June 28, 2013

How Do You Define Employee? The effects of the Construction Workplace Misclassification Act

            The enactment of the Construction Workplace Misclassification Act signals a new chapter in the effort to define whether an individual working on a construction site for himself, or for another, is considered an employee or an independent contractor. An individual’s status as an employee or independent contractor is crucial in determining whether an individual or a company will have financial exposure/responsibility for a potential workers’ compensation or third party liability claim.

  1. Employee vs. Independent Contractor

Historically, an employee is an individual who is a “servant” of another – the “master”. If the master provides the manner and means of performing the work, including tools of the trade or other implements of work and withholding taxes, then the servant is an employee of the master. An independent contractor is not an employee, because there is no master/servant relationship. The following factors are used in determining whether an individual is an employee or independent contractor:

  • Terms of agreement between the parties
  • Nature of the work or occupation
  • Skill required for performance of the work
  • Whether the one employed is engaged in a distinct occupation/business
  • Which party supplies the tools
  • Whether payment is by the time or by the job
  • Whether the work is part of the regular business of the alleged employer
  • Right to terminate the work

II.  Statutory Employer

As part of the determination of whether an individual at a construction site is an employee or independent contractor, a body of case law developed in which an individual or entity may be found, by operation of law, to be the employer. A statutory employer is a master who is not a contractual or common law employer. Interestingly, the Pennsylvania Workers’ Compensation Act does not use the term “statutory employer.” Section 302 (a) of the Act defines a contractor (and thus, a statutory employer). Section 302 (b) of the Act mandates who will be liable at workplaces that are fixed sites, including most construction sites. The statutory employer is liable to pay compensation benefits for an employee of a subcontractor unless the subcontractor has workers’ compensation coverage. Typically, the statutory employer issue surfaces in cases where the subcontractor does not have workers’ compensation coverage, and a worker of that subcontractor has been injured. The injured worker would then seek benefits from the general contractor or the next contractor “up the chain” with workers’ compensation coverage based on the theory that that contractor is the worker’s “statutory employer.”

Litigation in this area is primarily based on identifying who is the statutory employer. In the seminal case of McDonald v. Levinson Steel, Co., the Pennsylvania Supreme Court enunciated the five (5) elements that must be present to confirm whether an individual/business is a statutory employer, including:

  1. Contract with owner of land or one in position of an owner,
  2. Premises occupied or under the control of the contractor seeking statutory employer status,
  3. Subcontract made by the contractor,
  4. Part of the contractor’s regular business must be entrusted to the subcontractor under the contract,
  5. Employee of the subcontractor is injured on the premises.

      There have been numerous cases that have litigated the variety of issues related to whether an individual/business is the statutory employer. Because of the growing problem on the myriad issues involved, the Pennsylvania General Assembly saw fit to enact the Construction Workplace Misclassification Act.

  1. Construction Workplace Misclassification Act

Effective February 10, 2011, an individual who performs construction services for pay is an independent contractor, only if all three (3) of the following criteria are satisfied:

  1. The individual has a written contract to perform such services,
  2. The individual is free from control or direction over performance of such services both under the contract and, in fact,
  3. As to such services, the individual is customarily in an independently established trade, occupation, profession, or business (these terms are then defined under the Act).

The Act presupposes that the individual is an employee, unless the criteria for an independent contractor are met. Crucial is that a contract needs to be in place with such individual. For businesses, this means that what the business thought was a subcontractor can become an employee by operation of law, and the business would then possibly owe workers’ compensation benefits to an injured subcontractor or worker for the subcontractor. The Act, to some degree, is designed to abrogate the prior statutory employer scheme. The Act mandates that a contract be in place for the worker’s independent contractor status to be asserted.

Given that the Act is relatively new, there is no body of case law interpreting it. Cases that involve the Act will wind their way through the court system, and we expect judicial interpretation of the Act in the near future.

The Act creates a more specific roadmap to be followed by a contractor/business to enable the contractor/business to be insulated from liability for workers’ compensation claims. Most contractors are unaware that to avoid potential liability for a workers’ compensation claim, a handshake deal with a subcontractor no longer suffices.

What It Means to You

The Construction Workplace Misclassification Act creates a new landscape designed to avoid the litigation prevalent in the “statutory employer” context. The message is that contractors and their subcontractors must reduce to writing the agreement related to the services being provided as well as the remuneration for those services. The onus lies with the general contractor to ensure that a written contract is obtained and is in force, thereby allowing the general contractor to assert the independent contractor status of its subcontractor or the subcontractor’s workers, and avoid workers’ compensation liability.

Situations to Consider:

  • A contract in place, but the parties have a different emergency job that takes precedence. No signed contract exists relating to the new site. A worker is injured at the new site.
  • A contract exists between a contractor and a subcontractor. The subcontractor does not have workers’ compensation insurance. Where does an injured worker go to seek redress? (The Uninsured Employer Guaranty Fund may need to be involved.)
  • Is there an amount of direction and control exercised by a general contractor sufficient to show that the general contractor is the employer, even where there is a contract with the subcontractor stating that the subcontractor in an independent contractor and not an employee?

These are just a few of the vexing issues that will likely be litigated in the ensuing years as the courts continue to wrestle with issues related to the employer/employee relationship.