Worker Misclassification

There is a nationwide crisis affecting the Construction Industry. This crisis is the misclassification of "Employees" as "Independent Contractors". Many Contractors use this type of misclassification to secure construction projects by not including into their bids the payroll taxes, unemployment taxes, other state taxes and workers compensation premiums. This is an unfair advantage to the contractors that play by the rules and pay their required taxes, thus enabling cheating contractors a unfair advantage in securing contracts.

Workers classified as Independent Contractors also lose out by not having the protections that Employees have. Workers that are misclassified as an independent contractor do not have the protection of workers compensation, unemployment benefits or Social Security or Medicare benefits on their income. Workers that are misclassified as independent contractors are responsible for all taxes on the income earned from being classified as independent contractors, but that depends on being sent a Form 1099 Miscellaneous by the Employer or Contractor. Many of these 1099's never get reported or submitted on tax returns. These misclassified workers also do not have any worker protections under the National Labor Relations Act or the Department of Labor.

Employers or workers should use the IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) in determining independent contractor/employee status . Workers that submit this form to the IRS will require the employer to be notified. The Employer will have to fill out this form and submit this form for determination of classification. If the worker is determined by the IRS not be properly classified as an employee, then the contractor may be required to pay all the Employer taxes and penalties and the employees share of taxes also.

There are many studies that show the revenue loss and impact to the federal government and to the states. Losses are in the hundreds of millions of dollars in taxes and workers compensation premiums. Congress has held hearings this year in relation to this issue. Many states have enacted or considering the implementation of laws that includes severe penalties and including criminal charges for intentionally misclassifying employees as independent contractors.

Worker Misclassification News

DA to crack down on 'independent' contracting in construction


DA to crack down on 'independent' contracting in construction


4:29 PM EST, February 15, 2011



Construction firms that label their employees "independent contractors" in order to skirt taxes and labor laws could be targeted in Northampton County under a new state law, District Attorney John Morganelli said Tuesday.

The Pennsylvania Construction Workplace Misclassification Act, which took effect last week, establishes civil and criminal penalties for companies that improperly claim their workers aren't in fact employees, to avoid paying unemployment, workers' compensation and local wage taxes.

"Today, I want to notify Northampton County construction firms that the Misclassification Act will be enforced," said Morganelli said at a news conference.

The law, which covers only the construction industry, was passed last year and signed by now former Gov. Ed Rendell. It came amid pressure from union laborers who said some companies were gaining an unfair advantage by misclassifying their workers.

The law establishes limits on who can be considered an independent contractor. Among the requirements: Independent contractors must have a written contract, supervise and control their own work, own or be a partner in their business, and have liability insurance of at least $50,000, Morganelli said.

Morganelli said he has received "two or three" complaints under the new law and has begun looking into two of them. Violators could be charged locally, referred to the Department of Labor, or notified and encouraged to change their practices, he said.

Under the law, anyone misclassifying an employee can face criminal prosecution, fines of up to $2,500 per violation and a court issued stop-work order, Morganelli said.

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