Employee misclassification is an area of employment law that has steadily become a prominent subject of litigation in recent years. The decision of whether a specific worker is properly identified as an employee or independent contractor is not always easy to make and depends on the specific policies and practices applicable to each worker. Making the correct decision is critical. Consistent with numerous other jurisdictions across the country, a new lawsuit filed by the District of Columbia Attorney General demonstrates the District’s intent to curb instances of worker misclassification particularly within the construction industry. Construction companies must be vigilant when making the determination of whether a worker must be classified as an employee or independent contractor to avoid potentially harsh penalties that may arise when a worker is misclassified.

Employees vs. Independent Contractors

It’s important to note the legal differences between the rights afforded employees versus independent contractors. For instance, employees are guaranteed a minimum wage, and in the case of non-exempt employees, overtime compensation. Employees also may be entitled to certain benefits under state law, such as paid vacation, holidays, or time off, as well as meal breaks, rest breaks, or other benefits. Ultimately, independent contractors are deemed to work for themselves. Thus, in most circumstances, independent contractors are not entitled to receive such benefits. Accurate classification is critical because companies face harsh penalties for misclassification. State laws often provide for double, triple, or quadruple damages for unpaid wages occasioned by misclassification, plus attorneys’ fees and costs to the worker. But how do companies determine which workers are proper employees and which are permissible independent contractors?

In January 2024, the Department of Labor proposed a final rule for determining independent contractor/employee status. The proposed final rule advocates for a six-factor test which considers:

1. the worker’s opportunity for profit or loss depending on managerial skill;
2. the investments made by the worker and the employer;
3. the degree of permanence of the working relationship;
4. the nature and degree of control the company has over the worker;
5. the extent to which the work performed is an integral part of the company’s business; and
6. the worker’s skill and initiative, although additional factors may be considered as well.

These factors are similar to tests utilized by courts in many states to make the independent contractor/employee determination.

The broad and vague nature of the various tests makes classification decisions difficult for companies. And there is very little opportunity to short circuit or simplify the classification determination. Even when the worker and company agree to an independent contractor relationship, that agreement is not controlling. The actual circumstances of the work and the parties’ relationship will govern review, often through hindsight.

The Case

This primer on classification issues leads us to the case in question. On June 18, 2024, the Attorney General for the District of Columbia filed a lawsuit in the District of Columbia Superior Court against a large construction subcontractor performing mechanical services work on several high-profile projects across the District. The lawsuit alleges that the company regularly violates District law to bolster its profits by intentionally misclassifying its workers as independent contractors instead of employees. Specifically, the company is accused of obtaining misclassified workers through a rotating cast of “labor subcontractors,” i.e., second-tier subcontractors, which exist primarily to provide misclassified construction workers for the subcontractor’s projects. The labor subcontractors are included as co-defendants in the complaint. These labor subcontractors are alleged to serve as what are commonly referred to as labor brokers, which are prevalent in the construction industry and serve as intermediaries between workers and the non-union construction companies they service. Notably, these entities serve no supervisory or decision-making role on the projects for which they are subcontracted. Their sole purpose is to provide low-cost workers which are often misclassified as independent contractors.

In the lawsuit, the Attorney General states that: “By misclassifying their employees as independent contractors, these companies have systemically denied the employees of their rights to minimum wage, overtime pay, and paid sick leave, resulting in unlawfully suppressed labor costs.” Such alleged illegal cost reductions not only benefit the contractor and its labor subcontractors, but are passed up through the contracting chain to all general contractors who contract with the mechanical subcontractor. Accordingly, the Attorney General included a well-known general contractor as a co-defendant, seeking to hold both the mechanical subcontractor and general contractor strictly liable for their labor subcontractors’ violations of the District’s wage-and-hour laws. The Attorney General is claiming relief in the form of restitution, injunctive relief, and statutory penalties, among other authorized damages under the District’s Workplace Fraud Act, Minimum Wage Revision Act, and Sick and Safe Leave Act.

How Can Construction Companies Avoid Litigation?

While allegations of wage theft and unfair labor practices have always been prevalent in the construction industry, this lawsuit particularly builds on the Attorney General’s ongoing efforts to stop employee misclassification in the construction industry, including addressing the perceived improper use of labor brokers. Construction companies should examine their hiring practices and ensure that accurate classification decisions are made as to each worker. What is more, general contractors and higher-tier subcontractors should implement compliance obligations for their subcontractors and lower-tier subcontractors in order to avoid wage-and-hour liability passing up the chain to an otherwise compliant construction company. Ensuring accurate classification of workers will help construction companies avoid being targeted by state and local regulators and the potential financial impact of wage-and-hour litigation.