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ADMINISTRATION AND ENFORCEMENT OF THE CONSTRUCTION WORKPLACE MISCLASSIFICATION ACT IN 2013

Julia K. Hearthway,
Secretary of Labor & Industry
Commonwealth of Pennsylvania
Opens Act 72 report in PDF format
Opens Act 72 poster in PDF format

TABLE OF CONTENTS

INTRODUCTION

The Construction Workplace Misclassification Act, 43 P.S. §§ 933.1 - 933.17 ("Act 72" or "the Act"), went into effect on February 10, 2011. The Act establishes a definition of "independent contractor" for purposes of workers' compensation, unemployment compensation, and worker classification. The Act also prohibits construction employers from classifying workers who do not satisfy all of the definitional criteria as independent contractors. It provides for the imposition of criminal and administrative penalties against employers, or officers or agents thereof, who are found to have committed violations. Additionally, the Act empowers the Secretary of Labor & Industry ("the secretary") to petition a court to issue a stop-work order mandating the partial or complete cessation of work at the site of an ongoing intentional misclassification.
 
Section 4(c) of the Act authorizes the secretary to undertake remedial action if she receives evidence establishing that a person has violated the Act. Section 10(a) explicitly prohibits an employer from discriminating in any manner or taking adverse action against any person for exercising any right protected by the Act, including the filing of a complaint with the Department of Labor & Industry ("the department") or informing any person about an employer's noncompliance. Section 10(b) makes clear that a complainant's failure to prevail on the merits on allegations of employer noncompliance does not remove the retaliation prohibition set forth in subsection (a), so long as the complainant's allegations were made in good faith. Finally, Section 10(c) creates a rebuttable presumption that the taking by an employer of adverse action against a person, within 90 days of that person's exercise of rights protected by the Act, constitutes prohibited retaliation.
 
Section 14 of the Act requires the department to submit annually, by March 1, a report to Pennsylvania's General Assembly "detailing, to the maximum extent possible, data on the previous calendar year's administration and enforcement of [Act 72].1" The department is permitted to include in the report all relevant facts and statistics that it believes to be necessary.
 
After receiving nine misclassification complaints during 2012, the Bureau of Labor Law Compliance ("the bureau") received 25 such complaints during 2013. The bureau closed 12 investigations during 2013, four of which involved complaints received during 2011, two of which involved complaints received during 2012, and six which involved complaints received during 2013. In three of these 12 closed cases, the department collected administrative fines totaling $2,500; the reason for closing the remaining nine cases was that there was insufficient evidence of a violation to justify further proceedings. As of December 31, 2013, three cases were referred to the department's legal counsel for prosecution. To protect the confidentiality of complainants, and the integrity of active investigations, the department has omitted from this report both details of any complaint or information regarding any ongoing investigation. Instead, this report contains general geographic, temporal, and substantive information regarding such complaints.
 
1For this reason, references to "2013" (or any other year) in this report are to the calendar year, unless explicitly stated otherwise.

ENFORCEMENT AND EDUCATION EFFORTS

The bureau currently has 27 investigators on staff, each of whom is responsible for 13 labor and safety laws. Current Act 72 enforcement efforts are complaint driven. In 2014, the bureau is developing a proactive plan to initiate job site visits or "sweeps" of construction projects. While conducting unexpected visits of construction job sites, bureau investigators will simultaneously conduct interviews of workers to ensure that they are properly classified. While conducting the sweeps, the bureau may encounter violations of the other laws it enforces, such as the Minimum Wage Act, Child Labor Act, or Prevailing Wage Act. It is expected that the sweeps will maximize the effective use of the bureau's limited resources to put construction employers on notice that this Act is being enforced, while protecting vulnerable workers at risk of misclassification.
 
The bureau continues to conduct one-on-one and small group educational sessions on Act 72 for the benefit of both workers and employers. It intends to continue this outreach program in order to educate workers and employers about their rights and responsibilities under the Act. The department believes that such sessions are an effective means to increase compliance with the Act without incurring increased investigative or enforcement costs. This should prove especially effective in the law's early years of applicability, when many in the construction sector may not be familiar with the Act.
 
In 2012, the bureau created a poster, as required by Section 11 of the Act. It outlined the criteria necessary for proper classification as an independent contractor, the criminal and administrative penalties for misclassification, and the procedure for filing a complaint with the bureau. The bureau continues to make the poster available in a printable format on the department's web site. In addition, bureau investigators routinely bring copies of the poster when they visit construction job sites in the course of investigating the commonwealth's labor standards laws, and provide them to workers and employers upon request.
 
Finally, the department continues to engage in an internal information-sharing process among various entities within its jurisdiction. As a matter of course, the Bureau of Workers' Compensation (BWC) and the Office of Unemployment Compensation Tax Services (OUCTS) annually perform audits on many Pennsylvania businesses, including construction companies. For example, in 2013, OUCTS identified 9,820 instances of worker misclassification. The department has instituted an intra-agency procedure pursuant to which OUCTS and BWC will refer any such findings of misclassification by construction companies to the bureau. This approach will make efficient use of audits that already are being conducted within the department. The bureau, for its part, will refer Act 72 complaints to BWC and/or OUCTS when such complaints appear to reveal that an employer, via misclassification of employees, has failed to pay taxes or other financial obligations owed to one or both entities.
 
As of December 31, 2013, 13 referrals have been made to the bureau by OUCTS. Three of those referrals have been closed with no evidence of an Act 72 violation. The remaining 10 referrals are going to be evaluated by the bureau's legal department to determine if there needs to be further investigation conducted by the bureau. The department will continue such proactivity in seeking other referral and cooperative arrangements with appropriate partner entities in pursuit of more effective Act 72 enforcement.

COMPLAINTS RECEIVED DURING 2013

Pursuant to Section 10 of Act 72, any person is entitled to file a complaint alleging non- compliance with one or more provisions of the Act. The next few sections of this report provide general information about the complaints that were filed with the bureau during 2013.
 
Section 12 of the Act provides that "[t]he department shall not be required to enforce this act until adequate funding is appropriated." Nevertheless, the bureau is attempting to enforce Act 72, even though no funding as referenced in Section 12 has been appropriated.
 
In total, the bureau received 25 complaints during 2013. The bureau opened investigations into each of the complaints, and 19 of the 25 investigations remained open and ongoing as of Dec. 31, 2013. Three complaints resulted in settlements with the department and payment of $2,500 in administrative penalties. One of those settlements is discussed further in the next section of this report. The remaining three complaints were closed because they lacked sufficient evidence of an Act 72 violation.
 
Therefore, this report contains only general information regarding the substance of the complaints. All details that might either breach the confidentiality of a complainant or compromise the integrity of an active department investigation have been omitted. Following are tables and analyses of the complaints by geographic region, month in which the complaint was received by the bureau, and substance of allegations.

ADMINISTRATIVE ACTIONS BASED ON COMPLAINTS

Pursuant to Section 4(c) of Act 72, if the secretary has received information indicating that a violation of the Act has been committed, she may not only conduct an investigation into the allegations but also issue upon the alleged violator an order to show cause why it (or one or more of its officers and agents) should not be found to be in violation of the Act. The party upon which the order to show cause has been issued then is entitled to 20 days to file an answer to the order. Pursuant to Section 4(d), if the secretary, subsequent to the issuance of an order to show cause, finds probable cause that the employer has committed a violation of the Act that is criminal in nature, she is required either to refer the matter to the Office of Attorney General for investigation or to impose administrative penalties under Section 6 of the Act.
 
As of December 31, 2013, one of the department's investigations resulted in the issuance of an order to show cause. The matter concluded in a settlement with the alleged violator, prior to a hearing and final determination, and collection of a $1,500 administrative fine for three separate violations under the Act.

ANALYSIS OF COMPLAINTS BY REGION

The bureau maintains five district offices in different geographic regions throughout the state. Table 1 (below) indicates the number of complaints received by each district office in 2013. Notably, the Philadelphia district office, which serves the geographic area encompassing the commonwealth's most populous city, accounted for more than half of the bureau's complaints. The three cases, where the bureau collected administrative fines, were from complaints received by the Philadelphia district office.
 
TABLE 1:  NUMBER OF COMPLAINTS FILED BY GEOGRAPHIC REGION (2013)
 
REGION NUMBER OF COMPLAINTS FILED
Altoona
0
Harrisburg
4
Philadelphia
17
Pittsburgh
1
Scranton
3
TOTAL
25

ANALYSIS OF COMPLAINTS BY MONTH

Table 2 (below) sets forth the number of Act 72 complaints received by the bureau during each month of 2013. As the table shows, the most number of complaints were filed in May, which is after the winter months when the number of construction projects increases.
 
TABLE 2:  NUMBER OF COMPLAINTS FILED BY MONTH (2013)
 
MONTH NUMBER OF COMPLAINTS RECEIVED
January
1
February
1
March
0
April
0
May
11
June
0
July
0
August
7
September
3
October
1
November
0
December
1
TOTAL
25

ANALYSIS OF COMPLAINTS BY SUBSTANCE OF ALLEGATIONS AGAINST EMPLOYER

Section 3(a) of Act 72 provides that an individual is not an independent contractor within the meaning of the Act unless the individual:
  1. has a written contract to perform the services in question for the employer;
     
  2. is free from control or direction by the employer, both under the contract and in fact, over the individual's performance of such services; and
     
  3. customarily is engaged in an independently established trade, occupation, profession, or business for the performance of such services.
Section 3(b) provides that an individual is not "customarily engaged" in an independently established trade, occupation, profession, or business with respect to services the individual performs unless all of the following are true:
  1. the individual, independent of the person or employer for whom the services in question are performed, possesses the essential tools, equipment, and other assets that are necessary for the performance of such services;
     
  2. the individual's arrangement with the person or employer for whom the services in question are performed is such that the individual will realize a profit or suffer a loss as a result of performing the services;
     
  3. the individual performs the services in question through a business in which the individual has a proprietary interest;
     
  4. the individual maintains a business location that is separate from the location of the person or employer for whom the services are being performed; and
  1. the individual maintains liability insurance during the term of the contract in question of at least $50,000.
As Table 3 (on page 13) shows, the five most common allegations made in the 25 complaints received by the bureau in 2013 each appeared in at least 23 of the complaints. Complaints may (and, during 2013, often did) contain more than one allegation.
 
The two most common allegations that appeared in 23 of the 25 complaints were that an employer had classified the worker as an independent contractor who did not have a liability insurance policy of at least $50,000 (Section 3(b)(6)), and that the worker did not maintain a business location separate from the employer's (Section 3(b)(4)). The second most common allegation was that the worker was classified as an independent contractor, and the worker had no written contract with the employer (Section 3(a)(1)). Sixteen of the 25 complaints alleged that the worker was being paid hourly, and therefore would not realize a profit or loss as a result of performing the services (Section 3(b)(2)). Fifteen of the 25 complaints alleged that the worker did not own the tools being used to perform the work, but instead was provided with such tools by the employer; Section 3(b)(1) of Act 72 states that individuals who do not possess such tools are not "customarily engaged" in the trade in question, and therefore are not independent contractors under Section (3)(a)(3).
 
In the three complaints that resulted in the collection of administrative penalties, the misclassified workers made all five allegations listed in the table. During its investigation, the bureau substantiated the allegations made by the workers, which ultimately resulted in the settlement of violations under Act 72 with their prospective employers.
 
TABLE 3:  NUMBER OF COMPLAINTS FILED BY NATURE OF ALLEGATIONS (2013)
 
NATURE OF ALLEGATION NUMBER OF COMPLAINTS RECEIVED
No written contract between worker and employer (Section 933.3(a)(1))
22
Tools provided by employer rather than owned by worker (Section 933.3(b)(1))
15
Worker paid hourly (Section 933.3(b)(2))
16
No place of business (Section 933.3(b)(4))
23
Worker did not have liability insurance (Section 933.3(b)(6))
23

CONCLUSION

The department in 2013 collected $2,500 in administrative penalties from the investigation of three substantiated Act 72 complaints. The department anticipates future administrative actions or settlements in 2014. Also, the department expects that construction site "sweeps" will further enforcement and educational efforts with minimal cost to the commonwealth.
 
The department intends to continue its educational outreach to promote compliance with Act 72. In addition to such educational efforts, the department will continue to maximize the efficiency with which it utilizes its limited investigative and financial resources by partnering with BWC and OUCTS to capitalize on misclassification findings revealed by audits that already are being performed.
 
The department appreciates the General Assembly's review and input regarding the manner in which it handled its responsibilities regarding Act 72 in 2013. The department looks forward to continued cooperation with the General Assembly in pursuit of more effective and efficient enforcement and administration of the Act.
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