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.
For purposes of workers’ compensation and unemployment compensation taxes, contractors may only classify workers as independent contractors if the following conditions are met:
- The work is subject to a written contract;
- The worker controls and directs his own work;
- The worker owns the necessary tools, rather than the contractor providing them;
- The worker can to earn a profit or suffer losses from his work;
- The worker is an owner or partner in his own business;
- The worker has a separate business location from the business or person which hired him to perform the construction;
- The worker presents himself as available and able to work as an independent contractor;
- The worker has liability insurance of at least $50,000.
Any worker not meeting this strict definition, who performs services in the construction industry and is paid, must be classified as an employee. Each employee’s pay is subject to the unemployment compensation tax, which must be paid by the employer. Each employee who is misclassified counts as a separate violation by an employer who failed to pay the required tax on their earnings.
Employers found to be violating this act are subject to fines of $1,000.00 for a first offense, and fines of $2,500.00 for subsequent offenses. Moreover, even if the employer is a contractor, the person responsible for paying the taxes of the corporate contractor may be held individually liable for unpaid taxes.