In general, workers in the construction industry fall into one of two categories: employees or independent contractors. Under the FSLA, workers designated as employees are entitled to certain rights such as minimum wage and overtime pay. Misclassification of workers is an ongoing issue in the industry. In some cases, this misclassification is intentional—such as when employers hoping to save money or gain a competitive advantage wrongly classify employees as independent contractors. In other cases, misclassification is the result of oversight. Whether intentional or not, incorrect classification of workers has consequences for both employees and employers alike. It is critical that contractors classify workers correctly to both protect employee rights and avoid significant penalties themselves.

What happens when workers are misclassified?

Beyond creating unfair competition in the industry, the misclassification of workers can negatively impact employees and also have serious consequences for employers.

Impact on Employees

Employees misclassified as independent contractors may be denied minimum wage, overtime pay, and other FSLA-protected rights. Those involved in public works projects might also be denied prevailing wage—a violation of prevailing wage laws. Misclassified workers can also face unfair tax burdens when classified as independent contractors, as they become solely responsible for paying taxes typically shared between an employer and employee (i.e. Social Security and Medicare taxes).

Consequences for Employers (Contractors)

When an employee is misclassified, the contractor is responsible for paying any unpaid wages and benefits owed to the employee, including employer taxes such as federal and state unemployment and workers’ compensation. The contractor may also face civil and criminal penalties (up to $2,500 for the first violation and $5,000 for repeat violations per employee), as well as related legal fees. Fines on federal and state withholding taxes not withheld and paid could be as high as 100% of the tax owed. Other risks include potential lawsuits and civil liability. In severe cases, contractors may even face criminal prosecution and temporary debarment from public works jobs.

What is the law?

Last year, in response to the ongoing issue of misclassification, the U.S. Department of Labor passed a final rule revising guidance on classifying employees versus independent contractors under the Fair Labor Standards Act (FLSA). This final rule, effective as of March 11, 2024, rescinded the 2021 Independent Contractor Status Under the Fair Labor Standards Act rule. The 2024 final rule applies to all employers subject to the FLSA.

Under the FLSA, workers are considered employees if they are economically dependent on the employer for work. Alternatively, workers are considered independent contractors if they are in business for themselves.

According to the DOL’s Fact Sheet 13, a worker’s classification depends on the “economic realities” of the relationship between the worker and the employer. To assess these economic realities, contractors must consider all of the following six factors:

1. Opportunity for profit or loss depending on managerial skill: Does the worker experience profits or losses as a result of their own decisions and efforts?
2. Investments by the worker and the potential employer: Does the worker make capital or entrepreneurial investments?
3. Degree of permanence of the work relationship: What is the nature and duration of the work relationship?
4. Nature and degree of control: How much control does the employer have over the performance of the work and the economic aspects of the relationship?
5. Extent to which the work performed is an integral part of the employer’s business: Is the work critical to the employer’s principal business?
6. Skill and initiative: Does the worker use their own specialized skills to perform the work and support the business?

If the economic realities of the relationship prove that the worker is economically dependent on the contractor for work, that worker is considered an employee.

What else do you need to know when classifying workers?

• A person’s title or label at work is not relevant in determining status as an employee or independent contractor.
• Factors such as where the work was performed, when and how the worker was paid, and whether the worker is licensed by state or local government do not determine worker classification.
• A worker cannot choose to waive employee status and be classified as an independent contractor.
• According to the Wage and Hour Division, a worker may be an employee even if the worker agrees to be paid off the books, receives a 1099 tax form, signs an independent contractor agreement, is registered as an independent contractor or other business entity under state law, or agrees with the employer on independent contractor status.

Conclusion

It is important that contractors familiarize themselves with the guidelines for worker classification to prevent potential repercussions. Classifying your workers correctly is key to protecting worker rights and avoiding negative consequences for your business. For additional details and guidance, visit the DOL’s Frequently Asked Questions page, Small Entity Compliance Guide, and Fact Sheet 13.