Watch Out for Worker Misclassification!

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Recently the U.S. Supreme Court declined to hear a case on appeal from the Illinois Supreme Court regarding a challenge to the state’s Employee Classification Act, which classifies workers in the construction industry as employees unless they meet specific requirements under the Act for independent contractor status. And, as you all know, by not speaking, SCOTUS actually speaks volumes with what isn’t said.

In the Illinois case, owners of a construction company brought a lawsuit challenging the Act, alleging constitutional violations of due process and equal protection rights under both the federal and state constitutions. The company lost in both trial and appellate courts and submitted the case for review by SCOTUS. Of note is that while the company faced nearly $1.7 million of potential liability in penalties for misclassified workers, the Illinois Department of Labor never entered a final judgment or attempted to collect the penalty.

Of greater importance is that this case, and others before it, highlights the need to clearly identify employees versus independent contractors. Multiple other states (including Colorado, Maryland, Massachusetts, New Jersey, and New Mexico) have laws targeting misclassification in the construction industry, which is an industry with a history of misclassification issues. Significantly, you should know that simply calling someone an independent contractor does not make them one, and in states with more stringent requirements, you must be doubly careful to avoid making that mistake. This is so even if the employee has agreed in writing to accepting that status.

While laws do vary from state to state, generally workers are considered employees if they are subject to another’s right to control the manner and means of performing the work. In contrast, independent contractors are individuals who secure customers of their own to provide services. The test is that they are not subject to “close control” over the manner in which they perform their services. For example, under the Illinois law (which is mirrored in several other states), in order to qualify as independent contractors, workers must (1) be free from control and direction by the contractor); (2) perform services outside of the usual scope of service performed by the contractor; and (3) be engaged in an independently established business or be a legitimate sole proprietor or partnership under the law.

Thus, the effects of the Supreme Court’s denial in hearing the case underscore the need for all employers (regardless of the industry, but particularly within the construction arena) to be exceedingly careful in classifying individuals as independent contractors, and to ensure that they properly classify workers in compliance with state misclassification laws. These areas remain a rich source of audit and litigation, and your company may not be as lucky so as to avoid penalties and fines as was the case in Illinois. While it may be tempting to keep your overhead down in terms of workers hired, misclassifying them will, in the end run, likely cost you much more.

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Posted In: Legal