INTRODUCTION
Employee misclassification occurs when a worker is paid by a business as an independent contractor but should be classified as an employee under New York law and federal law. It is particularly pervasive in the construction industry in New York, which has prompted the state legislature to pass the New York Construction Industry Fair Play Act.
New York and the federal government apply multiple tests to determine whether a worker is an employee or independent contractor, including the IRS 20-factor common law test, the ABC test for unemployment insurance, and the economic realities test under wage laws. These complex standards have led to unpredictable results and litigation over minimum wage, overtime, unemployment insurance, workers’ compensation, sick leave, and anti-discrimination protections. This article evaluates the current state of the law regarding misclassification of employees in New York, with a focus on developments related to workers in the construction industry.
LEGAL STANDARDS AND STATUTORY DEVELOPMENTS
Under New York Labor Law Sec. 511(1)(a), “employment” is defined as “any service under any contract or employment for hire, express or implied, written or oral”. In Matter of Vega, 35 N.Y.3d. (NY Ct. of Appeals 2020), the New York Court of Appeals observed that “the touchstone of the analysis [concerning the existence of an employer, employee relationship] is whether the employer exercised control over the results produced by the worker or the means used to achieve the results.” The Court of Appeals observed further that, due to varying nature of work across industries, the doctrine is “necessarily flexible” and cannot rely on a uniform set of factors to be uniformly applied in every situation. Accordingly, courts in New York apply a variety of employment tests depending on the specific employment benefits being sought and the governing statute.
(a) The Economic Realities Test:
Courts in New York may be tasked with determining whether an individual is an employee under the Fair Labor Standards Act (FLSA). In this case, New York courts apply the “economic realities test”, which evaluates four non-dispositive factors, namely whether the employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records. See e.g. Matter of Carver v. State of New York, 26 N.Y.2d 272. In Matter of Carver, the New York Court of Appeals applied the economic realities test to determine whether an individual who performed work for the City of New York in exchange for public assistance and food stamps should be protected by the federal minimum wage provisions of the FLSA. Finding that the City was an employer under the FLSA, the Court of Appeals observed that the City retained the ability to terminate the individual’s participation in the City’s Work Experience Program (WEP) and supervised and controlled the individual’s work hours as well as the manner and rate of payment of wages. Matter of Carver illustrates that the test courts in New York apply to an alleged employment relationship will depend on the particular statute that is the subject of the litigation.
(b) New York’s Common Law Test
In cases involving employment status under the New York Labor Law, courts in New York may apply the flexible common law test described in Matter of Vega, which focuses on the degree of control the employer exercises over the worker. Though no factor is determinative, courts may consider whether the worker (1) worked at his own convenience, (2) was free to engage in other employment, (3) received fringe benefits, (4) was on the employer’s pay roll and (5) was on a fixed schedule. See e.g. Bynog v. Cipriani Group, 1.N.Y.3d 193, 198. These factors are similar to the 20-factor test employed by the IRS in determining employment status for tax purposes in that it focuses on the employers’ degree of control. However, New York’s common law test is notable in its flexible application. See e.g. Matter of Vega (finding an app-based delivery service was an employer under New York’s flexible common law test).
(c) Industry Specific Standards Under the New York State Construction Industry Fair Play Act
Matter of Vega highlights the difficulty associated with complex, subjective standards for classifying workers as employees or independent contractors.. Fortunately, the state legislature has made significant strides in this clarifying this distinction with the passage of the New York Construction Industry Fair Play Act, codified in Section 861-a of the New York Labor Law. As the Appellate Division, Third Department noted in In re Truax & Hovey, Ltd., 2022 NY Slip Op 3294 (N.Y. App. Div. 2022), “the Fair Play Act was enacted as a measure to curb widespread abuses and fraud in the construction industry of misclassifying workers as independent contractors resulting in disproportionate and unfavorable consequences for both workers and the public.” Indeed, the New York State Department of Labor has cited studies estimating that anywhere from 15 to 25 percent of construction workers may be misclassified in New York State.
The Fair Play Act creates a statutory presumption that individuals working for an employer in the construction industry are employees unless the individual meets all three criteria set forth in Section 861-c(1) of the Labor Law, which is often referred to as the “ABC test”. The test requires that all the following criteria be met in order for a construction worker to be properly classified as an independent contractor:
(a) The individual is free from control and direct in performing the job, both under his or her contract and in fact;
(b) The service must be performed outside the usual course of business for which the service is performed; and
(c) The individual is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue.
Additionally, the Fair Play Act provides a framework to determine whether a sole proprietor, partnership, or corporation that provides services in the construction industry be considered a separate entity from its contractual counterpart. This “separate business entity test” is codified in Section 861-c(2) of the Labor Law and requires all of the following criteria be met:
(a) the business entity is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result;
(b) the business entity is not subject to cancellation or destruction upon severance of the relationship with the contractor;
(c) the business entity has a substantial investment of capital in the business entity beyond ordinary tools and equipment and a personal vehicle;
(d) the business entity owns the capital goods and gains the profits and bears the losses of the business entity;
(e) the business entity makes its services available to the general public or the business community on a continuing basis;
(f) the business entity includes services rendered on a Federal Income Tax Schedule as an independent business or profession;
(g) the business entity performs services for the contractor under the business entity’s name;
(h) when the services being provided require a license or permit, the business entity obtains and pays for the license or permit in the business entity’s name;
(i) the business entity furnishes the tools and equipment necessary to provide the service;
(j) if necessary, the business entity hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees’ income to the Internal Revenue Service;
(k) the contractor does not represent the business entity as an employee of the contractor to its customers; and
(l) the business entity has the right to perform similar services for others on whatever basis and whenever it chooses.
(d) Application and Penalties Under the New York Construction Industry Fair Play Act
Willful violation of the Fair Play Act by misclassifying employees are subject to civil penalties of up to $2,500 per instance of misclassification. Second violations within a five-year period may result in penalties of up to $5,000 per instance of misclassification. In severe cases, employes may face misdemeanor criminal prosecution resulting in possible jail time and a fine of up to $25,000 and debarment from public works projects for up to one year for a first offense,with greater fines and penalties for subsequent offenses. These penalties are applicable to misclassifications under New York’s Labor Law, Workers’ Compensation Law, and the New York State Tax Law. In addition, an employee who has been deprived of employment benefits due to misclassification may have a claim for lost wages above and beyond the statutory penalties set forth in the Fair Play Act.
CONCLUSION
Outdated, varying legal tests and inconsistent enforcement have allowed misclassification of employees as independent contractors to remain a persistent problem in New York. Specific legal standards such as those provided for in the Fair Play Act can be looked to as a statutory model to address the problem that exists in a wide array of industries, including delivery services, healthcare, janitorial services, and the gig economy writ large. If the problem is addressed, all citizens of New York will benefit through increased tax revenue, such as additional payroll taxes, and greater contributions to unemployment insurance.
Muchmore & Associates PLLC offers experienced representation to employees and employers alike regarding disputes under the New York Labor Law. Contact attorney Garrett Cusack, Esq. for a comprehensive consultation.
About Author
Garrett Cusack graduated from the University of Maryland School of Law in 2019, where he served as an Editor of the Journal of Business & Technology Law. Read more.
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