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Newly enacted Construction Industry Fair Play Act targets employee misclassification

New York Governor David A. Paterson signed into law the New York State Construction Industry Fair Play Act (Senate Bill 5847), which creates a clear litmus test to distinguish the difference between a worker and an independent contractor among construction industry workers. It also provides a method to clearly define which business on a construction project is responsible for which workers. Also, for the first time in state history, it imposes monetary and criminal penalties specifically for the act of employee misclassification on construction projects. The new law, which becomes effective on October 29, adds a new article 25-B to the New York Labor Law, providing for a presumption of employment in the construction industry. The law provides that any person performing services for a contractor will be classified as an employee unless the person is a separate business entity or unless the person meets the following criteria, in which case the person will be considered as an independent contractor: (1) the individual is free from control and direction in performing the job, both under his or her contract and in fact; (2) the service must be performed outside the usual course of business for which the service is performed; and (3) the individual is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.

Contractors who willfully fail to properly classify an individual as an employee will be subject to civil and criminal penalties. Violators will be subject to a civil penalty of up to $2,500 for a first violation per misclassified employee and up to $5,000 for each subsequent violation per misclassified employee within a five-year period. In addition to civil penalties, willful violators may be charged with a criminal misdemeanor offense. Upon conviction of a first offense, violators face a fine of up to $25,000 or imprisonment of up to 30 days. Upon conviction of a subsequent offense, violators face a fine of up to $50,000 or imprisonment of up to 60 days. Other penalties may also apply, including under the state’s unemployment insurance, workers’ compensation insurance, or business, corporate, or personal income tax laws. Further, if the contractor is a corporation, any officer of the corporation or shareholder who owns or controls at least 10 percent of the outstanding stock of such corporation who knowingly permits the corporation to willfully violate the law may also be found in violation of the law and subject to civil and criminal penalties.

The Construction Industry Fair Play Act also requires contractors to post notice in a prominent place at the business site that describes the responsibility of independent contractors to pay taxes required by state and federal law, the rights of employees to workers’ compensation, unemployment benefits, minimum wage, overtime, and other federal and state workplace protections, and the protections against retaliation and the penalties for failing to properly classify an individual as an employee. The notice must also contain contact information for individuals to file complaints or to inquire about employment classification status. The notice is to be provided in English, Spanish, or other languages required by the labor commissioner and must also be constructed of materials able to withstand adverse weather conditions. Contractors who violate the notice posting requirement will be subject to a civil penalty of up to $1,500 for a first violation and up to $5,000 for a subsequent violation within a five-year period.

Studies have shown that up to 15 percent of New York’s construction industry is misclassified at any given time, according to Governor Paterson, in a press statement announcing he had signed the measure. “Employee misclassification is a terrible practice that happens when a worker who should be considered an employee is improperly classified as an independent contractor or paid ‘off-the-books,’” Paterson said. “It deprives the government of tax revenue at a time when it is sorely needed and places an unfair burden on law-abiding employers who play by the rules. It often deprives New York’s workers of crucial benefits such as overtime pay, workers’ compensation and unemployment insurance. This new law will be a powerful tool that hopefully will clean up this practice once and for all.”