Unfortunately, worker misclassification is becoming an increasing problem in the U.S. construction industry. To combat improper worker classification, the Department of Labor's (DOL) Wage and Hour division released a memo in July 2015 with six guidelines that employers can use to know whether a worker should be classified as an employee or an independent contractor. While designed to help inform employers, these guidelines can also help workers understand whether they are acting as an independent contractor or should be classified as an employee.
Proper worker classification ensures employees receive workplace protections such as the minimum wage, overtime compensation, unemployment insurance and workers’ compensation. Misclassification can create an uneven playing field for employers who properly classify their workers. While some contractors purposefully misclassify workers to cut costs or avoid labor laws, be warned that intentionally worker misclassification is against the law.
A yearlong investigation by the McClatchy Company took a deeper look into the extent of worker misclassification in the construction industry and found that Texas was leading the states in rate of misclassification at 37.7% — an estimate of 316,793 total misclassified workers in the state. North Carolina was a close second with a 35.2% rate of misclassification (102,310 misclassified workers), and Florida was third at a 15.5% rate (93,412 misclassified workers).
Many states are stepping up to combat worker misclassification in the construction industry.
A worker who is economically dependent on an employer is classified as an employee. A worker who is in business for him or herself and not dependent on an employer can be classified as an independent contractor. The recently release DOL guidelines can help contractors determine the proper way to classify workers.
DOL worker classification guidelines
1. Is the work an integral part of the employers business?
According to the DOL, "if the work performed by a worker is integral to the employer's business, it is more likely that the worker is economically dependent on the employer. A true independent contractor's work, on the other hand, is unlikely to be integral to the employer's business."
2. Does the worker's managerial skill affect the worker's opportunity for profit or loss?
An independent contractor has the possibility to both make a profit and experience a loss, and their managerial skills will affect these opportunities.
3. How does the worker's relative investment compare to the employer's investment?
An independent contractor would make some investment and undertake at least some risk for a loss. According to the DOL, if the worker's investment is minor compared to that of the employer's investments that suggest the worker and employer are not on similar footings and the worker may be economically dependent on the employer. "A worker's investment must be significant in nature and magnitude relative to the employer's investment in its overall business to indicate that the worker is an independent businessperson."
4. Does the work performed require special skill and initiative?
Business skills, judgment and initiative can indicate a worker is an independent contractor. Technical know-how and even specialized skills do not indicate a worker is in business for him or herself.
The DOL memo uses the following example to illustrate this guideline:
If a carpenter uses the specialized skills of his craft on a job but does not decide when or where the work is done, order materials or choose which job to bid on next, he probably is not an independent contractor. A carpenter who custom-crafts cabinets for multiple construction firms, markets his services, orders materials and chooses which orders to fill is exercising skills common to independent contractors.
5. Is the relationship between the worker and the employer permanent or indefinite?
A permanent or indefinite relationship with an employer suggest a worker is an employee. An independent contractor does not necessarily work continuously or repeatedly for an employer. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship.
"The key is whether the lack of permanence or indefiniteness is due to 'operational characteristics intrinsic to the industry' or the worker's own business initiative."
6. What is the nature and degree of the employer's control?
An independent contractor must control meaningful aspects of the work performed and his or her control over the meaningful aspects of the work must be more than theoretical, In other words, an independent contractor must actually exercise his or her control.