Recent legislation in Illinois and New Jersey places new emphasis on proper classification of construction employees in those states. The impact of these new laws on remodelers could be as major as a complete restructuring for some companies, and as minor as a clerical inconvenience for others.
The details vary, but the basic consequence of Illinois' Employee Classification Act (ECA) and New Jersey's Construction Industry Independent Contractor Act (CIICA) is the same: Currently in New Jersey, and starting in 2008 in Illinois, these states will consider all people who work for construction contractors employees, until proven otherwise.
BURDEN SHIFT It's important to note that the rules for who, ultimately, can legitimately be classified as an independent contractor are unchanged. Illinois and New Jersey still will apply the “ABC test,” with the various exceptions for partnerships and sole proprietorships that have always applied. (Names and specifics of classification laws may vary from state to state.)
But, unlike in the past, the government will not have to prove its case that a employee has been misclassified. Instead, says D.S. Berenson, managing partner of the law firm Johanson Berenson LLP, “the burden will be on the contractor to prove that [independent contractors] fall under the exceptions,” or face potentially ruinous sanctions.
The penalties are substantial. In Illinois, the first violation costs $1,500, with each additional violation carrying a $2,500 fine. Maximum fines are more harsh in New Jersey. It gets uglier: Each day for each misclassified worker counts as a separate and distinct violation. Penalties are stiffer for “willing” violations — knowingly trying to get away with breaking the law. In New Jersey, repeat willing violations can result in criminal charges. Violators are also vulnerable to civil judgments, and may lose their eligibility for certain government contracts.
Remodelers in these states who use legitimate subcontractors for electrical, plumbing, and other trade work shouldn't have to worry about being required to hire these people as full-time employees. Should their company be audited or investigated, however, they will have to provide proof that these subs pass the ABC test or fall under one of the exceptions. So savvy remodelers should consider checking on and collecting that information before subbing out work to a company.
These new laws are of most concern where the line between “independent contractor” and “employee” is already blurry. For example, it's a relatively common practice for two self-employed individuals to work together on a project, receiving separate checks from the client. One of those people had to find the work, however, and that person is usually “in charge” on the site. For another example, “captive” subcontractors — individuals who are classified as independent contractors but who work exclusively for one company — are often retained by replacement contractors for window and siding replacement work.
TAKING QUICK ACTION Again, the rules determining the legitimacy of classifying people as independent contractors in either of the above cases have not changed with the new legislation. Both of the above situations are almost certainly against the spirit — and quite possibly the letter — of the old laws in Illinois and New Jersey and the current laws in other states.
What this legislation does is shift the burden of proof to the contractor. And Berenson says that it will be more difficult for contractors to actively argue their case than it will be to defend against the government's claims that an employee has been misclassified.
For this reason, Berenson says, he has recommended that his exterior contractor clients in those two states seriously consider treating their installers on a W-2 basis. As of mid-December 2007, when REMODELING went to press, several had begun “altering their installer relationships in preparation for operating under these new laws,” according to Berenson.
Legislators in Illinois and New Jersey claimed several reasons for passing the laws. “The practice of inappropriately classifying workers as independent contractors puts law-abiding contractors at a competitive disadvantage” because they are frequently outbid, according to Anjali Julka, spokesperson for the Illinois Department of Labor. “Also, when workers are misclassified, they are prone to losing protections under numerous labor laws, including minimum wage, overtime, workers' compensation, and unemployment insurance.” The actual text of New Jersey's CIICA uses similar language.
LIKELY TO SPREAD There is a third reason for the law that both states cite, and it is the one that has Berenson, at least, convinced that other states will soon be following Illinois' and New Jersey's lead.
According to Julka, the economics department at the University of Missouri–Kansas City estimated that the state of Illinois lost $8.9 million between 2001 and 2005 as a result of misclassification in the construction sector. On July 24, 2007, David Socolow, commissioner of the New Jersey Department of Labor and Workforce Development, testified to the U.S. House of Representatives that investigations and audits of construction companies uncovered $2.1 million in under-reported contributions in 2006 alone.
Berenson doesn't deny the legitimacy of the other two arguments in favor of laws like ECA and CIICA, but says that “there's no doubt this is to raise revenue.”
As for other states soon following Illinois' and New Jersey's lead, the federal government has shown interest in this issue, with a bill introduced in the Senate in September and referred to the Committee on Finance.
Berenson says that it is not uncommon for individual states to beat the federal government to the punch in legislative matters, citing two examples that should be familiar to contractors; rescission law, and anti-telemarketing statutes establishing do-not-call lists.