Delaware’s New Construction Services Industry Regulations – “Examples of Workplace Fraud”

On September 1, 2017, the State of Delaware, Department of Labor’s Division of Industrial Affairs (the “Division”), at the direction of the Secretary of the Delaware Department of Labor, adopted amendments to its regulations (the “Regulation Amendments”), which take effect ten days from the date of its publication in the Delaware Register of Regulations. See here.

These pertain only to the “construction services industry,” which includes, “without limitation,” all building or work on buildings, structures, and improvements of all types such as bridges, dams, plants, highways, parkways, streets, tunnels, sewers, mains, power lines, pumping stations, heaving generators, railways, airports, terminals, docks, piers, wharves, buoys, jetties, breakwaters, levees, canals, dredging, shoring, rehabilitation and reactivation of plants, scaffolding, drilling, blasting, excavating, clearing and landscaping.

The law, at 19 Del. C. § 3503, states: (a) An employer shall not improperly classify an individual who performs work for remuneration provided by an employer as an independent contractor; (b) An employer has improperly classified an individual when an employer-employee relationship exists, as determined in subsection (c) of this section, but the employer has not classified the individual as an employee; (c) An “employer-employee” relationship shall be presumed to exist when work is performed by an individual for remuneration paid by an employer, unless to the satisfaction of the Department the employer demonstrates that the individual is an exempt person or independent contractor; (d) A person shall not knowingly incorporate or form, or assist in the incorporation or formation of, a corporation, partnership, limited liability corporation, or other entity, or pay or collect a fee for use of a foreign or domestic corporation, partnership, limited liability corporation, or other entity for the purpose of facilitating, or evading detection of, a violation of this section; and (e) A person shall not knowingly conspire with, aid and abet, assist, advise, or facilitate an employer with the intent of violating the provisions of this chapter.

The law also states “[t]he Department shall adopt regulations to further explain and provide specific examples of subsections (c), (d), and (e) of this section.” The Regulation Amendments provide the following as “[e]xamples of Workplace Fraud” – which the Department says “are by no means exhaustive”:

Stated violation of 3503(c) – John Smith has an oral agreement with ABC Building Company (ABC) to do carpentry work on houses in a development designated by ABC.  John Smith supplies his own hand tools and has his own business license.  ABC supplies the material for each job.  He has to do the work himself and he works on a full time basis for the company.  For some work he is paid on a piecework basis and for some work he is paid on an hourly basis.  He does not have assistants, does not have an office, and does not advertise in newspapers or otherwise hold himself out to the public as being in the carpentry business.  ABC can fire him any time before he finishes a job without contractual liability. John Smith is an employee of ABC.

Stated violation of 3503(c) – Sarah Green is a painting subcontractor who has contracted with XYZ General Contracting, Inc. (XYZ) to paint 264 houses. She in turn hired 40 painters to do the work for her and as condition of employment requires the 40 painters to obtain business licenses before they can start work and they will receive a 1099 tax document at the completion of the project, although only about 15 are on the job at any one time. She supplies all the paint, brushes, and ladders. She designates the house to be painted and either pays the painters per house or by the hour. Detailed instructions about the work are not necessary because of the painters’ skill in their trade. Sarah Green inspects the work and requires them to repaint any unsatisfactory work. The painters cannot engage helpers without her consent. She can discharge them for any reason, and they are free to resign at any time. The painters assume no business risks and have no capital investment. The painters are employees of Sarah Green, not XYZ, and Sarah Green is an independent contractor, not an employee of XYZ.

Stated violation of 3503 (c) – Chris Johnson, an experienced tile and terrazzo journeyman, orally agreed with Floor, Inc. (Floor) to perform full-time services at construction sites. He uses his own tools and performs services in the order designated by Floor, Inc. and according to its specifications. Floor, Inc. supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers’ compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time. Chris Johnson is an employee of Floor, Inc.

Stated violation of 3503(c) – Person A employs workers from a temporary agency. These workers are never given a chance to become permanent hires. Their contracts are continually renewed by Person A, with no opportunity provided to become full-fledged employees. Person A classifies them as independent contractors.

Stated violation of 3503(d), 3503(e) – Person A and Person B are co-owners of Construction Company X. At the suggestion of Person A, Person B assists in the incorporation of Subsidiary Company Y, nominally owned by his relative, Person C. When Construction Company X receives a contract, it sub-contracts the work on this contract to Subsidiary Company Y. Subsidiary Company Y hires the employees of Construction Company X, and treats them as independent contractors.

Stated violation of 3503(e) – Attorney A advises Contractor B to create a corporation separate and distinct from his primary business.  When his primary business receives contracts, Attorney A advises him to employ the employees from his primary business in the separate corporation as independent contractors.

Stated violation of 3503(c), 3503(d), 3503(e) – Person A enters into a “sub-contracting agreement” with “Worker B, LLC” and “Worker C, LLC.” These workers are paid once per week at an hourly rate by Person A.  Person A provides all materials and tools for them to complete the project.  Person A provides them with the truck they use for hauling materials, and they report to Person A’s business location at the start of the workday to receive instruction from Person A concerning the work they will perform.  No sub-contracting agreements are drafted or signed.  As a condition of entry into these “sub-contracting agreements” and of employment on the project, Workers B and C are required to obtain business licenses through the efforts of Person B, who is employed by Person A.  Bid forms do not list any of the sub-contractors.

The Regulation Amendments also state that “[if any portion of these regulations is adjudged by a court of competent jurisdiction to be invalid, or if by legislative action any portion loses its force and effect, the ruling or action will not affect, impair or void the remainder of these regulations.”

It will be interesting to see how these regulations are enforced. As an attorney, I am particularly interested in the second-to-last example of fraud, which pertains to a conspiracy. The regulation appears to state that the attorney who gives legal advice to the contractor client engages in illegal “conspiracy” to commit fraud. It will be interesting indeed to see how the Division’s new Regulation Amendments are received.