The construction industry’s use of independent contractors and subcontractors, even sub-subcontractors, is standard practice. The nature of the business requires a wide range of expertise and independent contractors can help with the short-term staffing that a company does not have in-house, or they can supplement a contractor’s full-time workforce. Using independent contractors and subcontractors also saves the hiring contractor money because it doesn’t have to pay employee benefits, provide workers’ compensation coverage or withhold taxes on those entities.
The guidelines that many contractors follow in determining if an individual is an independent contractor come from the Internal Revenue Service, which focuses on the level of control the hiring contractor has over the independent contractor. “The general rule,” the agency says, “is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
The Protecting the Right to Organize Act, however, which won approval in the U.S. House of Representatives earlier this month and now awaits action by the Senate, seeks to redefine what constitutes an independent contractor through the use of the “ABC test,” a much stricter interpretation than the IRS’s.
The PRO Act, which also would expand unionization rights, would amend the National Labor Relations Act by classifying workers as employees unless these three criteria are met:
- The individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact.
- The service is performed outside the usual course of the business of the employer.
- The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
It’s the second prong of that test that could throw a wrench into how contractors do business.
“If you think about it,” said attorney Christopher Horton with Smith, Currie & Hancock, “most of the time an independent contractor’s … role is going to be within the usual course of the hiring entity’s business.”
For example, a drywall contractor might hire independent drywall mechanics to shore up their own workforce for a limited period of time. The same goes for a general contractor that self-performs or is licensed to self-perform work itself. Under the PRO Act, hiring a subcontractor to supplement the general contractor’s crew might be a violation of the NLRA.
In addition, Horton said, there would be stiff penalties that go along with running afoul of the PRO Act’s provisions. In most cases, a first penalty for miscommunicating to an employee what their designation is — employee versus independent contractor — would be $50,000 but could increase to $100,000 depending on the violation.
“Those are hefty fines, especially for a small business that routinely uses independent contractors,” he said.
It’s no surprise then, he said, that trade organizations like the Associated General Contractors of America and Associated Builders and Contractors have come out against the legislation. The ABC said the independent contractor provision of the bill would increase costs for construction employers by up to $12.1 billion annually. The AGC warned that the independent contractor provision would “undermine many working people’s ambitions to establish their own firms and become self-employed.”
Perhaps the biggest lesson about the effort to tighten the definition of an independent contractor in this way can be gleaned from the enactment of Assembly Bill 5 (AB5) in California, which went into effect on Jan. 1, 2020.
AB5 includes the same ABC test in determining who is an independent contractor, but, because of the uproar over that narrow definition, construction employer advocates like the AGC of California were able to secure amendments that exempted construction subcontractors from the law.
However, including similar exemptions in the PRO Act would not be a quick fix in making the bill more attractive to lawmakers who oppose it, according to Brendan Carter, vice president of labor relations at the AGC of California.
“Taking exemptions here and there is not going to … alleviate the chaos that this potentially might throw into labor relations across the country,” he said. Given the totality of the federal bill, Carter added, one-off exemptions won’t really provide much benefit to employers.
As federal lawmakers consider the PRO Act, he said, they need to realize that construction is a complex industry, different from other industries where the ABC test and other provisions might not cause as much disruption.
“They need to really consider that construction is very complex and has a lot of moving parts and a lot of players involved in a single jobsite,” Carter said.
The consensus is that the PRO Act won’t get the 60 votes it needs to pass the Senate, but Horton isn’t ready to declare the battle over.
“From the research I’ve done, I don’t give this a high chance of passing,” he said, “but I probably would have said the same thing six months ago, and look where we are. It’s passed the House.”