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Construction Companies: Employee Classification for Payroll (2026)
Employee classification in construction companies is two questions: whether laborers and carpenters are employees or contractors, and whether the employees are exempt from overtime. BEG runs construction company payroll for $45 per employee per month inside the payroll software you already use, all-inclusive, live in 3 to 5 business days.
Employee or contractor: how construction companies get it wrong
The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors.
DOL lists misclassification of laborers and mechanics, and failing to record hours in each classification when one worker performs two or more classifications in a day, among the compliance issues that most often arise on Davis-Bacon projects.
Exempt or non-exempt
Non-management construction workers such as carpenters, electricians, plumbers, iron workers, operating engineers and laborers are blue-collar employees who cannot be classified as exempt under the FLSA white-collar exemptions no matter how highly paid. Those exemptions require a duties test and a salary of at least $684 per week.
The salary floor for the executive, administrative and professional exemptions is $684 a week, restored to the 2019 level after the 2024 rule was vacated. Construction laborers at the May 2025 national median of $47,120 a year clear that salary test, so the duties test decides.
What misclassification costs
On Davis-Bacon covered work the prevailing wage is the basic hourly rate plus the fringe benefit amount listed in the wage determination. The contractor may satisfy it by paying the whole amount as cash wages or by a combination of cash wages and bona fide fringe benefits, and it must be paid for all hours worked on the site of the work.
Reclassifying a contractor as an employee means back FICA at 15.3 percent split between the parties, back FUTA, penalties and interest, and often back overtime under the FLSA at time and one half for two or three years.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors. [IRS Publication 5522]
- DOL lists misclassification of laborers and mechanics, and failing to record hours in each classification when one worker performs two or more classifications in a day, among the compliance issues that most often arise on Davis-Bacon projects. [DOL Fact Sheet #66]
- Non-management construction workers such as carpenters, electricians, plumbers, iron workers, operating engineers and laborers are blue-collar employees who cannot be classified as exempt under the FLSA white-collar exemptions no matter how highly paid. Those exemptions require a duties test and a salary of at least $684 per week. [DOL Fact Sheet #17P]
- On Davis-Bacon covered work the prevailing wage is the basic hourly rate plus the fringe benefit amount listed in the wage determination. The contractor may satisfy it by paying the whole amount as cash wages or by a combination of cash wages and bona fide fringe benefits, and it must be paid for all hours worked on the site of the work. [DOL Fact Sheet #66]
Read the full guide to the employee versus contractor test, and the rest of the construction company payroll library.
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Frequently Asked Questions
Are laborers in a construction company employees or contractors?
The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors.
What does the second test look at?
DOL lists misclassification of laborers and mechanics, and failing to record hours in each classification when one worker performs two or more classifications in a day, among the compliance issues that most often arise on Davis-Bacon projects.
Which construction company employees can be exempt from overtime?
Non-management construction workers such as carpenters, electricians, plumbers, iron workers, operating engineers and laborers are blue-collar employees who cannot be classified as exempt under the FLSA white-collar exemptions no matter how highly paid. Those exemptions require a duties test and a salary of at least $684 per week.
What does managed payroll cost for a construction company?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Prevailing wage compliance, certified payroll and union vs non-union are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including Construction Companies. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: IRS: Independent Contractor or Employee
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