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ADMINISTRATION AND ENFORCEMENT OF THE CONSTRUCTION WORKPLACE MISCLASSIFICATION ACT IN 2014

Kathy Manderino
Acting Secretary of Labor & Industry
Commonwealth of Pennsylvania
March 1, 2015
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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 prohibits construction employers from classifying as independent contractors workers who do not satisfy all of the definitional criteria of an independent contractor. The Act establishes a definition of "independent contractor" for purposes of workers' compensation, unemployment compensation, and Act 72. It provides for the imposition of criminal and administrative penalties against employers, or officers or agents thereof, which 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.
 
In 2014, the department collected $12,700 in administrative penalties from Act 72 enforcement efforts. These collections were either the product of an investigation conducted by the Bureau of Labor Law Compliance ("the bureau"), or the product of the bureau's settlement efforts with employers referred by the Office of Unemployment Compensation Tax Services (OUCTS) for misclassification. In order to protect the confidentiality of complainants and the integrity of open investigations, this report contains general geographic, temporal, and substantive information regarding complaints, referrals, and collections.
 

1 For this reason, references to "2014" (or any other year) in this report are to the calendar year, unless explicitly stated otherwise.

ENFORCEMENT 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 and OUCTS referral driven. In 2015, the bureau plans to increase its jobsite visits or "sweeps" of construction projects. This involves gathering a group of several investigators from each bureau district office visit a jobsite unexpectedly. The investigators will simultaneously conduct interviews of construction workers in various trades to ensure that they are properly classified as employees. While conducting the sweep, the bureau may encounter violations of the other laws it enforces, such as the Minimum Wage Act, Child Labor Act, or Prevailing Wage Law. It is expected that the increased sweeps will result in 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.
 
In 2015, the bureau will work closely with the Bureau of Workers' Compensation, like it has with OUCTS, to explore further collaboration. Since the bureau has seen increased success with its OUCTS referral process, it would like to develop something similar with Workers' Compensation. Not only does it ensure that employers comply with Act 72, but it also aids in enforcing the Pennsylvania Workers' Compensation Act while sharing resources.
 
The bureau continues to conduct many 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.

COMPLAINTS RECEIVED DURING 2014

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 2014. 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 using its best efforts to enforce Act 72, even though no funding as referenced in Section 12 has been appropriated.
 
After receiving 25 misclassification complaints during 2013, the bureau received 50 such complaints during 2014. The bureau opened investigations into each of the complaints, and 42 of the 50 investigations remained open and ongoing as of December 31, 2014. One complaint resulted in a settlement with the department and payment of $700 in administrative penalties. The remaining seven complaints were closed because of insufficient available evidence of an Act 72 violation.

ANALYSIS OF COMPLAINTS BY REGION

The bureau maintains five district offices in different geographic regions throughout the state. Table 1 indicates the number of complaints received by each district office in 2014. Notably, the Philadelphia district office, which serves the geographic area encompassing the commonwealth's most populous city, accounted for almost half of the complaints filed. Nearly all of the Act 72 complaints filed were from the geographic regions covered by the Philadelphia, Altoona, and Harrisburg district offices. The Pittsburgh and Scranton district offices received only a few complaints in 2014.
TABLE 1: NUMBER OF COMPLAINTS FILED BY GEOGRAPHIC REGION (2014)
REGION NUMBER OF COMPLAINTS FILED
Altoona 14
Harrisburg 10
Philadelphia 22
Pittsburgh 2
Scranton 2
TOTAL 50

ANALYSIS OF COMPLAINTS BY MONTH

Table 2 sets forth the number of Act 72 complaints received by the bureau during each month of 2014. As the table shows, most complaints were filed in June, which is when the construction industry tends to begin its peak season. The bureau received only a handful of complaints during the winter months (November-February). Nearly half of all the complaints were filed August through October.
TABLE 2: NUMBER OF COMPLAINTS FILED BY MONTH (2014)
MONTH NUMBER OF COMPLAINTS RECEIVED
January 5
February 0
March 3
April 2
May 1
June 10
July 3
August 9
September 6
October 8
November 3
December 0
TOTAL 50

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...
     
  5. the individual maintains liability insurance during the term of the contract in question of at least $50,000.
As Table 3 shows, the five most common allegations made in the 50 complaints received by the bureau in 2014 each appeared in at least 16 of the complaints. Complaints may (and, during 2014, often did) contain more than one allegation.
 
The two most common allegations that appeared in all of the 50 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 had no written contract with the employer (Section 3(a)(1)). The second most common allegation that the worker was classified as an independent contractor was that the worker did not maintain a business location separate from the employer's (Section 3(b)(4)). Sixteen of the 50 complaints alleged that the worker was being paid hourly, and consequently would not realize a profit or loss as a result of performing the services (Section 3(b)(2)). Thirteen of the 50 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).
TABLE 3: NUMBER OF COMPLAINTS FILED BY NATURE OF ALLEGATIONS (2014)
NATURE OF ALLEGATION FREQUENCY OF ALLEGATION
No written contract between worker and employer (Section 933.3(a)(1)) 50
Tools provided by employer rather than owned by worker (Section 933.3(b)(1) 13
Worker paid hourly (Section 933.3(b)(2)) 16
No place of business (Section 933.3(b)(4) 45
Worker did not have liability insurance (Section 933.3(b)(6)) 50

COMPLAINT DISPOSITION IN 2014

The bureau closed 34 investigations during 2014, 17 of which involved complaints received during 2011, two of which involved complaints received during 2012, seven of which involved complaints received during 2013, and eight of which involved complaints received during 2014. For two of the closed cases, the department collected administrative fines totaling $2,200; the reason for closing the remaining cases was that there was insufficient evidence of a violation to justify further proceedings. As of December 31, 2014, one case was referred to the department's legal counsel for prosecution.

ADMINISTRATIVE ACTIONS IN 2014

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, 2014, one of the department's investigations had resulted in the issuance of an order to show cause, followed by a fact-finding hearing and the issuance of a proposed order determining the occurrence of two Act 72 violations. Currently, the bureau is waiting for the secretary's final decision in the matter.

STOP-WORK ORDERS

According to Section 7(a) of Act 72, certain things must occur before the secretary may issue a stop-work order on a job site. They are as follows: (1) the department must receive information that there is a potential violation; (2) the bureau must conduct an investigation into the allegation; (3) the department must issue an order to show cause why the employer should not be found in violation of the act; (4) twenty days must elapse allowing the employer a chance to file an answer in writing; (5) the employer is then provided notice and a hearing is conducted; (6) if evidence presented at the hearing establishes the finding of a violation, the secretary must petition a court of competent jurisdiction for an order; and (7) the employer must be served the order so it may take effect. As of December 31, 2014, the secretary had not initiated proceedings to issue a stop-work order on a job site.

UNEMPLOYEMENT COMPENSATION TAX REFERRALS

In 2014, the bureau refined its process for sharing information on worker misclassification with OUCTS. OUCTS performs unemployment compensation tax audits on many Pennsylvania businesses, including construction companies. These audits reveal whether such businesses have misidentified employees as independent contractors. In order to take advantage of the audits that were already being performed, the department previously instituted an intra-agency procedure so that the OUCTS can refer its misclassification findings to the bureau, and vice versa. In 2014, the bureau and OUCTS fine-tuned that internal information-sharing process, and the result was successful. While in 2013 only 13 referrals were made to the bureau by OUCTS, in 2014, OUCTS made 402 referrals to the bureau.
 
These referrals were from tax audits that took place in 2011, 2012, and 2013. It is unlikely that the bureau will receive this number t of referrals in the future since the referrals received will be for the current year only. The bureau anticipates receiving roughly 100 OUCTS referrals a year.

REFERRAL DISPOSITION IN 2014

OUCTS referred its findings of misclassification in the construction industry to the bureau's central office. The bureau then reviewed the referrals to see if an Act 72 claim was substantiated by the supporting OUCTS audit reports. If a misclassification violation was clearly substantiated by the audit report, a settlement offer was sent to the employer for resolution of the violation. If it was clear from the audit report that there was not an Act 72 violation, then the referral was rejected. Referrals that required more information to determine a violation were assigned to the appropriate district office so that an investigator within that office could conduct further investigation into the matter.
 
As Table 4 depicts, of the 402 referrals made to the bureau, more than half were rejected. The reasons for rejecting referrals included: the violations occurred prior to the Act's effective date, February 10, 2011 (this was roughly half of the rejections); the workers were not misclassified as independent contractors; the employers were not in the construction industry; and, there was not a violation under Act 72. Eighty-five OUCTS referrals required additional information and were opened as investigations, and 58 referrals remained in the central office for settlement letters to be issued. Less than half of the referrals required further action by the department.
TABLE 4: NUMBER OF REFERRALS AND THEIR STATUS (2014)
STATUS OF REFERRALS NUMBER OF REFERRALS
Rejected in the central office 259
Pending further action in the central office 34
Settlement offers sent from the central office 24
Sent to the district offices for investigation 85
TOTAL 402
Of the 24 settlement letters sent from the central office, 12 settlement offers were executed by employers and resulted in the collection of $10,500 in penalties. The remaining 12 were unresolved. As of the close of February 2015, the bureau's central office had 34 referrals being processed for the issuance of settlement offers.

CONCLUSION

In 2014, the bureau placed emphasis on fine-tuning the referral process with OUCTS. This referral process netted $10,500 in penalties compared to the $2,200 in penalties resulting from the complaint process. With the number of referrals pending action, it is anticipated that the department will increase its Act 72 collections for 2015. Because of the OUCTS referral success, the bureau will explore collaborating with the Bureau of Workers' Compensation in hopes of similar success.
 
In addition to its increased referral efforts, the bureau will continue to fully investigate all complaints, prosecute violations under the Act, and educate the public about worker misclassification. Because this is a relatively new law, the department is always looking for ways to enforce Act 72 and ensure that Pennsylvania employers comply with the laws regarding worker misclassification.
 
The department appreciates the General Assembly's review and input regarding the manner in which it handled its responsibilities regarding Act 72 in 2014. 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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