workers’ compensation Act.  Fifteen years later, any employer involved in construction should still be well aware of the effects of the CWMA. 

Generally, if a worker is an independent contractor, workers’ compensation benefits are not available for any injuries sustained on the job.  The independent contractor must have his or her own insurance.  The practical effect of this is that many employers would classify, or misclassify, their workers as independent contractors, when they were actually employees.  By calling workers independent contractors, employers can try to avoid the cost of carrying expensive workers’ compensation benefits, and can be held out of long and costly litigation over work injuries.  This practice is especially prevalent in construction businesses, such as roofing and general contracting, where workers’ compensation insurance is prohibitively expensive, and injuries are often quite severe and debilitating.

For many years, a relatively vague test, which basically came down to how much control an employer had over a worker, controlled the law as to that worker’s status as either an employee or an independent contractor.  However, under the CWMA, an individual who performs construction work may be considered and paid as an independent contractor only if:

• The individual has a written contract 
• The individual is free from control or direction over performance of such services, both under the contract and in fact 
• The individual is customarily engaged in an independently established trade, occupation, profession or business 

Thus, a written contract seems to be essential, however, this aspect alone certainly would not suffice.  For years, many employers have simply written up employment agreements which name employees as independent contractors.  However, the addition of codified degrees of control over services and the addition of the requirement of an “individual (who) is customarily engaged in an independently established trade,” serve to clarify matters even further.  

Before the CWMA, employers looking to be free of the liability and costs of workers could simply have each worker sign a contract labeling each worker as an independent contractor, and then nevertheless control each aspect of that workers’ job.  However, now there must be a definitive lack of control over a true independent contractor, and there would likely need to be a showing that this worker is not simply performing a task for the employer, but rather, that the worker performs this task independently as part of an established trade or business.  Thus, showing that the worker performs the same task for numerous employers would be an ideal way to meet the this requirement.  

With respect to the third criterion above, the CWMA states that an individual is customarily engaged in an independently established trade, occupation, profession, or business only if:

• The individual possesses his/her own tools 
• The individual’s arrangement is such that he/she can realize a profit or suffer a loss as a result of the individual’s performance of services through a business in which the individual has a proprietary interest 
• The individual maintains a separate business location 
• The individual previously worked as a bona fide independent contractor (as defined by the CWMA) or holds him/herself out to the public as a bona fide independent contractor.

These requirements basically codify the factors which have been used in litigation for many years.  When a worker supplies his or her own tools, the obvious connection is that they are not just an employee, but an outside contractor, who clearly possesses a skill and service that requires tools to perform that service.  For example, an electrician who is hired by a contractor (who does not himself do electrical work) to wire a home and comes with his own tools to do so, is clearly an independent contractor.  However, an electrician who wires a home with another individual’s tools would be more likely to be considered an employee.  

The second requirement regarding profits or losses seems to indicate that while an employee gets paid for a job whether performed well or not, an independent contractor would be more likely to lose money on a poorly performed job, or conversely make more of a profit on a job that was completed efficiently, or take a loss on a job that was over budget.

Under the CWMA, there are a lot of hurdles to clear in order to establish that a worker should be classified as an independent contractor.  The overwhelming majority of workers in the construction industry in Pennsylvania who are currently classified as independent contractors are now considered employees.  Further, the failure to withhold federal or state income taxes or pay unemployment compensation contributions or workers compensation premiums will not be considered in determining whether an individual is an independent contractor.  The CWMA sets out the factors to be used by the courts, instead of relying upon case law which points to numerous and varying factors. 

Misclassification directly affects workers’ comp coverage: if a construction worker is not a valid independent contractor under CWMA, they are an employee for workers’ compensation purposes and must be covered.  The two statutory frameworks (CWMA and Workers’ Compensation Act) operate simultaneously but are not mutually exclusive – violation of CWMA results in administrative penalties while also establishing employee status for workers’ comp claims.

The courts have generally held that the absence of a written contract (defining that the employee is an independent contractor) alone makes the worker an employee entitled to workers’ comp benefits.  This means that even if all of the other factors from above are met, without a contract, Judges generally find that alone to be enough to make the injured worker an “employee” under the Workers Compensation Act.  Staron v. W.C.A.B. (Farrier), 121 A.3d 564 (Pa.Cmwlth.Ct. 2015), further established that this contract must exist at the time of the injury, and not after the fact. 

Recent case law has limited the scope of the CWMA to some extent.  The most significant recent development is the Pennsylvania Supreme Court’s 2018 decision in Department of Labor and Industry v. WCAB (Lin and Eastern Taste), 647 Pa. 28 (2018), which clarified the scope of the CWMA by holding that the statute applies only when the putative employer is itself in the business of construction.  This ruling narrowed the CWMA’s reach and confirmed that the traditional common-law balancing test continues to govern worker classification disputes in non-construction industries—even when the work being performed involves construction activities.

However, another new case clarified the CWMA even further.  In 2024, the Commonwealth Court’s decision in Linda’s Cleaning Consultants, Inc. v. Department of Labor and Industry, 308 A.3d 962 (Pa.Cmwlth.Ct. 2024), reinforced the rigor with which the CWMA’s criteria are applied in Department enforcement proceedings.  The court upheld the Department’s determination that where an employer claims workers carry their own liability insurance but fails to provide documentary proof despite having opportunities to do so, testimony alone is insufficient to satisfy the CWMA’s insurance requirement.  This ruling emphasizes that employers must be prepared to document satisfaction of CWMA criteria, particularly the insurance requirement, when challenged by the Department.

Under the CWMA, the consequences for misclassifying an individual as an independent contractor are severe.  Administrative penalties may be up to $1,000 for the first violation, and up to $2,500 for each subsequent violation, and each misclassified worker is considered a separate offense.  In addition, violations of the CWMA can lead to a “stop work” order requiring the cessation of work by misclassified individuals within 24 hours, individual liability, and criminal sanctions. 

The Pennsylvania legislature’s intent was clear, and still is, to stop abuse of the classification of workers as independent contractors to avoid employers’ liability under the Workers’ Compensation Act.  If you have questions about how this applies to your employment or your business, contact a certified specialist workers’ compensation attorney for a consultation – it could save you big time in the long run.