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Contractors Could Face Liability for Subcontractor Wage Violations

A New Ruling Found GC Liable for its Sub's Violations
Lerch Early's Legal Update 2017, Vol. 2

Under a recent ruling, a general contractor could face liability for the wage and hour violations of its sub- contractor.

In Salinas v. J.I. General Contractors, Inc., the U.S. Court of Appeals, 4th Circuit adopted a new, broader test for joint employment under the Fair Labor Standards Act (FLSA). Applying the new test, the Salinas court found that a general contract- ing and finishing company was the joint employer of the workers of a drywall installation company that the general contractor used on projects and therefore was liable for the subcontractor’s violations.

The New Joint Employer Test

Most jurisdictions employ a joint employer test focusing on the relationship between the worker and the alleged joint employer. In Salinas, the Fourth Circuit adopted a two-step framework that focuses on whether the entities should be treated as joint employers and, if they are, whether a worker is an employee or independent contractor of the joint employer. Under this new test, two or more entities or persons are joint employers if they are “not completely disassociated” regarding a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise co-determine – formally or informally, directly or indirectly – the essential terms and conditions of the worker's employment. The Fourth Circuit set forth a non-exhaustive list of six factors for courts to use to determine whether joint employers are completely disassociated:

1) Whether, formally or as a matter of practice, the alleged joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means.

2) Whether, formally or as a matter of practice, the claimed joint employers jointly determine, share, or allocate the power to – directly or indirectly – hire or fire the worker or modify the terms or conditions of the worker’s employment.

3) The degree of permanency and duration of the relationship between the alleged joint employers.

4) Whether, through shared management or a direct or indirect ownership interest, one claimed joint employer controls, is controlled by, or is under common control with the other putative joint employer.

5) Whether the work is performed on a premises owned or controlled by one or more of the alleged joint employers, in- dependently or in connection with one another.

6) Whether, formally or as a matter of practice, the claimed joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work.

Under the new joint employer test, if the factors demonstrate that the employers are “not completely disassociated,” then the analysis shifts to whether the combined influence over the essential terms of the work demonstrates the worker is an employee as opposed to an independent contractor. If the worker is an employee, then the two entities will be jointly liable for any wage and hour violations.

The Future Under the Salinas Decision

The Department of Labor under President Trump could undercut Salinas through future regulations. The decision is also subject to further appeal through a companion case involving DirectTV that the Fourth Circuit issued on the same day as Salinas. For now, however, Salinas is something that all businesses working with subcontractors in the Fourth Circuit must take into account.

It is difficult for two businesses that collaborate on work to be completely dissociated. There will be some standards for work, some collaboration, some give and take over the work product. The best working relationships between a business and its subcontractors probably have seamless collaboration. Under Salinas, the more collaboration and integration the more likely the two entities will be found joint employers. Because of this new reality, businesses should make sure their subcontractors comply with wage and hour laws. Doing so requires businesses to thoroughly vet the subcontractors selected for projects.

Businesses should also continue to avoid assigning work to the workers of subcontractors or overseeing the work, requiring workers of subcontractors to wear their uniforms, and using the same subcontractors for the same work repeatedly. The risks created by an expansive joint employer test are best mitigated proactively rather than in response to a lawsuit.

Michael Neary is an employment attorney and commercial litigator who works with businesses to prevent and defend against employee claims. He also litigates commercial disputes such as real estate controversies, business fraud, corporate and partnership dissolutions, and commercial contract claims. Contact Michael at 301-657-0740 or mjneary@lerchearly.com.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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