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Contractors now have to deal with a new law, the PA Construction Workplace Misclassification Act. The law, enacted in October of 2010, and effective February 10, 2011, could possibly impact your business activities and insurance polices.

As a contractor, some of your independent contractors could soon be reclassified as employees. Meant to contain evasion from Unemployment Compensation and Workers’ Compensation obligations, the law:

• spells out how to determine if an individual is an independent contractor or an employee, and
• provides for civil penalties, as well as criminal penalties for intentional infractions

For purposes of workers’ compensation and unemployment compensation laws, an individual who performs services for remuneration in the construction industry can be considered an independent contractor ONLY IF he or she:

• has a written contract to perform the services
• is free from control or direction over performance of the services, both under the contract and in fact, and
• is customarily engaged in an independently established trade, occupation, profession or business with respect to the services performed

To be “customarily engaged in an independently established trade, occupation, profession or business,” an individual must demonstrate that:

1. The individual possesses the essential tools necessary to perform the services
2. The individual’s arrangements with the person for whom the services are being performed is such that the individual shall realize a profit or loss
3. The individual has a proprietary interest in the business
4. The individual maintains a separate business location
5. The individual has previously performed the same or similar services or holds himself out to other persons as available to perform similar services
6. The individual maintains a minimum of $50,000 in liability insurance

We encourage you to familiarize yourself with the new law by contacting your attorney, trade association or other sources. Make sure you keep apprised of any developments (some adjustments could be made to the law in the next legislative session). And most importantly, review your contracts in light of these new conditions, and assess if any of your subcontractors could be impacted.

In addition to the fact that Pennsylvania may view your contracts with independent contractors differently, insurance companies (particularly for Workers’ Compensation) will likely incorporate these new definitions in their audit process. Making sure all criteria are met and evidenced will facilitate the process and keep audit premiums in check.

If you have any questions regarding your insurance policy, please do not hesitate to contact our office. We can also provide sample contracts for your review and use upon request. We’ve also attached a synopsis of the new law from an attorney. Feel free to provide this to your subcontractors.

Click here for Workplace Misclassification Act Overview.pdf