Understanding Worker Misclassification
Wage theft is the denial of wages or employee benefits that are rightfully due. In the construction industry, this often occurs when a worker is misclassified as an independent contractor (1099) when they should be classified as an employee (W-2). A misclassified worker is deprived of essential benefits like overtime pay, health insurance, and retirement contributions. The government may also lose out on payroll and income taxes that would otherwise be collected.
The Gray Area of Intent
While there are truly malicious forms of wage theft—such as not paying for all hours worked, deducting money from paychecks for unauthorized reasons, requiring employees to work off the clock, not paying a fair wage, and falsifying time records—it’s important to recognize that not all instances of worker misclassification arise from malicious intent.
Many contractors, for instance, may not understand the legal nuances of worker classification. In their efforts to stay competitive, they may inadvertently misclassify workers, believing they are operating within the bounds of the law.
For example, a construction business owner might classify a worker as an independent contractor because they work on a project basis and have other construction jobs on which they perform work. Such cases illustrate the complexities of classification and the need for a nuanced understanding of intent.
Local Liability Laws
In Washington, D.C. (and similarly in Maryland and Virginia), the law holds general contractors accountable for wage violations committed by subcontractors, including their lower-tier subcontractors, regardless of intent. Liability flows up to the contractor above them, all the way to the general contractor. This upward liability means that if a subcontractor fails to pay workers appropriately, the general contractor can be held responsible for those wage violations. This legal framework is designed to protect workers by ensuring that if they are not paid correctly by their actual employer, they have recourse through the higher-tier contractors. In addition, the laws reinforce the obligation for general contractors to monitor compliance throughout the supply chain and promote fair labor practices.
Rock Spring’s Experience
Seven years ago, at the end of 2017, Rock Spring received a subpoena from the D.C. Office of the Attorney General asking for a list of documents related to our employees’ payroll and, more importantly, our labor subcontractor partners’ payroll. At the time, we were confused and honestly didn’t understand what we could have done that would be in question.
Rock Spring was not misclassifying our workers, but unbeknownst to us, some of our labor subcontractor partners were generally unaware of the law and were treating their workers as independent contractors, leading to the liability flowing up to us.
I can confidently say that none of our subcontractors misclassified their workers with malicious intent. All their workers were paid well above minimum wage and at rates commonly accepted in the trade. It was also a common practice among trade workers to be classified as 1099. While this misclassification is not acceptable, it was not done to cheat workers in any way. It stemmed from a lack of understanding and awareness of the law, which both Rock Spring and our subcontractors shared at the time.
As soon as we received that subpoena, we began educating ourselves and our labor subcontractor partners. While it is never pleasant for a company to go through a government investigation, there was a silver lining: we educated ourselves, implemented a thorough compliance process, became early adopters of technology to help solve the problems, and were seen as leaders in creating a solution to the problem.
Evolution
Finding the right solution to combat worker misclassification was a process that evolved over time. We knew we had to work with our subcontractor partners to ensure they paid their workers as employees and not independent contractors, but it wasn’t as easy as flipping a switch.
The workers themselves did not want the change, as the bottom line for them was that once taxes were deducted, their take-home pay was lower than before. To enable the workers to take home the same amount they did when classified as 1099s, Rock Spring had to start paying our subcontractor partners much higher hourly rates for their employees. This shift was challenging at first because our pricing became less competitive in an industry that was still largely uneducated on worker misclassification, even at the general contractor level.
In addition to educating our subcontractor partners and asking them to change how they paid their workers, we knew we needed to continuously audit to ensure compliance. Our process of auditing led us to create our own software called Verfico, which we initially built ourselves. The idea was simple: have workers log in and out of our job sites each day via an app on their phones. Simultaneously, we required our subcontractors to provide payroll reports each week (like a certified payroll job) and then match the payroll to the logs, ensuring workers were paid fairly for all hours worked, paid overtime, and that payroll taxes were deducted.
As we began to build and use Verfico, we discovered many additional advantages, including better insight into who was on each job site, improved data on the scope and tasks being worked on, and enhanced safety tracking for both training and violations. We also incorporated workforce scheduling.
Verfico has since become its own entity, and is available to other subcontractors and general contractors to use to combat wage theft. Learn more about Verfico.
Final Takeaways
Addressing worker misclassification requires proactive solutions. Education and training programs for employers can help raise awareness about classification laws and best practices, thus reducing the prevalence of unintentional misclassification.
Rock Spring has a commitment to compliance, and we follow three key practices:
Understand liability: We take responsibility for ensuring that our own employees and the employees of every tier of subcontractors below us are paid correctly and not misclassified.
Work with trusted partners: We maintain a small group of trusted labor subcontractor partners. If we look to add partners, our vetting process can be intimidating, but we prioritize working with other companies who want to operate correctly.
Adopt an educate-and-audit approach: We work to educate our subcontractor partners on labor laws and continuously audit them to ensure compliance and help them recognize any mistakes. A system like Verfico is crucial in this process.
I have spoken on this topic to general contractors and subcontractors, again in an effort to educate the industry, and because of Rock Spring’s commitment to compliance. Should you have any questions, please feel to reach out.
Kate Dugan is the Vice President of Operations at Rock Spring Contracting, LLC. Kate has her MBA from UCLA Anderson School of Management and her Bachelors of Arts from The University of Washington.
Rock Spring Contracting, LLC, founded in 2010 by Nick DeSarno and Sean Keegan, is a top tier commercial subcontractor headquartered in the Greater Washington DC area, with additional offices in Richmond, Charleston, and Atlanta. Offering a wide array of service lines including but not limited to high-end interiors and ceilings, data center construction, demolition, and hauling, Rock Spring prides itself on quality craftmanship and relationships with long-term clients. Their award winning work is a direct result of the high performing team in place, positive and safe working environments, and a culture that values each individual across the company.
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