Recently, Governor Edward G Rendell signed into law a bill that could have a devastating impact on your business.  I’m not talking about a health care law, a tax law or an anti-discrimination law.  I’m referring to House Bill 400.

“What’s House Bill 400 have to do with me?” you ask.  House Bill 400, otherwise known as the Construction Workplace Misclassification Act, now clearly defines an Independent Contractor for the Construction Industry and specifies penalties for non-compliance, or misclassification.  The bill was approved on October 13, 2010 and takes effect on February 10, 2011. Now is the time to make sure you’re obeying the law.

Let’s back up a bit…    In a previous blog, Worker Compensation Insurance: Do You Need It?, we talked about classifying workers as either Employees or Independent Contractors and how it can be a challenge to make a determination.  We referenced the “IRS Test” and suggested you familiarize yourself with the rules so as to not be subject to penalties for misclassifying your workers.

We now have a clearer picture of what an Independent Contractor actually is.

Does This New Bill Impact My Business?

First, let’s look at who falls under this new law.  The law is intended for the Construction Industry.  Under the law, “Construction” is defined: “Erection, Reconstruction, Demolition, Alteration, Modification, Custom Fabrication, Building, Assembling, Site Preparation and Repair Work done on any Real Property or Premises under Contract, whether or not the work is for a Public Body and paid for from Public Funds.”

It might be a bit unclear as to whether your specific business falls under this definition, but it does seem to encompass a large variety of operations.

Second, let’s look at what is now considered an Independent Contractor.  A worker, “for purposes of Workers Compensation, Unemployment Compensation and Improper Classification of Employees,” is an Independent Contractor ONLY IF:

1) The individual has a written contract to perform such services

2) The individual is free from control or direction over performance of such services both under the contract of service and in fact.

3) As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.

The law seems to indicate that all three of these must exist for a worker to be classified as an Independent Contractor.

Further, there are specific guidelines as to how we can prove number “3″ above.  In order to be an Independent Contractor, the individual must essentially demonstrate they have their own business.  They can do that by meeting the following criteria: (An individual has their own business ONLY IF)

1) The individual possesses the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed

2) The individual’s arrangement with the person for whom the services are performed is such that the individual shall realize a profit or suffer a loss as a result of performing the services

3) The individual performs the services through a business in which the individual has a proprietary interest

4) The individual maintains a business location that is separate from the location of the person for whom the services are being performed

5) The individual either: (a) performs or has performed the same or similar services for another person while free from direction or control over performance of the services, or (b) holds himself/herself out to other persons as available and able to perform the same or similar services while free from direction or control over performance of the services

6) The individual maintains liability insurance during the term of the contract of at least $50,000

In other words, the individual must have their own tools, must have a financial stake in the work, must work or be able to work for others, must have their own business location and must have their own liability insurance.

What are the Penalties?

There you have it, a clear way to determine whether someone is an Employee or an Independent Contractor.  But, so what?

Let me finish this blog by detailing the penalties you might incur by misclassifying your workers.

Penalties may be up to $1,000 per violation for the first violation.  Note that each misclassified worker is considered a separate violation.  Further, each subsequent violation will be up to $2,500.

In addition, if it can be determined that an employer intentionally misclassified a worker, a court can issue a stop-work order, which would prevent the employer from using that misclassified worker.  If misclassified workers make up a majority of your workforce at a particular site, you can be issued a stop-work order for your entire operations at that site.  Violating the stop-work order can incur a fine of $1,000 per day.

Moreover, anyone who knowingly contracts with an employer that is knowingly intending to misclassify employees can be subject to these same penalties.  Ouch!

To read the bill in it’s entirety, go to www.legis.state.pa.us and search for H400.

If you are a business with employees or a business that works with third parties (customers), you should become familiar with this acronym.   

Employment Practices Liability Insurance

Do you hire or fire employees?  Has anyone heard the latest “news” around the water cooler?  Do you perform employee reviews?  Do you provide raises or promotions?  Do you or your employees interact with customers or vendors?  Have you ever told a joke at work?

All of these things can lead to an Employment Practices claim.  What is an Employment Practices claim?  Any claim of actual or alleged abuse, harassment, failure to promote or provide a raise, inappropriate hiring or firing, the list goes on.

Lawsuits involving race, retaliation, and harassment make up the top three Employment Practices claims.  There are also lawsuits alleging wrongful termination, failure to promote, being offended by a joke…  You’re getting the picture.

Of course, many of these claims could prove to be groundless.  However, defense costs alone could end up costing major dollars, possibly up to $50,000.  Without Employment Practices Liability Insurance you could be left paying out of your own pocket.  Wouldn’t you rather dip into an insurance company’s pocket?

Studies show that it is more likely for your business to suffer an Employment Practices loss than a General Liability or even a Fire loss.  Are you prepared?

The Equal Employment Opportunity Commission website, www.eeoc.gov, has excellent information regarding laws and regulations pertaining to employers.  The Home Page even gives examples of recent lawsuits and how they were settled.  It’s an eye-opener!

Employment Practices Liabilty Insurance can provide you with the protection you need.  Limits can be purchased to include defense costs and claims brought against you by a third party, such as a vendor or customer.  You can also buy a policy that provides defense costs in addition to the coverage amount.  It’s not too late to find out if your insurance agent can provide you with this coverage.  It’s a call worth making, and it’s insurance worth buying.

Many property insurance policies provide coverage on your computers if they burn in a fire or get stolen.  However, that policy probably does not provide coverage against computer viruses, or the coverage might be limited.

Some insurance companies offer a special kind of coverage designed specifically for risks inherent with computers.  It is often called “Electronic Data Processing (EDP).”  This coverage usually provides insurance against computer viruses.  But it also provides much more!

Computers can be susceptible to breaking down, either mechanically or electrically.  This could include malfunction, short circuit, blow-out, electrical or magnetic injury, or even accidental erasure of data caused by electrical or magnetic injury.  An EDP policy would normally provide coverage for these types of losses.  (Typically not covered is electrical damage which originates more than 1500 feet from your property.)

Also provided in a typical EDP form would be coverage on your portable computers, such as laptops, notebooks or handheld computers while away from your property.  This equipment may have limited coverage on your standard business insurance policy.

So, if your business depends on computers you may want to consider looking into whether your business insurance company can offer you this type of protection.

Think of it as a handkerchief for your PC.