Payroll Compliance for Trades Businesses: Navigating Regulatory Challenges

Skilled trades like HVAC, plumbing, construction, and other jobs in this vein come with an array of payroll compliance challenges. In addition to the standard labor and payroll regulations that all employers must comply with, there may be additional state laws governing the trades. Trade unions may also set their own stipulations that affect pay, benefits, overtime, and downtime, which make payroll obligations more complex than those of non-union workers.

Payroll Compliance for Trades Businesses Navigating Regulatory Challenges

Misclassification of workers is incredibly common in the trades, with the Department of Labor citing that this is often due to off-site workers working multiple jobs and tradespeople often having their own tools. Failure to correctly classify workers, pay them at the correct rates, and comply with overtime regulations can result in expensive lawsuits or even being shut down. Navigating payroll compliance for trade businesses can be challenging, but here is our overview of common pitfalls to look out for.

Understanding Payroll Compliance for Trades Businesses

All businesses must comply with federal, state, and local payroll regulations. This includes minimum wage, overtime, withholding taxes from employees' paychecks, paying into federal and state unemployment funds, keeping employee records, and ensuring that workers are correctly classified as employees and independent contractors where needed.

Labor law for the trades can get complex, but payroll compliance in this context means having a workers' compensation plan established prior to hiring employees. Other mandated benefits, including any state and local bonding obligations, also must be accounted for.

Regulatory Landscape for Employees in the Trades

Labor laws, tax laws, and laws specifically governing the trades will affect trade businesses. The government is cracking down on misclassification in the trades, focusing on construction in particular. The latest final rule from the Department of Labor effective March 11, 2024 now utilizes the Fair Labor Standards Act (FLSA) to determine whether a worker is an employee or independent contractor. This replaces the looser interpretation of the "economic reality test" that was previously applied.

Even if a worker brings their own tools to work or works for multiple employers, it may not necessarily make them an independent contractor by default. Workers who are incorrectly classified as employees are denied minimum wage, overtime, workers' comp if they are injured, and other protections, and may result in lawsuits and heavy fines. Since the FLSA applies to a vast majority of workers, the new Department of Labor rule will make it more difficult to claim trades workers as independent contractors.

States may impose their own rules governing worker classification in that may be stricter than federal guidelines. Unions also impose minimum pay tiers, overtime rates, and benefits that union shops must comply with. Non-union workers may also need to be paid at union rates even if they are not members, depending on the stipulations of the project.

On the flip side, the Inflation Reduction Act has appropriated funds for apprenticeships in the trades. Numerous tax credits for training and hiring apprentices in the construction and clean energy fields are now available, with specific wage and hour requirements that must be met. While these new credits will increase payroll tax compliance costs, the immense benefits may outweigh them.

Common Challenges in Payroll Reporting for Trades

Payroll compliance in the trades can be difficult due to industry-specific challenges. Misclassification frequently occurs due to the fluctuating workforces in project-based trades.

Projects may be a few weeks or a few years, depending on the size and scope of the developer's vision. A simple repair may only take a few days, but construction on a new hotel can take a year or longer.

This complicates compliance strategies in the trades based on both federal and state regulations governing the trades specifically, and rules for all workers, such as the final rule from the Department of Labor regarding classification. Workforces can be both permanent and itinerant, with little surety whether they're being classified correctly.

Overtime pay is another challenge in the trades. Generally, employees must receive at least 1.5 times their base pay if they are not exempt and work more than 40 hours per week.

State labor laws may have more stringent rules of their own regarding overtime. Most trades workers are not exempt, but executive, administrative, and managerial jobs likely are exempt from overtime rules. Trades businesses will likely have a blend of exempt and non-exempt workers as far as overtime regulations go.

According to the Department of Labor, only about 10% of American workers belong to a union. Over half of the 14.4 million American union employees belong to public sector unions, with private sector union participation remaining the highest in utilities, transportation, and warehousing. In many states, trade unions like IBEW are the most popular private-sector unions.

Unions set guidelines for how much their members must be paid, overtime, paid time off, benefits, and other aspects of compensation and working conditions. Complying with union demands can be costly, and create additional payroll obligations and challenges. The union employs some employees and not the firm, depending on the industry and location.

Best Practices for Payroll Tax Compliance

Trades payroll regulations can be challenging to keep up with, but not impossible. Leveraging human resources technologies that stay current on regulatory changes and industry-specific compliance obligations can simplify managing workforces. Payroll reporting for the trades helps keep track of more than just timesheets and paystubs and can be used to obtain lucrative tax credits after monitoring eligible hires' work hours.

Regularly auditing employee records and project-specific records also ensures that you are making a good-faith effort to comply with regulations.

Ensure your trades business stays compliant with Workforce PayHub's expert payroll services. Contact us today!


Eric Jones
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