Dive Brief:

• The attorney general for the District of Columbia sued Power Design on Monday, alleging that the Florida-based electrical contractor purposefully misclassified at least 535 construction workers as independent contractors so that it could cut costs, avoid legal responsibilities and evade taxes. The lawsuit also alleges various minimum wage, overtime and other labor violations and claims that senior management was involved in the scheme. In a request for comment, Power Design told Construction Dive that it had not yet been served and that Power Design believes it is in compliance with all applicable laws and regulations in the district.
• In addition to Power Design, Attorney General Karl A. Racine's suit also names JVA Services LLC and DDK Electric Inc., two labor brokers hired to staff Power Design work sites. 
• The lawsuit alleges the companies violated the District's Workplace Fraud Act, which requires companies to classify workers as employees in in most circumstances, as well as the Minimum Wage Revision Act, Sick and Safe Leave Act and Unemployment Compensation Act from 2014 through 2017. It seeks monetary and injunctive relief for the affected employees and recovery of penalties to the District of Columbia, which could be $1,000 to $5,000 for each misclassified worker. Injunctive relief is a court order for a defendant to stop a specified act or behavior.

Dive Insight:

Misclassifying construction-industry employees is an offense many states are taking measures to combat. For example, Colorado’s governor, John Hickenlooper, issued an executive order in June that created a task force to investigate and find ways to address the misclassification of construction employees as independent contractors. Such misclassification not only hurts employees, but because the misclassification is an attempt to have a lower cost of doing business, it also hurts companies who correctly classify employees and therefore have higher bids.

Employee misclassification also leads to workers' compensation insurance fraud. William Canak, workers' comp and employment policy expert and professor at Middle Tennessee State University, estimated that up to 30% of construction workers are misclassified. 

In May, Manhattan District Attorney Cyrus R. Vance Jr. sought indictments against New York City Parkside Construction for allegedly defrauding more than 500 workers out of $1.7 million in pay and the New York state Insurance Fund out of $7.8 million in workers' comp premiums. This came after Vance charged area construction companies and owners with stealing more than $2.5 million in wages from more than 400 construction workers, beginning a crackdown on wage theft. Vance also formed the Construction Fraud Task Force in 2015 to investigate safety hazards in addition to construction-related fraud.

The Department of Labor spells out what constitutes an employee versus an independent contractor. Although no single factor exists to differentiate the two, the U.S. Supreme Court considers seven factors to be significant, including the permanency of the relationship, the extent to which the services rendered are an integral part of the principal’s business and the alleged contractor’s opportunity for profit and loss.