On Oct. 13, Pennsylvania Governor Ed Rendell signed the Construction Workplace Misclassification Act (“Act”). The new law takes effect on Feb. 10, 2011. In enacting the law, Pennsylvania joins the growing list of states attempting to severely crack down on so-called “misclassified” workers in the construction industry.

Under the Act, an independent contractor must (a) Have a written contract to perform his services; (b) Must be free from control or direction over the performance of his services; and (c) Must be engaged in an independently established trade, occupation, profession, or business.

This is a version of the standard “ABC” test used by many states to determine worker status under state unemployment insurance law. But the Act becomes more burdensome because Pennsylvania spells out an exacting six-part test that must be met to satisfy prong (c) of the test.

Test and Consequences

The six-part test generally requires the independent contractor to (i) own his own tools and equipment; (ii) be able to realize a profit or loss from his work; (iii) perform his services through a business he owns; (iv) have a separate business location; (v) perform the same type of services for other people or companies as well as the employing general contractor; and (vi) maintain liability insurance of at least $50,000.

Penalty provisions for violations of the Act are numerous. The first penalty provision is criminal in nature. An employer who intentionally violates the Act commits a misdemeanor of the third degree for a first offense and a misdemeanor of the second degree for a second or subsequent offense. An employer who negligently fails to properly classify an individual as an employee — for example, using a subcontractor as an employee but claiming that he or she is a subcontractor — can be fined up to $1,000.

The second penalty provision is civil in nature and allows the state to fine the employer up to $1,000 for the first violation and up to $2,500 for each additional violation. Additional penalties, including stop-work orders and mandatory future reporting to the state can be imposed.

With this new law, Pennsylvania contractors now need to ensure that their relationships with their 1099-based workers are tightly structured under a series of operational safeguards and protocols that will protect them from attack by the state, class action lawyers, and disgruntled ex-workers — or they will have to convert their workers to a W-2 employee structure.

—D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.homeimprovementlaw.com), a national law firm specializing in the representation of contractors and the home improvement industry. He may be reached at info@johansonberenson.com. This article is for informational purposes only and should not be construed as legal advice.