Here’s the #1 Problem in Construction Payroll

BenefitMall is a payroll and benefits administration provider based in Dallas, Texas. Among their many offerings is a specialized payroll solution designed for the construction industry. Why would they offer such a solution? Because construction payroll is more complex than payroll in other industries. It is also rife with opportunities to make mistakes, as evidenced by the #1 payroll problem plaguing construction companies.

Do you know what that problem is? If you guessed employee misclassification, you are correct. Of all the possible mistakes construction companies can make with their payroll, employee misclassification is at the top of the list. It’s a mistake that costs construction companies tens of thousands of dollars in fines and back pay.

Employee or Contractor

So, why do construction companies have so much trouble with employee misclassification? Because of the way the industry handles labor. Because construction is so fluid, it is not unusual for companies to avoid strict employment levels. Rather, they prefer to use contractors and subcontractors based on need.

Consider a company specializing in residential homes in Indiana. Indiana’s climate dictates that new home construction slow down or cease entirely during the winter months. The company will not need as many workers during the off-season. So rather than hiring all of their employees in the spring only to lay them off in the fall, they maintain the smallest possible workforce and make up for increased labor needs through contractors and subcontractors.

The problem is that the IRS distinguishes between regular employees and contractors for tax and FLSA purposes. This distinction requires employers to classify their workers accordingly. Get it wrong and a company could be on the hook for back pay, taxes, and penalties.

Some Mistakes Are Intentional

It is assumed that the majority of construction companies guilty of misclassifying workers have made legitimate mistakes. Those mistakes are the direct result of not understanding federal law. Unfortunately, not all mistakes are accidental; some cases of misclassification are intentional.

According to ABC57 News in South Bend, IN, the local construction industry there has a big problem with intentional misclassification. It’s not surprising when you understand how much money is at stake. One of the companies profiled by the news station estimated how much money could be saved by intentionally misclassifying workers.

Amazingly, misclassifying for just one year would save that company in excess of $3 million. The savings would be realized through lower taxes, lower worker’s comp rates, and lower contributions to Social Security and Medicare.

The numbers show that intentionally misclassifying workers as contractors benefits the companies that do it. That doesn’t make it right, though. And for the company that is caught doing so, the penalties can be severe. Another company mentioned by ABC57 News was fined in excess of $82,000 – not accounting for back taxes, Social Security, and Medicare.

The Solution to Misclassification

All of this leads to the inevitable question of how misclassification can be avoided. There are two things to consider, starting with getting a firm handle on the law. The IRS offers a 20-point checklist to help construction companies figure out whether their workers are employees or contractors.

The second part of the solution involves either speaking with an experienced attorney or contracting payroll to a company specializing in serving the construction industry. Either solution partners company management with a payroll expert who knows how to correctly classify workers.

If you own a construction company, don’t take any chances with classification. Inadvertently or purposely misclassifying employees as contractors is not only wrong, but it could also cost your company a fortune. It’s not worth the risk.

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