By Jonathan Young
What once was a simple, almost silly question is now much more complex. The work relationship that once was easily characterized as between an “Employer” and “Employee” is now more nuanced with the usage of Independent Contractors and Subcontractors, Borrowed Employees, and Temporary Employees all entering the workplace picture. This has resulted in a host of new employment law issues about legal agency, workers’ compensation coverage, general liability indemnification, and some recent criminal sanctions for intentional misclassifications.
It is the nature of the work relationship, not the terminology, that controls the legal status between the Employer and the Employee. Many people who have been told they are “Independent Contractors,” after appropriate legal analysis, are “Employees”. This is not a distinction controlled by whether you receive a 1099 or a W2 tax form at the end of the year but by a significant list of factors used to determine your status.
DISTINCTION BETWEEN EMPLOYEE AND INDEPENDENT CONTRACTOR
Pennsylvania’s legal analysis of this topic still uses antiquated terminology such as “master” and “servant” to explain the Employment relationship. Master means Employer, and Servant means Employee.
Under the Pennsylvania Workers Compensation Act, the term Employee is synonymous with Servant and includes all natural persons who perform services for another for a valuable consideration. Generally, if the manner and means of performing the work reside in a Master, tools and other implements of work are supplied by the Master, and taxes are withheld, the Servant is an Employee of the Master.
Just calling someone an Independent Contractor does not make that person an Independent Contractor. Neither does not withholding taxes and paying them via a 1099. The IRS sets forth specific criteria which help discern the difference between an Employee and an Independent Contractor. (See: IRS Revenue Ruling 87-41, 1987-1 C.B. 296)
Pennsylvania Courts have weighed in on this definitional difference and set forth the factors to consider in determining whether an individual is an “Employee or an “Independent Contractor.”
The Courts have reviewed the amount of direction and control exercised by a “Master” to determine the existence of an Employee/Employer relationship. Control in an employment relationship exists where the alleged Employer possesses the right to select the Employee, the right and power to discharge the Employee, the power to direct the manner of performance, and the power to control the Employee’s time and compensation. That individual is an “Employee” regardless of whether they are called an “Independent Contractor” or not.
To avoid insurance expenses, particularly in hazardous occupations such as in the construction business, there was often an attempt to misclassify an “Employee” as an “Independent Contractor”. In such a case where someone suffered a severe injury on the job, this misclassification led to significant financial woes for the worker and often left the state on the hook for medical bills through MEDICAID or the State Workers Compensation Uninsured Employer’s Fund.
To address these issues, the Construction Workplace Misclassification Act was passed in 2011. Effective February 10, 2011, an individual who performs services in the construction industry for remuneration is an independent contractor only if all three of the following criteria are satisfied:
The individual has a written contract to perform such services.
The individual is free from control or direction over the performance of such services, both under the contract of service and in fact.
As to such services, the individual is customarily engaged in an independently established trade, occupation, profession, or business.
The Employer must be in the construction industry for the Misclassification Act to apply. In the Misclassification Act, the term independently established construction trade, occupation, profession, or business is defined as someone who:
• possesses the essential tools, equipment and other assets necessary to perform the service;
• can realize a profit or loss from the service;
• performs the service through a business in which the individual has a proprietary interest;
• maintains a separate business location;
• has previously engaged in similar services set forth above while free from direction and control;
• maintains liability insurance of at least $50,000.
UNLESS YOU CAN COMPLY WITH THESE DEFINITIONAL REQUIREMENTS, YOU ARE AN EMPLOYEE EVEN DESPITE ANY BOSS’S INSISTENCE THAT YOU ARE AN INDEPENDENT CONTRACTOR.
Financial Penalties: A violation of the Misclassification Act is considered a summary offense subject to a $1,000 fine for a first violation and $2,500 for each subsequent violation, payable to the Workers’ Compensation Administrative Fund.
If you have an employment law or workers’ compensation matter you need help with, call us at 610.367.2921 or contact us online.