Independent Contractors: What You Need to Know to Protect Your Construction Business Right Now

Using independent contractors on your construction projects can seem like a win-win. They bring specialized skills and flexibility, often working on specific projects with specific schedules. This can benefit your business by allowing you to scale your workforce up or down quickly without the overhead costs associated with full-time employees. You might also save on benefits and payroll taxes.

Want easy-to-use software to manage time, HR, & certified payroll? GET A FREE DEMO OF eBACON TODAY.

However, there’s a significant risk involved. Misclassifying workers as Independent Contractors can lead to serious legal and financial trouble. The Department of Labor (DOL) takes worker classification seriously, and misclassification can result in hefty fines, back pay owed to workers, and even criminal charges.

The DOL recently issued a Final Rule clarifying how to classify workers. This blog post dives into the pitfalls of misclassification and how to follow the Final Rule to ensure you’re working with true independent contractors in the construction industry.

Titles or Agreements Do Not Determine an Independent Contractor’s Status

The key takeaway? Titles, choices, agreements, or pay structures don’t determine Independent Contractor status. Just calling someone an independent contractor doesn’t make it so. The DOL uses a multi-factor test to assess the “economic reality” of the work relationship. Here’s an example: You hire a carpenter to frame a new house addition. You provide all the materials and tools, set the work schedule, and closely supervise their work. In this scenario, the carpenter is likely an employee, regardless of any agreement calling them an independent contractor.

The Responsibility Lies with You Not the Independent Contractors

The burden of correct classification falls on the business owner. If a worker is misclassified, you’re liable for back taxes, benefits (including unemployment insurance and workers’ compensation), and penalties. Things get even trickier because classifications can vary depending on the agency involved (DOL, IRS, NLRB, etc.). An individual might be considered an employee for some purposes and an IC for others. This is why it’s crucial to understand the specific factors used by each agency.

The Economic Reality Test for Construction

For construction businesses, the FLSA’s economic reality test is the primary tool. Here, workers are considered employees unless they have the ability to find work elsewhere and are not economically dependent on you. In construction, this might look like a carpenter who has their own LLC, uses their own truck and tools, and takes on framing jobs for multiple contractors throughout the year. They are not beholden to your project timeline or direction and have the ability to profit or lose money based on their own business decisions.

The Final Rule: A Deeper Look

The Final Rule goes beyond the economic reality test, considering the “totality of the circumstances” through these six factors:

Opportunity for Profit or Loss

Can the worker influence their income by negotiating pay, taking on other jobs, or managing expenses? For example, a plumber who sets their hourly rate and can accept or decline jobs based on their workload has more opportunity for profit or loss than someone working for a set hourly wage dictated by you.

Investment by Worker and Employer

Does the worker invest in equipment or materials, indicating an independent business? If a roofer has their own truck, trailer, and specialized equipment, they’ve likely made a significant investment compared to others.

Permanence of the Relationship 

Is it a short-term project or a long-term, ongoing arrangement? A one-time project to frame a house addition leans towards an Independent Contractor scenario, whereas a worker continuously brought in for various framing jobs over a long period suggests an employee relationship.

Degree of Control

Do you set schedules, supervise work closely, or restrict who they can work for? Micromanaging a worker’s day-to-day activities and dictating how they perform their tasks is a strong indicator of an employee relationship.

Integration into Your Business

Is the work essential to your core operations? Framing is a core function of building a house, so a carpenter brought in specifically for that task is likely integrated into your business. Supplying a subcontractor with a crew for electrical work might be less integrated, especially if they work on various projects for different companies.

Skill and Initiative

Does the worker possess independent business skills, not just technical skills? Someone who can market their services, manage finances, and secure jobs independently demonstrates more entrepreneurial initiative than someone simply skilled in carpentry.

While intended to clarify things, some argue the Final Rule increases ambiguity. The DOL offers no specific weighting for each factor, potentially leading to more litigation. However, the Final Rule does provide resources and guidance to help businesses make informed decisions about worker classification.

Protecting Yourself with Independent Contractors: What You Can Do

Here’s how to protect yourself under the Final Rule:

• Review your Independent Contractors policy: Ensure it aligns with the updated criteria outlined in the Final Rule. Consider consulting with a legal professional specializing in employment law to ensure your policy is compliant.
• Consider an employee-only workforce: This eliminates classification risks. However, this might not be feasible for all construction projects, especially those requiring specialized skills.
• Workers questioning their status: They can file IRS Form SS-8 to request a determination. The IRS will analyze the workers relationship based on specific factors and issue a classification decision.

Proactive Measures to Avoid Misclassification

Beyond the above tips, here are some proactive measures to avoid misclassification:

• Clearly define the scope of work: A detailed written contract outlining the project, timeline, deliverables, and payment terms can help clarify the working relationship.
• Maintain separate workspaces: If possible, encourage Independent Contractors to work from their own offices or use their own equipment.
• Avoid providing benefits: Don’t offer Independent Contractors health insurance, paid time off, or other benefits typically provided to employees.
• Pay per project, not per hour: Structure payments based on completed milestones or deliverables, not hourly wages.
• Maintain independent business records: Encourage Independent Contractors to maintain their business licenses, tax registrations, and liability insurance.

The Importance of Worker Classification

Proper worker classification is crucial for both businesses and workers. Businesses avoid legal and financial trouble, while workers receive the benefits and protections they deserve. Misclassification can also hurt employee morale and lead to distrust between workers and employers.

By following these tips and staying informed about the Final Rule, you can ensure you’re working with independent contractors legally and compliantly. This will protect your business and ensure a fair and safe working environment for everyone involved in your construction projects.

The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.