Of the many legal issues that can arise between a contractor and its subcontractors, few are as confusing and counterintuitive as the distinction between “pay if paid” and “pay when paid” contract clauses.

The Construction Workplace Misclassification Act regulates when contractors may identify their workers as independent contractors for payroll and tax purposes. This act must be understood in light of the Unemployment Compensation Act, which requires employers to pay a small percentage of each employee’s, but not independent contractor’s, earnings in unemployment compensation tax. Failure to abide by these regulations can trigger criminal prosecution and heavy fines.

What is the purpose of this law? The Pennsylvania Contractor and Subcontractor Payment Act (PCSPA) was created to assist businesses and individuals collect payment for their construction work. All construction contracts fall under the PCSPA, except for improvements to six or less residential units which are simultaneously under construction.

In October 2008, the Pennsylvania Legislature approved the Home Improvement Consumer Protection Act (HICPA) which requires contractors to register with the Bureau of Consumer Protection. The law also mandates certain terms and language for home improvement contracts, and codifies penalties for contractor fraud.