Currently, many employers throughout the U.S. Economy classify workers as “1099” independent contractors to reduce labor costs. By classifying a worker as an “independent contractor” instead of as an employee, employers avoid having to pay payroll taxes, the expenses associated with workers’ compensation and unemployment, employee benefits, and the time and money associated with administering and complying with various state and federal employment mandates regarding employees. However, employers cannot simply designate a worker as an independent contractor as a way to avoid financial obligations. Rather, the worker must actually be an independent contractor based on the criteria set forth in the applicable state and federal regulations.
Until recently, employers frequently misclassified (intentionally or unintentionally) workers as independent contractors when those workers really should have been classified as W-2 employees. However, the Obama administration recently made it a priority to crack down on employers that misclassify employees as independent contractors. This led to a joint effort between the U.S. Department of Labor and the IRS which has resulted in several recent lucrative judgments and demands against employers, particularly against those employers in construction and construction related industries. For example, on May 9, 2013, the U.S. Department of Labor announced it had recovered more than $1 million in back wages for workers at a Kentucky-based cable installation company that was misclassifying its workers as independent contractors. In discussing this outcome, acting Secretary of Labor Seth D. Harris explained that “[t]he misclassification of employees as independent contractors cheats workers of wages and benefits to which they would otherwise be entitled to under the law, subsequently hurting our economy. It also leads to unfair competition because businesses that play by the rules operate at a disadvantage to those that don’t.”
As the Obama administration and the federal government continue to tighten its grip on construction industry employers and employers in general with regard to this issue, it is essential that management for New York construction companies have a full understanding of the State and Federal criteria for determining whether workers are employees or independent contractors. As seen in the above mentioned case, failure to make the correct classification could expose a business to significant financial liability. This is especially true in the construction industry where contracting and subcontracting are the norm and often the lines between employee and independent contractor are blurred. The applicable New York criteria are set forth in the New York Construction Industry Fair Play Act, a summary of which can be found here. The applicable Federal criteria is set forth in the Fair Labor Standards Act, a summary of which can be found here. Companies that are unsure as to whether their workers should be classified as employees or independent contractors should consult with their attorneys immediately.
This article has been authored by Donna Mulato, a law student extern at Farrell Fritz, PC, edited by Jason Samuels.