In its continuing efforts to crack down on employers who misclassify employees as independent contractors, the New York State legislature has set its sights on the construction industry with the unanimous passage of the New York State Construction Industry Fair Play Act (Act), which was signed into law by New York State Governor David A. Paterson on August 31, 2010 and becomes effective October 26, 2010.
The Act's claimed intent is to eliminate the misclassification of employees as independent contractors in the New York construction industry. The Act's reach is applicable to all contractors, general contractors and subcontractors authorized to engage in the construction industry within the State of New York. The term "construction" is broadly defined by the Act to include "constructing, reconstructing, altering, maintaining, moving, rehabilitating, repairing, renovating or demolition of any building, structure, or improvement, or relating to the excavation of or other development or improvement to land."
The Act also brings about a profound change in the law by amending the New York Labor Law, the New York Unemployment Insurance Law, and the New York Workers' Compensation Law to create a rebuttable "presumption" that all construction workers are deemed employees of the contractor. This "presumption" of employment can only be rebutted by the contractor establishing that the "presumed employee" either meets the Act's three-part "independent contractor" test or meets its "separate business entity" test.
The "independent contractor" test provides that any individual performing services for a contractor will be classified as an employee of that contractor unless the contractor can demonstrate that the individual meets the following criteria, in which case the person will be considered as an "independent contractor": (1) the individual is free from control and direction in performing the job, both under his or her contract and in fact; (2) the service must be performed outside the usual course of business for which the service is performed; and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.
To be considered a "separate business entity," 12 specific facts must all be established by the contractor to demonstrate that a "presumed employee" rendered services through an entity that:
- Is free from direction or control over the means and manner of providing the service, subject only to the right of the contractor to specify the desired result;
- Is not subject to cancellation or destruction upon the end of the relationship with the contractor;
- Has a substantial investment of capital in its business beyond ordinary tools, equipment, and a personal vehicle;
- Owns its capital goods, realizes its profits, and bears its losses;
- Makes its services available to the general public or the business community on a continuing basis;
- Includes the services rendered on a federal income tax schedule as an independent business or profession;
- Performs services for the contractor under its own name;
- Obtains and pays for any required license or permit in its own name;
- Furnishes the tools and equipment necessary to provide its services;
- Where necessary, hires its own employees without contractor approval, pays them without reimbursement from the contractor, and reports their income to the IRS;
- Is not represented as an employee of the contractor to customers; and
- Has the right to perform similar services for others on its own terms.
A "presumed employee" that is demonstrated by the contractor to meet the "separate business entity" definition shall not be considered an employee of the contractor, but will itself be deemed a contractor under the Act, and shall be required to comply with all of the provisions of the Act applicable to contractors with respect to its own engagement of workers.
The Act also provides that any contractor found to have willfully misclassified an individual as an independent contractor shall be subject to a civil penalty of up to $2,500 per misclassified employee for a first violation and up to $5,000 per misclassified employee for each subsequent violation within a five-year period. In addition to civil penalties, any contractor found to have willfully violated[1] the Act shall be charged with a criminal misdemeanor offense. Upon conviction of a first offense, violators shall be subject to a fine of up to $25,000 or imprisonment for up to 30 days. Upon conviction of a subsequent offense, violators shall be subject to a fine of up to $50,000 or imprisonment for up to 60 days.
The Act further provides that if the contractor is a corporation, any officer of the corporation or any shareholder who owns or controls at least 10% of the outstanding stock of such corporation who knowingly permits the corporation to willfully violate the Act shall also be subject to civil and criminal penalties.
In the event of a criminal conviction, the Act provides for debarment from public works projects for one year for a first violation and up to five years for a subsequent violation.
The Act also prohibits contractors from retaliating against any employee for exercising any rights granted under the Act, including, but not limited to, making complaints to a contractor or initiating or participating in any proceeding commenced under the Act. Any contractor that engages in retaliatory conduct may be subjected to a private cause of action in addition to the penalties described above.
The Act also mandates that contractors post a notice at the worksite, capable of withstanding adverse weather conditions which contains a statement from the Commissioner of Labor that explains workers' rights, the penalties proscribed for misclassification, protections against retaliation, tax responsibilities for independent contractors, rights of employees to unemployment insurance benefits, workers' compensation, minimum wage, and other federal and state workplace protections.[2] The notice is required to be posted in a prominent place, in English and Spanish and/or other languages as appropriate and the notice must contain contact information for individuals to file complaints or inquire with the Commissioner about employment classification status. Contractors failing to post the required notice at the work site shall be subject to a civil penalty of up to $1,500 for a first violation, and up to $5,000 for each subsequent violation within a five-year period.
Finally, the Act requires that the New York State Workers' Compensation Board, the New York State Department of Taxation and Finance, and the New York State Commissioner of Labor share information regarding all cases of misclassification shortly after one of them identifies an instance of misclassification.
The New York State Construction Industry Fair Play Act's mandate for inter-agency enforcement, stringent standards and stiff penalties for willful construction worker misclassification should persuade every contractor engaged in the construction industry within the State of New York to review their existing employee/independent contractor classifications, develop strategies to comply with the rigorous new standards, and address potential risks associated with the misclassification of independent contractors.
We hope you find this information helpful. If you have questions pertaining to the material presented in this Client Alert or other legal issues, please contact Joseph P. Asselta, Esq. or any other attorney at Agovino & Asselta, LLP at (516) 248-9880.
Disclaimer
This Client Alert provides an overview of certain aspects of a particular new law. It has been prepared by Agovino & Asselta, LLP for informational purposes only and is not intended to serve as, and should not be considered, legal advice for any specific fact situation. Readers should not act upon the information contained in these publications without the assistance of professional counsel.
[1] New York State Labor Law § 861-e (2) defines the term "willfully violates" to mean a contractor knew or should have known that the conduct was prohibited.
[2] Within thirty days of the effective date of this article, the Commissioner shall create the notice and post the notice on the department's website for downloading by contractors at http://www.labor.ny.gov.
