Remodelers, new-home builders, and construction supply firms that take pride in how they keep an army of independent subcontractors working virtually fulltime for them should take note: Washington increasingly views that relationship as cause for making you treat those subs as employees.

The toughening stance at the Labor Department (DOL) on the issue--best exemplified by an administrator's interpretation issued July 15 by the head of the Wage and Hour Division--has set off alarm bells within the construction community. At the least, Washington's stepped-up campaign should prompt companies that treat subcontractors as independent firms to re-examine whether their business practices can pass Labor's evolving standards.  One good starting question is: Do you give your subs so much work that they pretty much don't do jobs for anyone else?

Stripped of its legalese, the memo's key message is that DOL is looking closer at a subcontractor's economic independence when deciding whether that sub really ought to be regarded as an independent enterprise, Suzanne Beall, federal legislative director at the National Association of Home Builders, told Remodeling in an Aug. 6 interview.

Tracking 'Economic Dependence'
That appears to be a shift from the past, when government reviews appeared to focus on whether a company controlled a supposedly independent contractor by setting that person's hours, providing tools, and requiring the contractor wear the company's uniform. "[N]o single factor, including control, should be over-emphasized,"  David Weil, administrator of DOL's Wage and Hour Division, wrote in his administrator's interpretation. "Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factors should be used as guides to answer that ultimate question of economic dependence."

Beall, in a July 20 memo to NAHB members, said the factors considered under the economic realities test include:

  • Is the work an integral part of the employer’s business?
  • Does the workers’ managerial skill affect the workers’ opportunity for profits or loss? 
  • How does the worker’s relative investment compare to the employer’s investment? 
  • Does the work performed require special skill and initiative?
  • Is the relationship between the worker and the employer permanent or indefinite?
  • What is the nature and degree of the employer’s control?

How Independent Are Carpenters?
Weil's use of construction as examples--and Beall's commentary on what Weil said--indicate that construction-related companies could find themselves slicing the English language finely if they seek to keep treating subs as independents.

For instance, Weil said a construction company that frames residential houses should regard carpenters as integral to an employer's business because carpentry is an integral part of framing homes.

Beall's response: "Notably, this example references a construction company that frames residential homes. [Emphasis hers.] Arguably, a company that builds homes is distinguishable from a company that frames homes. It is hard to argue that carpenters are not integral to a framing company. Consequently, this example does not imply that a framing subcontractor is integral to the home builder’s business. Framing is a necessary component to constructing a house, but it could be argued that it is not integral to the builder’s business."

Later, in elaborating on how the need for "special skill and initiative" can help identify an independent contractor, Weil said that while a highly skilled carpenter might provide carpentry services for a construction firm, in general he doesn't operate independently because he does not determine the sequence of work, order additional materials, or think about bidding the next job. In other words, Weil said, he's not showing the managerial and business skills that are part of being an independent contractor, but rather is just providing skilled labor. 

Then Weil added: "In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill."

Crackdown in Utah, Arizona
Beall saw a connection between that language an a DOL announcement in April in which the department secured consent judgments with 16 defendants in Utah and Arizona who had claimed more than 1,000 of their workers were independent contractors. In that case, which yielded $700,000 in back wages and penalties, the defendants were accused of requiring the workers to become member/owners of limited liability companies. "These construction workers were building houses in Utah and Arizona as employees one day and then the next day were performing the same work on the same job sites for the same companies but without the protection of federal and state wage and safety laws," DOL's announcement said. "The companies, in turn, avoided paying hundreds of thousands of dollars in payroll taxes.

Labor Department officials "certainly showed their cards when their priority is construction and their priority is misclassification," Beall said. She said contractors need to increase their efforts in explaining why the construction industry needs and uses independent contractors.

"A homebuilder may build two or three homes a year," she said. "They don¹t have enough demand to hire fulltime employees. There¹s not enough economic demand to justify hiring. Now, under the guidance, that isn¹t as persuasive an argument.  We need to focus on why carpentry might be a special skill. "