Fair Play Construction Act

In recent years, government agencies and legislative initiatives at both federal and state levels have indicated that independent contractor arrangements will receive enhanced scrutiny.  Government interest in misclassification of these employment arrangements stems from the significance of revenue derived from employment taxes, FICA/FUTA, unemployment insurance contributions and workers’ compensation premiums. Misclassification has also highlighted various immigration issues.

Specific to the construction industry, New York has enacted the Construction Industry Fair Play Act, effective Oct. 26, 2010, adding a new article (Art. 25-B) to the state Labor Law to further specify the circumstances when a worker can be classified as an independent contractor. Under Article 25-B, it is presumed that a contractor engaged in construction shall be classified as an employee unless the company employing the worker can show that the worker is an independent contractor or a separate business entity. This presumption applies to determinations under the Labor Law (including labor standards, prevailing wage law and unemployment insurance.)  

For a person to be an independent contractor, the alleged employer must demonstrate ALL three of the following:

  1. The person is free from control and direction in performing the job, both under contract and in fact;
  2. The person is performing services outside of the usual course of business for the company; and 
  3. The person is customarily engaged in an independently established trade, occupation or business that is similar to the service s/he performs.

To simplify this test, also known as the “ABC Test”, an employer is more likely to satisfy the first part if they merely provide the worker with a job to be done, but otherwise remains hands-off as to specifically when and how that job gets accomplished. Behavior such as requiring the worker to work on the job at hours fixed by the employer would cut against an argument that the employee is an independent contractor. Regarding the second part, the worker would be doing a job that is not what the employer usually does as part of its trade, for example, a carpentry company hiring a plumber to help with plumbing for a house it is building. And for the third part, the work that the contractor was doing for the employer would be similar to what they usually do for a living. Using the same example from before, if the worker performing the plumbing work for the carpentry company was primarily a plumber by trade, it would help the argument that the plumber is an independent contractor. 

The Third Department recently illustrated this analysis in In re Barrier Window Sys. Inc., regarding a dispute as to whether window installers who worked for a window company were independent contractors or not. The court held that the employer maintained significant control over the installers in how the job was done and what was charged to customers, that window installation was a normal part of business for a company that sells windows, and there was little evidence to show that the installers had independently established businesses, so the employer failed under all three parts of the ABC test.

Alternatively, the law contains a twelve-part test to determine when a sole proprietor, partnership, corporation or other entity will be considered a “separate business entity” from the contractor, and thus not classified as an employee.  If an entity meets ALL of the twelve statutory criteria, it will not be considered an employee of the contractor. Instead, it will be a separate business entity that is itself subject to Article 26-B regarding its own employees.

To be considered a separate business entity from the business to which services are provided, a sole proprietor, partnership, corporation or other entity must: 1) be performing the service free from the 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; 2) not be subject to cancellation when its work with the contractor ends; 3) have a substantial investment of capital in the entity beyond ordinary tools and equipment and a personal vehicle; 4) own the capital goods and gain the profits and bear the losses of the entity; 5) make its services available to the general public or business community on a regular basis; 6) include the services provided on a federal income tax schedule as an independent business; 7) perform the services under the entity’s name; 8) obtain and pay for any required license or permit in the entity’s name; 9) furnish the tools and equipment necessary to provide the service; 10) hire its own employees without contractor approval, pay the employees without reimbursement from the contractor and report the employees’ income to the IRS; 11) have the right to perform similar services for others on whatever basis and whenever it chooses; and 12) the contractor does not represent the entity or the employees of the entity as its own employees to its customers. 

The new text enacted under the Fair Play Act represents a significant departure from the current legal test for determining whether a worker is an independent contract or employee in other industries. In non-construction industries, the determination of whether one is an independent contractor in New York is based on the common law test, involving an analysis of factors addressing whether the hiring party retains or exercises the right to control the matter or means in which the worker/employee performs his or her services. In applying this test, no single factor or group of factors conclusively defines an employer/employee or independent contractor relationship. 

Civil and criminal penalties may ensue for a violation of the Fair Play Act if any contractor willfully fails to classify an individual as an employee. Civil penalties for a first violation may be a $2,500 fine per misclassification, with fines increasing up to $5,000 per misclassification for subsequent violations. Large criminal penalties ($25,000 fine, up to 30 days in jail, and disbarment from Public Work for one year for first offenses, $50,000, up to 60 days in jail, and disbarment from Public Work for up to five years for subsequent violations) may be imposed upon corporate officers and certain shareholders. “Willful violation” in these cases is interpreted to mean that the employer knew or should have known that their conduct violated the law, so ignorance likely would not be a sufficient excuse. Further, if misclassification also creates a situation where a worker is injured on the job, and it is deemed the employer should have had a Workers’ Compensation policy in place, the employer is then potentially liable to its injured employee to cover their medical expenses and lost wages associated with the accident.  

Finally, the act requires posting a notice about the Fair Play Act at the job site.  Failure to post the notice can result in penalties of up to $1500 for a first offense and up to $5000 for a second offense.

Commenters have speculated that the Fair Play Act may have the effect of eliminating most independent contractors in the construction industry by imposing a restrictive definition of “independent contractor”, as well as rigid corporate and personal civil and criminal liability and penalties associated with a willful misclassification. Since the distinction between an independent contractor and an employee is a highly factual one, it behooves any employer to use extreme care in structuring any arrangement with a contractor to increase the likelihood that the desired classification will withstand challenge.