With the recent announcement that Lowe's will pay $6.5 million to settle a class-action lawsuit in California centered around the treatment of subcontractors working in installed sales for the retailer, now is a good time for the remodeling and construction industries to re-evaluate the issue of worker classification and treatment.

The big-box retailer was hit with what became a class-action lawsuit after two subcontractors came forward alleging that Lowe's treated them as employees but didn't provide them any benefits, such as health insurance or time off. The plaintiffs said that Lowe's controlled all aspect of their work, from the uniforms they wore to how they were paid, and they were told by the retailer to describe themselves to customers as Lowe's employees. Lowe's view was that its relationship actually was with a business that had recruited the two. 

For many remodelers, especially those working with limited overhead, relying on subcontractors is a vital part of their business. These subs provide some or all of the labor on a project and often provide specialty skills—such as drywall or framing—required to complete a job.

The Lowe's story shows how important it is that you know the rules and laws on the treatment and classification of subcontractors. Misclassification of employees can result in both state and federal penalties. Those penalties can include fines and years worth of back pay. Therefore, it's essential that you understand the difference between a full-time employee and a subcontractor. One of the easiest ways to avoid confusion is to hire subs as a company and not an individual, and to keep complete records of which workers are subcontractors and which aren't.

According to construction lawyer D.S. Berenson, the recession left cash-strapped states and the federal government wary of 1099 labor—so called because of the Form 1099 used to designate such labor—due to the need for additional sources of revenue. This means they were ready to pounce on any perceived violations, which often come from disgruntled employees.

One of the easiest ways to trip up when working with subcontractors is with wages and overtime. Berenson says that wage and overtime laws are overseen by the Department of Labor and are explained in the Fair Labor Standards Act (FLSA). Each state also has its own version of the FLSA, meaning businesses are subject to both federal and state regulations.

Lowe's is not the only company to have issues with subcontractors and payment. In June 2010, a subcontractor hired by 84 Lumber to work on a housing project at the University of California-Davis was ordered to pay $1.3 million in wages and $200,000 in fines after the company failed to pay prevailing wages and overtime. As part of that settlement, 84 Lumber paid more than $726,000 in outstanding wages and penalties.  

If it's done right, hiring a subcontractor should be a well-planned and carefully thought-out decision—one that should take into account more than just costs, but also the quality of that sub's skills and how well you think the sub will represent your company on the jobsite. For this reason, remodelers and business owners who have experience working with subs often try to build a community of subcontractors they trust and can rely on. You can build up such communities by continuously offering jobs to your most trusted subs and by also offering them perks such as training and certification courses. 

Companies such as Lowe's and 84 Lumber, with their many installers and subcontractors, can afford to pay the types of fines and penalties levied against them for worker misclassification violations, but most small- to mid-size remodeling companies cannot. That's why smaller businesses need to pay close attention to how the subcontractor game works so that they don't get burned.