May 21, 2024

3 Ways to Avoid Construction Worker Misclassification & Stay Compliant

Are your independent contractors actually employees? A recent report shows up to 20% of the construction workforce—approximately 2.1 million workers—are misclassified or paid off the books.

Worker misclassification doesn’t just hurt the tradespeople who support your projects and business growth. It puts you at risk for severe legal and financial penalties that set you back on your business goals. Plus, it can harm fair competition across the construction sector.

This article will cover why compliance is more important than ever for all companies—including staffing firms—and how to decrease risks for your construction business.

The Regulatory Crackdown on Worker Misclassification

Scrutiny of the independent contractor label has rapidly grown in recent years. High-profile lawsuits against gig economy apps like Uber and DoorDash have led to massive settlements. In the construction industry, a recent employee misclassification case resulted in a company paying $1.6 million in back wages and liquidated damages.

Worker classification issues extend far beyond the construction sector—and that’s why unethical hiring practices are now under the regulatory spotlight. In 2020, a study by the National Employment Law Project found 10-30% of companies misclassify employees as independent contractors. Businesses across the country have cut their own compensation and payroll costs at the expense of workers and government agencies.

In response to growing malpractice, the Department of Labor (DOL) published new guidance to help businesses determine if workers are employees or independent contractors in January 2024. The updated rule, which now includes a six-factor test (more on that below), aims to broaden the definition of an employee and strengthen worker protections.

3 Ways to Avoid Construction Worker Misclassification

The risk of worker misclassification is growing. However, construction leaders can stay compliant with regulations by taking these three precautions.

1. Understand Worker Classification Laws

The best way to avoid employee misclassification is by learning about the construction labor laws in the areas where your business operates. Getting to know the legal differences between employees and independent contractors is especially crucial.

Here’s a brief overview of the six key worker classification factors under the new DOL rule:

  1. Opportunity for profit or loss depending on managerial skill: Employees have limited ability to negotiate their pay and schedule. Independent contractors have the freedom to make their own hiring, rental, and purchase decisions.
  2. Investments by the worker and the potential employer: Employees may buy tools and equipment to perform their job. However, independent contractors can make business investments to expand their services, take on more work, reduce costs, and expand their reach.
  3. The degree of permanence of the work relationship: Workers tend to be employees if they work indefinitely, continuously, and/or exclusively with your business. They're more likely to be independent contractors if they work with you during a limited time frame on a project-based, non-exclusive basis.
  4. The nature and degree of control: Independent contractors have more control over the projects they work on, their schedules, their workloads, and who they work with. However, they may still be required to follow health, safety, insurance, and legal guidelines.
  5. The extent to which the work performed is an integral part of the potential employer's business: If your business cannot function without the service provided by a worker, or their work is integral to your processes, that worker is likely an employee.
  6. Skill and initiative: Independent contractors are more likely to hold specialized skills and use them to expand their own business or workloads. Employees are more likely to depend on training from employers.

Be sure to thoroughly review the full legislation for more context and considerations.

Local and state governments may have additional definitions of employment. Texas, for example, uses a 20-point guide that aligns with the DOL rule.

2. Conduct Routine Compliance Audits

As your workforce changes—whether due to expansion or turnover—company policies and employment contract terms may evolve. For example, some workers may gain additional job duties as you strategize to close the construction skills gaps on your team.

Routine compliance audits can help your company avoid worker misclassification risks as these changes occur. At least annually, review the nature of your job positions and the actual duties workers are performing. Then, assess how they stack up to current local, state, and federal guidelines.

3. Work with Third-Party Experts

Legal jargon can be confusing. Without expertise in the complex world of worker classifications, it can be easy to slip into gray areas and risk non-compliance. Consider hiring third-party experts, such as legal professionals and human resources consultants, to conduct extra-thorough reviews and provide an outside perspective.

Partnering with a construction staffing firm can further reduce risk for your organization—but be sure to check how they classify their employees before signing on. Reputable temporary staffing firms typically hire W-2 employees, rather than 1099 contractors, since construction workers are often assigned to set schedules and have limited flexibility and control.

At Skinner, our team of experts—who have over 80 years of experience in the construction staffing field—stays up to date with complex, ever-changing regulations to help you avoid penalties. We become the employer of record (EOR) for your team members. Plus, we can manage their payroll, including reporting requirements, to save you time.

Stay compliant with worker classification laws. Contact Skinner to learn how we can support your construction staffing needs.


Related Articles:

How 4 Texas Construction Labor Laws Affect Your Temporary Workforce Plan

Are Construction Workers Happy? How to Boost Employee Satisfaction & Improve Your Bottom Line

Overcoming the Construction Skills Gap: Key Strategies to Combat Present & Growing Labor Shortages