Back in August of last year the National Labor Relations Board (NLRB) handed down a new standard that “rewrites U.S. Labor law and upends thousands of business relationships”. Their reasoning is that the old standard was “increasingly out of step with changing economic circumstances”. Reaction was swift with several calling it “alarming” and “fundamentally unrealistic”. The new rule stems from the board’s watershed Browning-Ferris decision which dealt with joint-employer relationships. While the rule will have far reaching effects on industries from staffing companies to franchises, it will also have great effect on the construction industry in terms of how our labor is classified. And yes you should at the very least be aware and even concerned.
The focus of this ruling for our industry concerns the classification of labor into the camps of employees and sub-contractors. While the NLRB, the governmental agency that implements the National Labor Relations Act, has found it within their jurisdiction and infinite wisdom to reverse several decades of practice in labor relationships, they are of the opinion that the line between the two to be blurred to the point that action separating them must be taken. The dissenters on the board who voted against this decision said it “reverses several prior decisions that established clear standards…all of which had been approved by powerful federal courts of appeal”. This is specifically addressing the use of 1099-based labor in the construction industry.
I’m sure many are aware of the IRS’s 20 Point Checklist for Determining an Independent Contractor (http://art.mt.gov/artists/IRS_20pt_Checklist_%20Independent_Contractor.pdf) which has been used in the past to make the distinction between an employee and a subcontractor. It now appears that the NLRB wishes to go beyond this already stringent test to make it even more so as the Obama administration chases “perceived worker rights abuses” as a main target as increased funding to both the NLRB and the IRS has increased in the last few years. The rule seems to actively seek to “restrict and tighten the use of independent contractors “ in the construction industry. This matter is especially poignant to the homebuilding industry since the NAHB states that a typical builder “relies on an average of 22 subcontractors to build a typical single family home.” Much of this stems from the toughening stance put forth from the Department of Labor and an administrator’s opinion that stated that the DOL “is putting more weight on a subcontractor’s economic independence when it decides whether that sub really ought to be regarded as an independent enterprise”. No longer is the IRS’s checklist enough. Now subcontractors must show “the managerial and business skills that are part of being and independent contractor, not just providing skilled labor”.
At stake is misclassification of your labor, if you use subcontractors, and the perception that they should have been W-2 based employees. The money it could cost you if they deem you have breached their new rules “can be ruinous”. It has been said that “reclassification attacks are very expensive to defend” and the resulting actions trigger a “domino-like effect” that if you lose your case can have you paying beloved fees such as past due overtime, past due health insurance, past due retirement benefits, past due employee benefits, past due worker’s compensation insurance, past due state and federal withholding taxes plus penalties and interest and enormous legal fees to the other side.
I doubt any installation contractors in our industry want to incur such onerous penalties that could potentially put them out of business, so each must understand the risks and rewards of this issue. This issue is currently being researched and information is being disseminated by the installation industry. There has even been a period of time after this ruling for associations such as ours to comment to the NLRB our opinion of the rule and how it will affect our members.
There has been legislation proposed in Congress to undo the rule by representatives whose constituents have shown an “immense backlash” to it. I urge you to consider the ramifications of the NLRB’s new rule on your business and our industry. Do some research into how the rule will be applied in your state. I also urge you to contact your legislators to support, as one congressman put it, “commonsense proposals that would restore policies in place long before the NLRB’s radical decision, the very same policies that served workers, employers, and consumers well for decades.”
A program on this very subject will be presented at the Surfaces show in Las Vegas and is just one of the educational opportunities available there January 19.