Let’s suppose that you own a Crackerjack Construction Contractors. You often augment your crew by sub-contracting with Sensational Subcontractors . The arrangement has worked very well for you. Your customers pay you, then you pay Sensational. You pay your employees, and Sensational pays its employees. Everyone is seems just great. Then one day, you find out that Sensational’s workers are claiming that they were entitled to but did not receive overtime pay. They file suit–against Crackerjack and Sensational. Wait. What? How is that Crackerjack’s problem? Do Sensational’s workers have a right to expect overtime pay from Crackerjack? One court says “yes”. If you are a general contractor and you use sub-contractors could you end up in this situation? Maybe. Is there anything you can do? Maybe. Read on and find out…
(images from slideshare.net and nahbnow.com)
You have probably guessed that the hokey hypothetical above is based on a real case, Salinas v. Commercial Interiors, Inc., N(o. 15-1915, 4th Circuit, January 25, 2017). You might also have guessed that “hot” employment law concept comes in play here is joint employment. Yep. The fourth circuit held that the general contractor and the subcontractor are joint employers. As such they are both responsible for the proper payment of their joint employees’ wages and overtime.
How did that happen?? The trial court level dismissed the employees’ overtime claims. The general contractor argued — and the District Court agreed–that its relationship with the sub-contractor was simply a typical general-subcontractor relationship, which is more or less a cornerstone in the industry. The District Court found that the general-sub relationship between the two companies was not one created to avoid compliance with wage and hour laws, and therefore the general contractor was not liable for the subcontractor’s failure to pay overtime to its employees. That was not the end, however.
On appeal, the Fourth Circuit, while not disputing the intent or legitimacy of the general-sub relationship, essentially found it irrelevant to the question of whether the parties are joint employers. The key is whether the entities operate independently enough of each other and whether they jointly control terms and conditions of the workers’ employment. To answer that question, the Fourth Circuit says that one must consider the following 6 factors:
- Do the potential joint employers, either formally or in practice, directly or indirectly jointly determine, share or allocate, the power to direct, control or supervise the worker?
- Do the potential joint employers, either formally or in practice, jointly determine share or allocate the power to hire or fire workers or modify terms or conditions of their employment, either directly or indirectly?
- What is the degree or permanency of the relationship between the two (or more) potential joint employers?
- Does one potential joint employer own or control or is it owned or controlled by, or is it under common control with the other potential joint employer, be it through shared management, or direct or indirect ownership interest?
- Is the work performed on premises owned or controlled by one or more of the potential joint employers, either independently or in connection with each other?
- Do the potential joint employers, either formally or in practice, jointly determine, share or allocate responsibility regarding certain employer functions (e.g. payroll, payroll taxes, workers comp coverage, providing the necessary materials for the work, etc.)
Note that when the court named these particular factors it also said that: a) one factor alone can, but won’t automatically be dispositive in determining joint employment; and b) the above 6 factors are not an exhaustive list of factors to consider. Wait. So what else is there? Anything that would tend to show that two or more entities share the ability to determine essential terms and conditions of the workers’ employment.
Applying the above factors, the court made and relied on the following findings: a) the subcontractor worked exclusively for the general contractor, except when the general contractor did not have sufficient work; b) the general contractor regularly communicated its site-specific needs to the subcontractor; c) the general contractor usually exercised control over the work site and dictated the conditions under which the subcontractor’s workers worked; d) the general contractor required the subcontractor’s workers to sign time sheets that it retained; e) the general contractor required the subcontractor’s workers to attend meetings regarding safety and scope of work; f) the general contractor required the subcontractor’s employees to hard hats and vests bearing the general contractor’s logo; g) the general contractor had an on-site foreman for the job in question, and the foreman one time even threatened to terminate one of the subcontractor’s workers; h) the general contractor provided all the tools used.
It shouldn’t be difficult to see how the court found that general contractor exercised enough control over the subcontractor’s workers to be a joint employer. Granted, this decision is only binding on those courts within the Fourth Circuit (Maryland, the Carolinas and the Virginias). That said, we have seen the concept of joint employment expand significantly in recent years. What then, might you do to minimize joint employment liability if you use subcontractors? Here are a few options:
- While a general contractor might set start and end times for work, and might determine safety on the site, it can still take steps to ensure that the subcontractor otherwise acts independently of it. In other words, the general contractor should aim to minimize the degree of control it exercises over the subcontractor’s employees or work conditions;
- Consider holding back some of the money due under the contract, to ensure that the subcontractor pays its workers in accordance with FLSA and state wage and hour requirements;
- Make sure to work with subcontractors with a good compliance track record.
Well-written indemnification clauses (i.e. limitation of liability, reimbursement for wage claims) are also a good idea.
OK, that should be enough food for thought this week. Bye for now!
Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.
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