Owning and managing your own construction company can be more than a full-time job, to say the least.
- Purchasing material; and
- Sourcing a team
… you’re often left scrambling.
Enter: Independent contractors. There are many benefits, both financial and logistical, to hiring independent contractors for construction.
But, differentiating between an independent contractor and an employee might not be as easy as it sounds.
We’ll review what rules you can look at in order to help you classify your team and avoid the independent contractor laws for construction that could cause problems for owners.
The Difference Between Independent Contractors and Employees
In order to determine whether a worker classifies as an independent contractor or an employee, you have to identify the working relationship between owner and worker.
The IRS will look at these three sets of common law rules that will provide evidence of the degree of control and independence a worker has:
- “Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer (ie. How is the worker paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”
But, where it can get tricky is when state laws come into play. Even if workers aren’t considered employees under federal law, they can be considered employees under state law.
- Are not covered for minimum wages, overtime, retirement benefits, and other labor law protections.
- Are not typically eligible for unemployment insurance or workers compensation.
- Are not covered under anti-discrimination, OSHA, and other employment laws.
- Must pay their own self-employment tax (including Social Security/Medicare).
3 Things for Owners to Avoid When Using Independent Contractors for Construction
Not Having a Written Contract
Rule #1 of smart invoicing is to keep track of your employee and independent contractor work agreements in writing.
Especially once you build a relationship with an independent contractor and continue to hire them for different projects, your written contracts will be essential to keep things straight.
Moreover, if there ever were a dispute over the status of your worker, you have a written contract to prove independent contractor status/classification.
Your written contract should clearly state that the worker:
- Is an independent contractor
- Will be paid as an independent contractor with no tax withholding, no benefits, etc.
Of course, the simple fact of having a written contract doesn’t mean the worker is in fact a true independent contractor, but the flip side is that the lack of a written contract could potentially make proving employee status much easier.
Paying By the Hour
How a business pays someone is about as fundamental a work variable as one can get. And it can be one of the most fundamental indicators of whether a worker is an employee or an independent contractor.
Luckily, in construction, subcontractors (aka independent contractors) are typically paid by the project via the general contractor.
Billing by the hour could tie the subcontractor to employee status, although on its own, it likely wouldn’t be enough.
Because of the industry-wide issue of delayed payments, Flexbase has created an invoicing system that makes it easy for contractors and subcontractors to send…
- Payment reminders; and
- Even legal notices
… to help mitigate the risk of non-payment and make sure your team is paid on time.
Requiring Set Hours
When you think of a classic employee job, you might think of a 9-5 workday. Set hours or a time clock are telltale signs of employee status.
Independent contractors, on the other hand, are typically paid upon completion of a job or project, not for how many hours it took to complete it.
However, that doesn’t mean a construction owner can’t have some control over the hours an independent contractor works.
Drawing the line at having your sub-contractors not work on a commercial building remodel past 6 p.m. doesn’t make them your employee.
Being able to discern which workers need to be on a set schedule and which do not will make classifying your team as employees or independent contractors that much easier.
Penalties for Construction Owners Who Treat Independent Contractors As Employees
According to the U.S. Department of Labor, businesses that misclassify workers as independent contractors instead of employees can be subject to:
- Repayment of employment taxes; and
- Even imprisonment by federal or state agencies
Independent contractor laws and regulations are tricky, and to make it even harder, they’re changing due in part to the increase in:
- Remote workers
- Drivers; and
- Unemployment benefit issues
… stemming from the COVID-19 pandemic.
If you aren’t sure if the construction workers on your team are classified as independent contractors or employees, it’s best to discuss your situation with your attorney or get a ruling from federal and state entities.