The Impact of Worker Misclassification in the Construction Industry

Trent Cotney, Partner, Adams and Reese LLP

For years, employers in a myriad of industries have grappled with the requirements related to worker classification. Misclassification occurs when employers designate workers as independent contractors when they actually should be considered employees. As presidential administrations have changed, so have the related laws and, along the way, some states have adopted stricter guidelines.

Recent studies show that in addition to drivers in gig industries such as Uber and Lyft, construction laborers are among the most severely impacted workers in the nation. In addition to affecting those workers, misclassification has far-reaching implications.

Worker Classification Guidelines

As you likely know, workers hired to do a job on a regular basis and at a set location are often categorized as employees. They receive benefits that may include medical insurance and paid leave. Their employers provide unemployment and workers’ compensation insurance and their Social Security contributions are taken directly from their paychecks. In contrast, independent contractors are not tied to one employer. They work on a number of different projects, usually for a set fee or hourly rate. They are generally not eligible for benefits.

It is important to realize, however, that classification requirements have changed over the years, at times becoming more restrictive or less so. The new rule introduced by the U.S. Department of Labor (DOL) in January 2024 requires a six-factor analysis to determine the proper classification.

• Whether the worker has the opportunity for either profit or loss. For example, does the worker choose the tasks to perform and set the rate of pay? Does the worker use marketing to seek more work?
• What investments the employer and worker have made: Who owns the equipment being used?
• Whether the working relationship is permanent: Is the work occasional or erratic? Or is it regular and ongoing?
• What the nature of the work is and who has control: Does the employer supervise the worker and set the hours?
• If the work is integral to the employer’s business: Is the work essential to the company’s success?
• If the work relies on the worker’s skill and initiative: Does the worker bring specialized skills? Or is the worker trained by the employer?

Before classifying workers, employers must carefully and comprehensively consider these factors. In roofing, this directly impacts subcontractor labor and 1099 salespeople.

Misclassification Practices

Even with these guidelines in place, many employers still misclassify their workers. Such practices may occur when employers lose track of the most recent requirements or do not fully understand them. However, some employers intentionally misclassify their workers as independent contractors as a way to save money. After all, paying for medical coverage, as well as unemployment and workers’ compensation insurance, can be expensive.

The Issue Specific to Roofing

Although many trades are affected by worker misclassification, the construction industry appears to be among the most problematic. A recent report found that more than one million – and perhaps as many as two million – construction workers either are misclassified or receive off-the-books payments. In fact, for many contractors, this misclassification may be fundamental to their business model.

Around the country, there are stories of roofing workers being hired via labor brokers. Many of these brokers operate offsite and pay workers in cash each week. These brokers often target low-paid undocumented workers who have few other options for work. Fearful of being deported, these workers will seldom report unfair labor practices and will take whatever jobs they can get.

However, this cash-only, off-the-books arrangement provides workers with few protections. If they are injured on the job, they may have no insurance. In addition, if their broker does not pay them, they have no recourse. Workers in skilled trades, such as roofing, appear to be the most widely affected.

Regional Trends

There is no doubt that worker misclassification is a national issue but it may be worse in various areas of the country. For example, according to some surveys, more than 30 percent of construction workers are misclassified in the South, with a nearly 40 percent rate in the state of Texas. In reality, I anticipate that these percentages are much higher.

With the new independent contractor rule that went into effect in March, recognize that if you use subcontractor roofing labor or independent salespeople, you may be at risk of a misclassification case. There are ways to mitigate the risk such as making sure you have sound agreements with your 1099s and that, operationally, you are focused on the independence of non-employees.

We anticipate that there will be additional regulation and legal opinions better defining misclassification in the months to come so stay tuned for additional legal updates.

FRM

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Trent Cotney is a partner and Construction Practice Group Leader at the law firm of Adams and Reese LLP and FRSA General Counsel. You can contact him at 813-227-5501 or trent.cotney@arlaw.com.