The New York State Standing Committee on Labor approved legislation (S. 5847-A) on Feb. 1, 2010, which, if enacted, would presume that any person performing services for a contractor (i.e., a person engaged in construction) is an employee.
Upon approving the legislation, Sen. George Onorator (D-Queens), a co-prime sponsor of the bill and committee chairman, said, “It is very clear that action needs to be taken to stop unscrupulous employers from misclassifying workers as independent contractors – a practice that costs the state a great deal of money, and that hurts both workers and honest employers.”
According to the legislative findings, nearly one in four construction workers are either misclassified as independent contractors or are employed by construction contractors completely off the books. Moreover, it is estimated that the legislation, if enacted, could save New York State and New York City more than $300 million a year in collections of unemployment, income, and payroll taxes, along with workers’ compensation assessments.
Under this pending legislation, all construction industry workers are presumed to be employees unless they meet each of the following:
- The individual is free from control and direction in performing the job, both under his or her contract and in fact.
- The service must be performed outside the contractor’s usual course of business.
- The individual must be customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.
The pending legislation also requires contractors to post in a prominent and accessible place on the construction site a statement, provided by the Commissioner of Labor, that describes:
- The responsibility of independent contractors to pay taxes required by state and federal law.
- The rights of employees to workers’ compensation, unemployment benefits, minimum wage, overtime, and other federal and state workplace protections.
- The protections against retaliation and penalties, if the contractor fails to properly classify a worker as an employee.
The statement must also contain contact information for individuals to file complaints or inquire about employment classifications.
Corporate employees who knowingly allow violations to occur may be subject to penalties, in addition to the corporate employer. Criminal penalties, including imprisonment of up to 60 days, may be imposed for willful violations.
New York is not unique in focusing legislation on these issues. Other states have addressed worker classification issues in a similar manner. As a result, the law regarding worker classification is becoming a patchwork of jurisdiction specific rules that may conflict with federal law.
Federal law on worker classification does not preempt state law, although many states use criteria similar to the federal law criteria for determining worker classification. Federal law generally follows the common law factors (discussed in IRS Revenue Ruling 87-41) for determining whether a worker is an employee or independent contractor.
Even if a state uses the common law factors, it may not permit the relief provided by Section 530 of the Revenue Act of 1978. Section 530 provides a safe harbor that allows a business to treat a worker as an independent contractor, even if the worker is an employee under the common law factors, if certain requirements are met. Thus, a business legally entitled to treat a class of workers as independent contractors for federal purposes nevertheless may be required to treat the workers as employees for state law purposes.
The nation’s recent economic turmoil is exacerbating the worker classification issue. Taxing authorities are looking for more revenue and to close the “tax gap,” for which misclassifying workers is perceived as a contributing factor. Independent contractors with no work are filing unemployment compensation claims listing as former employers businesses for which they performed services as independent contractors. Some businesses are battling the IRS and state employment commissions simultaneously over worker classification issues.
In this environment, businesses should look closely at how they classify workers. Even if they are comfortable with their classification for federal purposes, they need to examine how their state will classify the workers whose services they utilize.