Construction Worker Classification on the Jobsite
You may not think the ‘W2 versus 1099’ decision is overly important. But when an accident occurs, the construction worker classification becomes the focus of OSHA and, ultimately, the employer and the injured employee.
By Maureen Upchurch
When ground breaks on a construction project, the first order of business is completion of the “standard” paperwork. During this process, a worker is classified as either an employee with a W-2, or an independent contractor with a 1099. Often, a worker who completes a 1099 form also is asked to sign an agreement stating he is an independent contractor.
This 1099 paperwork is agreed to by both parties and carries through to payment of services. The classification of that employee seems set in stone. However, the Occupational Safety and Health Administration (OSHA) may see it differently. OSHA is focused on the boss-worker relationship “in action.”
If a jobsite injury occurs or OSHA performs an onsite inspection and citations are issued, these aforementioned forms can be deemed irrelevant. The result? Additional fines for the contractor, subcontractor or employee. It is important to get the construction worker classification right from the beginning.
Any label given to an employee-employer relationship is irrelevant in the eyes of OSHA.
How can an employee or employer be certain the correct classification has been selected? Look to the laws currently in place. According to the Fair Labor Standards Act, Family Medical Leave Act and Migrant and Seasonal Agricultural Worker Protection Act, you are an employee if your work indicates that you are economically dependent on an employer. You are an independent contractor if you are in business for yourself.
Any label that an employee or employer gives to the relationship, even in a signed agreement, is irrelevant in the eyes of OSHA. What matters is whether a worker is economically dependent on the employer (making him an employee) or in business for himself (making him an independent contractor), says the U.S. Department of Labor’s Wage and Hour Division.
OSHA does not always know whether a worker is classified correctly. However, members of OSHA personnel do conduct “drive-by” inspections. If an infraction is observed, immediate jurisdiction over the jobsite is obtained. The OSHA employee can come on the grounds and inspect for the infraction initially observed, as well as any other miscue he sees during this overview.
For instance, if an inspector sees a construction worker without a proper fall protection system during his drive-by inspection, that inspector can come on site and talk with the identified individual, says OSHA. In addition, the inspector can interview anyone else he determines has committed an infraction. The inspector also will ask a series of questions to determine how an employee is classified. The answers given during this interview allow OSHA to determine the precise nature of the relationship between the boss and worker.
Examples of questions an OSHA inspector might ask include “Who is your employer,” “Who told you what time to come in today,” “How many other jobs are you working,” or “Who provided you with the heavy equipment you are using today?” If a worker provides answers that make it clear he obtained direction from an employer not on site, it becomes obvious he is an actual employee, rather than independent contractor. A contractor would make his own hours and have his own equipment. He would have more than one job and would state that he is self-employed.
If an OSHA inspector is not satisfied that the paperwork provided reflects the actual nature of the working relationship, the employer receives a citation and is fined for the original infraction. This often comes as a surprise to the employer/company owner, who may truly believe that he prepared the paperwork correctly at the onset.
Top 10 OSHA Citations of 2016
The Occupational Safety and Health Administration (OSHA) released its preliminary list of the 10 most frequently cited safety and health violations for the fiscal year in October. The list was compiled from nearly 32,000 inspections of workplaces by OSHA staff. OSHA says that, year after year, its inspectors see thousands of the same on-the-job hazards – any one of which could result in a fatality or severe injury. If all employers simply corrected the top 10 hazards, the number of deaths, amputations and hospitalizations would drastically decline, they say. OSHA emphasizes that employers must take these issues seriously and urges employers to go beyond the minimal requirements to create a culture of safety at work, which has been shown to reduce costs, raise productivity and improve morale.
- Fall protection
- Hazard communication
- Respiratory protection
- Powered industrial trucks
- Machine guarding
- Electrical wiring
- Electrical, general requirements
It’s in the details
This raises the question of why an employer and employee wouldn’t ensure that all forms are completed correctly at the start. Why would either party leave it open to interpretation? Often, it’s simply a mistake. But sometimes, it comes down to money.
If both parties agree that the worker will be classified as an independent contractor and earn $13 per hour, then that worker receives a check for $13 per hour worked. If both parties agree that the worker is an employee, that employee receives a paycheck for $13 per hour, minus Social Security taxes, unemployment insurance, workers’ compensation insurance and more. In this case, an employee may misclassify because he is focused on the extra cash in his pocket. The employer may misclassify an employee because he finds financial benefit in not paying the IRS, Medicare, unemployment, etc.
While the choice may seem to make sense in the moment, it places those who correctly classify at a disadvantage. The “misclassifiers” are lowering their costs to the owner of the project unlawfully. It also can short the U.S. government billions of dollars each year.
Some construction workers may be unconcerned about money owed to the U.S. government. These workers will find that point of view to be a big mistake if they get injured on the jobsite. The independent contractor will have no employer-covered health insurance to treat an injury, nor will he have workers’ compensation while out on leave, healing from that injury.
If the worker is let go during the course of a job, he will not receive unemployment. So the extra two to three dollars per hour that would have gone to an insurance company or Uncle Sam don’t seem as big a deal, in hindsight. If a worker allows himself to be misclassified, he is vulnerable to the “what if,” which can cost him dearly.
OSHA says the long-term ramifications of misclassification are not being communicated to the independent contractors. Not only are individuals getting in over their heads, but also small contractors are getting into difficult situations.
As these contractors vie for additional and, perhaps, bigger business opportunities, OSHA citations can pile up on record for anyone to see. Owners or general contractors are certain to take this into account as they select subcontractors to work on new projects. In addition, fines and penalties could continue to increase. A company could go under if the employer is not careful about the way he does business.
Sometimes, the owners try to pass the citation fee on to the workers by taking it out of their paycheck, says OSHA. This causes the employee’s hourly pay to dip below minimum wage, and even bigger problems occur.
If you are preparing to begin a job on a construction jobsite or hire constructionworkers for that job, it is best to do your homework. Be prepared to complete the necessary forms, knowing the possible ramifications of incorrect worker classifications. For more information, visit www.dol.gov/whd/workers/misclassification.
To Be or Not to Be an Independent Contractor?
Following are some advantages and disadvantages of both hiring and being an independent contractor from John Gallo, a CPA based in Colorado.
Advantages of hiring independent contractors
- Could save money by not having to pay benefits, taxes and not having a full-time employee when you do not need him
- Staffing flexibility – hire for specific skills, as well as specific needs and times
- Potential reduction in exposure to lawsuits by spreading liability to others
- Potential for flat fees to help control costs of projects
- You may be able to get extended terms for payment
- Independent contractors do not generally attempt to form unions
- Generally no discrimination issues
Disadvantages of hiring independent contractors
- Less control over your workers
- Individuals actually performing the work may vary
- Right to fire depends on your written agreement
- Risk of government audits from IRS, labor boards, OSHA or others
- The independent contractor may not understand your business needs as fully as an employee
- Higher risk regarding confidentiality and privacy issues
- An injured independent contractor may not be covered by workers’ compensation, creating investigations and potential liability in that area
Advantages of being an independent contractor
- Since independent contractors are generally not tied to an employer, they are free to set their own rules of business, limited only by bargaining power
- The loss of one or two clients can have a significant effect on the livelihood of the independent contractor unless they develop a reasonably large network of clients
- You may be paid more than an employee would be for similar work, and you can set your own prices
- You have the opportunity to take increased business deductions, possibly an office in home deduction and vehicle deductions, that you would likely be unable to take as an employee
- More flexible work schedules – may be able to work at home and part-time
- You may be able to put more money in tax-deferred retirement accounts
Disadvantages of being an independent contractor
- You have no job security and might not get paid
- You must pay self-employment taxes
- You have no employer-provided benefits or unemployment insurance benefits
- You have no employer-provided workers’ compensation and few labor law protections
- You must maintain more bookkeeping records and accurate mileage records
- You must file a more complex income tax return, maybe multiple returns and sales tax returns
- You must make estimated income tax payments quarterly
- You may have to deal with the payroll reporting requirements, workers’ compensation reporting, and unemployment tax reporting
- You may have increased liability insurance costs and will need additional bank accounts
- You may have more difficulty getting loans
- You may have to deal with OSHA
- You may have to invest significant amounts of money in tools, equipment, facilities or inventory