Today’s “gig economy” and its heavy reliance on independent contractors is one indication of how our modern workforce is evolving. The tech industry is a perfect example. But look a little closer and you’ll see that many tech startups are facing a new threat: lawsuits from workers who allege they were misclassified as contractors when they should be employees.
So what’s the connection? Just like the tech industry, the construction industry relies heavily on contract work. That’s why it’s crucial to pay attention to the new guidelines on how to distinguish between an independent contractor and an employee, released by the Department of Labor’s (DOL) Wage and Hour Division in July 2015. Based on these guidelines, many workers will have to be reclassified, and that could be huge for construction businesses.
The high cost of misclassification
Your contractor agreements don't get you a free pass when it comes to new interpretations of labor laws. If the DOL rules your subcontractors are employees, your contract doesn't supersede that. And if the DOL or Workers’ Compensation Board decides your independent contractors are actually employees, you may be on the hook for:
- Minimum wage, overtime, and fines for failure to pay appropriate wages
- Workers’ compensation benefits and fines for not having adequate workers’ comp coverage
- Employment taxes and interest on payroll taxes
- Health insurance premiums, retirement contributions, and other benefits
If you have multiple workers who are suddenly reclassified and you get slammed with these liabilities all at once, it could bankrupt you. That should be incentive enough to properly classify your workers from day one.
Employee or subcontractor – how do you know?
When you’re classifying workers, you need to ask yourself some questions. Is the work being performed fundamental to the business? Does the worker have the skills and ability to capitalize on profit opportunities or avoid losses? Who’s investing in the venture and assuming the risks? How much control do you as the employer have over the work? Essentially, if the worker is economically dependent on you, that worker is an employee according to the DOL's new guidelines.
Making the right choice
As a general contractor or construction business owner, you can reduce your risk of misclassifying workers by following three simple steps:
- Identify. Make a list of every independent contractor you work with. If you send someone a 1099 at the end of the year, they go on the list.
- Review. Take a second look at those business relationships. Are those on your list in business for themselves? What percentage of their work do they rely on you for? If they get most or all of it from you, they probably won’t qualify as independent contractors. But if they run an established business, have their own contractors insurance, and have other projects regularly, they probably qualify.
- Adjust. If you’ve accidentally classified an employee as an independent contractor, don’t panic. Just take steps to correct the situation immediately, even if it means offering them a job as an employee and making back payments to avoid fines and a lawsuit.
Don’t forget the insurance requirements
Whether your workers are contractors or employees, you need the right insurance coverage. Most states require workers’ compensation insurance, and you may need to require your subs to carry their own. Your subcontractors also need to have their own GL insurance or be covered as an additional insured on your policy. Getting it right will spare you a great deal of time, money, and headaches down the road. Just ask the tech industry.
To learn more about worker classification and your insurance obligations, call the New York construction insurance experts at BNC Agency.