construction hat with gavel

How Changing Contractor Laws Affect Construction Companies

Regulations can sometimes create issues for construction companies. Some laws are hard to follow, but most are there to protect workers and the general public. Rules can change on a dime, so managers need to stay on top of the latest changes and abide by them while maintaining a profitable business.

What is worker misclassification? The federal government points to concerns over people being classified as contractors when they should be employees. This means they may lose out on minimum acceptable wages and benefits, leading to lower tax revenues for state and local government.

The Fair Labor Standards Act (FLSA) states that contractors may be employees even if they agree to the classification of independent workers. Many rules regulate who is a temporary employee and who isn't. Here's what construction executives should be aware of to avoid penalties and issues.

Know State Laws

Some states have passed contractor laws. California and Massachusetts both have strict rules on when and how companies can utilize independent contractors. Each state has tests to determine if the contractor is an employee or not. Some things that would define this include:

  • Is the contractor free from direction and completes the task on their own?
  • Is the service outside the normal scope of work?
  • Does the contractor typically work independently in this trade?

If in doubt, managers should consult a business lawyer specializing in the construction industry. It's best to make sure classification rules are not being violated. Businesses could wind up owing lost wages and benefits and paying high fines and tax penalties.


female construction worker with clipboard


Manage Work Quality

If a company develops a reputation of hiring contractors to avoid paying them benefits and higher wages, it will soon lose the more skilled people in a trade. The business might suffer as a result of lower-quality work. Although people often agree to contractor classification because they need the money, they will move on to greener pastures as soon as they gain enough experience.

While many construction companies have a genuine need for contract-only positions, such as requiring a particular skill from a brick mason for a single job, care is still necessary for vetting these workers. When you do need subcontractors, make sure you check with your insurance company to add them to your existing policies. Then, document the extent of their labor to prevent liabilities down the line.


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Pay Attention to Involvement

One of the key indicators on the ABC test implemented by California is how directly involved the company is in overseeing the work. For someone to truly be classified as an independent contractor, a company should have very little involvement in what they do. Here are two examples.

Example 1

Jack is a skilled bricklayer. A company needs a unique design on the front of a building, and none of its regular crew has the experience to complete the job. It's not likely to need Jack's services again in the near future. Jack is told what's required, and he comes in and creates the design without any micro-management.

In this situation, hiring Jack as an employee makes little sense as his services won't be needed again.

Example 2

Mary is a skilled interior painter. She provides finish work on every new home a company builds. Mary is expected to be on the job site from 8 a.m. to 4 p.m. every day. The foreman checks in on her to see the progress and provide feedback. Mary gets no paid vacation or benefits but works every day.

Mary really should be classified as an employee, even if she occasionally picks up other jobs. She is directly overseen by the construction manager and is limited in what other work she can take because she's required to be on-site during specific hours.


construction worker looking up at scaffolding


Keeping Up With Contractor Laws in Construction

Even though some states are more construction-friendly than others, it's vital to pay attention to every place’s regulations. Laws can change at any time, and companies could fall under new rules. The best course of action is to treat people fairly and look closely at how and when different skills are utilized.

Paying out benefits might seem like a costly addition, but hiring someone in construction whose skills are needed can save time and money in the long run. There won't be long delays waiting for a contractor to finish another job. Plus, they'll already be on staff and ready to jump into the project. It's better to err on the side of caution than to misclassify workers and wind up with hefty legal fees and tax penalties.


About the Guest Author

Holly Welles is a construction writer whose work is featured in Construction Executive, ConstructConnect and other industry publications. Learn more about her writing on her website, The Estate Update.

By Holly Welles, Guest Author | October 13, 2020