By Matthew C. Bouchard
The federal appellate court, having jurisdiction over North Carolina wage and hour claims arising under the Fair Labor Standards Act (FLSA), has allowed the employees of a defunct subcontractor to pursue overtime and other wage claims against a general contractor.
All contractors performing construction projects in North Carolina should be alarmed by this development.
In January, the Fourth Circuit Court of Appeals held in Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017) that a general contractor can be considered the “joint employer” of one of its subcontractor’s employees – and therefore responsible for those employees’ claims under the FLSA – when the GC exerts too much control over the subcontractor’s operations and employees. In so holding, the Fourth Circuit established a “joint employer” standard that is remarkably broad and provides federal trial court judges with considerable discretion in applying the new standard to future cases.
Bottom line, the “joint employer” standard established by Salinas could ensnare unsuspecting GCs who fail to treat their subs as the independent contractors they should be. This article is intended to assist contractors in avoiding that result. It summarizes the key fact of Salinas, discusses the “joint employer” standard established by the decision, and offers some tips for avoiding liability under this new standard.
The facts of Salinas reveal that the GC exerted extraordinary control over its subcontractor’s operations
Subcontractors typically serve as independent contractors to the general contractors who employ them. The facts set forth in the Salinas decision, however, suggest that the defunct drywall subcontractor in question was hardly “independent” from the GC.
For example, the employees/laborers of the defunct sub who were the plaintiffs in Salinas performed nearly all of their work on the GC’s jobsites, and not for any other general contractor. The GC, not the subcontractor, provided most of the tools, materials, and equipment necessary for the laborers’ work. On one occasion, the GC rented a house for the laborers to stay in during a project. The GC required the laborers to attend frequent meetings regarding their assigned tasks and safety protocols. And the GC also required the laborers to sign in and out with the GC’s foremen upon reporting to and leaving the jobsite each day.
It gets worse.
The GC provided the laborers with stickers bearing the GC’s logo to wear on their hardhats and vests while working on the GC’s jobsites. The GC also provided the defunct subcontractor with GC branded sweatshirts for its laborers to wear while working on the GC’s projects. And the defunct sub’s supervisors instructed the laborers to tell anyone who asked them that they worked for the GC. Yikes.
It’s often said that bad facts make bad law. The facts recited above couldn’t have been much worse in a case in which the degree of control exerted by the GC over the employees of its subcontractor was the central issue.
The standard articulated by the Fourth Circuit
In evaluating whether one person or entity is a “joint employer” with another for the purposes of sharing FLSA liability, the Fourth Circuit in Salinas ruled that the “fundamental question” is whether the two persons or entities “are ‘not completely disassociated’ with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of the worker’s employment.” In analyzing this “fundamental question” in future cases, the court instructed district courts sitting in the Fourth Circuit to consider the following six factors:
- Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;
- Whether, formally or as a matter of practice, the putative 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;
- The degree of permanency and duration of the relationship between the putative joint employers;
- Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;
- Whether the work is performed on premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and
- Whether, formally or as a matter of practice, the putative 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.
Importantly, the Fourth Circuit went on to say that these six factors are not exhaustive; lower courts can give weight to other considerations that speak to whether a purported joint employer shares or codetermines the essential terms and conditions of a worker’s employment.
Tips for protecting your company
It is unclear how a general contractor and a subcontractor – or, for that matter, a subcontractor and one of its sub-subcontractors – can collaborate successfully on a construction project without inadvertently falling within one or more of the six factors set forth in the “not completely disassociated” test recited above. What is clear from Salinas is this: general contractors who exert near total control over their subcontractors’ operations and employees are almost certainly exposing themselves to liability for FLSA claims asserted by those subcontractors’ employees. The same conclusion applies to first-tier subcontractors who exert too much control over their sub-subcontractors.
What is also clear, now that Pandora’s box has been opened, is that Salinas might represent only the tip of the “joint employer” iceberg (with apologies for the mixed metaphors). Trial court and appellate judges could conceivably apply its rationale to other types of cases, such as workers’ compensation and unemployment insurance claims, just to name a pair.
How should contractors aim to protect themselves in this still evolving, troubling landscape? A few tips spring to mind:
- Subcontract with caution. As the court itself warned in the Salinas opinion, “(o)nly when the general contractor hires a fly-by-night operator … or one who plans to spurn the FLSA, is the entity exposed to the risk of liability on top of the amount it has agreed to pay the contractor.” Price isn’t everything; make sure you’re subcontracting with substantial, competent entities. If the deal looks too good to be true, it probably is.
- Make sure independent contractors remain “independent.” Seek to avoid the transgressions made by the GC in Salinas. Don’t force your subs’ or sub-subs’ laborers to don your company’s logo. Don’t arrange for those laborers’ temporary housing, and don’t pay for incidental expenses directly. Don’t directly supervise those laborers in the field – let their own supers and foremen handle that responsibility. And don’t provide those employees with the tools they need to do their work – again, let their bosses do that.
- Observe proper communication channels. A general contractor’s superintendents and foremen should communicate, coordinate, and provide direction to the subcontractors’ superintendents and foremen, and then rely on those individuals to convey whatever information has been discussed to the subcontractors’ own laborers (and, if necessary, sub-subs). Same tip applies to subcontractor superintendents/foremen who interact with sub-subs: deal directly with downstream supervisory personnel, not downstream laborers.
- Consult your legal counsel. Because it is impossible to predict how future courts might weigh the six factors set forth in the “not completely disassociated” standard set forth in Salinas, spend some time discussing internally your company’s operations, policies, and procedures. Then ask your attorney to gauge your risk and ponder whether modifying your practices might be a good idea.
Matt Bouchard is a partner with the law firm of Lewis & Roberts, PLLC. Matt’s practice is dedicated entirely to the construction industry. He regularly represents general contractors, first-tier subcontractors, and the sureties who bond them in his practice.