Construction Industry Fair Play Act creates presumption of employment

As if the Lead Liability Issue hasn't been enough of a challenge for contractors to deal with, now the NY State has a new law changing the rules on Workers Compensation Coverage.  Effective Oct. 26, 2010, there's a major shift in the way New York state officially views workers in the construction trades, due to enactment of “The New York State Construction Industry Fair Play Act.” The law makes it extremely hard to qualify construction workers as independent contractors.


Because the law defines “construction” so broadly (see below), activities other than “new” construction are affected. Also, the new law makes it clear that someone cannot qualify as an independent contractor merely by maintaining a workers' compensation policy, as some may have assumed in the past.

Presumption-of-employment established. This new law (S.5847-F) creates a strong legal presumption that construction workers are employees. This represents quite a paradigm shift in an industry where a large portion of workers traditionally have been treated as independent contractors.

The “presumption” of employment can be overcome, so these workers can be classified as independent contractors—but only if they meet certain very specific criteria. To be treated as independent contractors, they must qualify as a separate business entity (as defined), plus meet certain tests showing true independence from the contractor that hires them.

Willful misclassification of construction workers carries stiff new penalties—and a greater chance of being detected and penalized, due to heightened information sharing among state agencies.

Summary of legal tests. The New York State Department of Labor (DOL) has boiled down the law's somewhat complicated tests into a simpler, more understandable three-part formula. The DOL's explanation for construction workers is a good place to start, in understanding the ramifications of the new law:

“The law says that you are an employee unless:

• you are free from direction and control in performing your job; AND

• you perform work that is not part of the usual work done by the business that hired you; AND

• you have an independently established business.

Your employer cannot consider you to be an independent contractor unless all three of these facts apply to your work.

IT IS AGAINST THE LAW FOR AN EMPLOYER TO MISCLASSIFY EMPLOYEES AS INDEPENDENT CONTRACTORS OR PAY EMPLOYEES OFF THE BOOKS.”

Notice requirement. As of the law's effective date (Oct. 26, 2010), contractors are required to post information on its provisions at job sites. The DOL, as required by law, has developed a poster that will fulfill this requirement, as well as a fact sheet. The DOL poster and related information can be viewed here: http://www.labor.ny.gov/sites/legal/laws/construction-industry-fair-play-act.page.

How the law works. First, the law adds some new definitions:

“Construction” is defined very broadly to embrace not just new construction but also repairs, demolition, excavation, etc.

“Contractor ” means any legal entity engaged in construction in New York, including both general contractors and subcontractors. (The law is designed so that independent contractors who qualify as separate business entities automatically are considered “contractors” in their own right. Thus, in turn, these individuals become subject to the law's requirements with respect to any workers they may hire.)

“Employee” (as defined in Workers' Compensation Law) is amended to include any individual performing services in construction for a contractor who does not overcome the presumption of employment.

Here's the “presumption” part: “Any person performing services for a contractor shall be classified as an employee unless the person is a separate business entity OR all of the following criteria are met, in which case the person shall be an independent contractor” [emphasis added]. In other words, the “person” here can be either a natural person or a business entity; and in each case the law applies certain tests before it will consider them an independent contractor.

Test for independent contractors. To be considered an independent contractor, an individual performing services for a contractor, must:

• be free from control and direction in performing the job, both under contract terms and in fact;

• perform services outside the usual course of business of the contractor for which the service is performed; AND

• have an independently established business.

Test of independently established business. To be considered a “separate business entity” from the contractor for which services are performed, the business must meet ALL of the following (for exact language, consult the text of the law):

• be free from direction or control (except as to the desired result);

• not be subject to dissolution upon severance of its relationship with the contractor;

• have a substantial capital investment in the business, beyond ordinary tools, equipment and a personal vehicle;

• own the capital goods, gain the profits and bear the losses;

• make services available to the general public or business community on a continuing basis;

• file federal taxes as an independent business or profession;

• perform services for the contractor under the business entity's name;

• furnish the tools needed to perform the job;

• obtain and pay for any licenses or permits in the business entity's name;

• if necessary, hire its own employees without contractor approval, pay them without reimbursement from the contractor and report its employees' income to the IRS;

• not be represented to others by the contractor as an employee; AND

• have the right to perform similar services for others on whatever basis, and whenever it chooses.

Enforcement. The bill imposes stiff penalties for failing to classify construction workers properly, which extend to certain individuals who are corporate officers or shareholders. Mandatory information sharing among the Workers' Compensation Board, the Labor Department and the Department of Taxation and Finance make it more likely that a contractor coming to the attention of one state agency will be scrutinized by the others. Workers who question their status or become whistleblowers are protected from reprisals.

For more information about how this law may impact your business, give us a call at 516-799-6900.