The Department of Labor (DOL) and Internal Revenue Service (IRS) have announced plans to be more aggressive in their investigations of independent contractors. They have identified the construction industry as one of their targets, and it's serious business: The Obama administration's proposed federal budget assumes about $7 billion in fines and tax repayments during the next 10 years from employee misclassifications.
When—and when not—to use independent contractors is tricky for many roofing contractors. Clearly, subcontractors are needed for many roofing projects and, typically, steer clear of the definition of independent contractor. But the issue is far from black and white.
The National Roofing Legal Resource Center advises you to become familiar with all federal, state and local laws; clearly define independent contractor relationships through contracts; ensure your actions do not supersede your contracts; and engage competent advisers.
When determining whether an employee is an independent contractor, the IRS uses its "right to control" test, which measures how much behavioral and financial control an employer has over a worker.
DOL applies its "economic reality" test, which focuses on whether a worker economically depends on a particular business for his or her livelihood.
Generally, if a worker economically depends on one business, the worker will be considered an employee. If the worker has other customers and sources of income, the worker generally will be considered an independent contractor.
Recent case law has been more favorable to employees seeking overtime and back pay who bring action against employers. Decisions even have gone against employers who had signed independent contractor agreements with workers but still failed the right-to-control tests.
The lesson here is simple: Make sure your records are in order; make sure you understand state and federal laws; and if you use independent contractors, make sure you are getting good advice.
Bill Good is NRCA's executive vice president.
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