You Might Have More Employees Than You Think You Do

If you are a contractor in the construction industry, there is a chance that a person who isn’t on your payroll is legally considered to be your employee.

If you meet the above description and you operate in North Carolina, South Carolina, Virginia, West Virginia, or Maryland, there is a particularly good chance that’s the case.

You might be thinking this is because of employee misclassification — which occurs when laborers are wrongly classified as independent contractors instead of employees. But that isn’t the whole story. Increasingly, unanticipated employer liability occurs not because of employee misclassification, but instead due to joint employment — a related but totally distinct issue.

This is happening because the definition of what constitutes employment, and joint employment particularly, has become increasingly broad in recent years. Many courts expanded the definition in response to stricter guidelines the Department of Labor’s Wage and Hour Division set forth during the Obama presidency. But this is perhaps most apparent in the Southeast, where, in January 2017, the Fourth Circuit Court of Appeals expanded the definition of joint employment in Salinas v. J.I. General Contractors, Inc. The Salinas decision, along with Hall v. DirecTV, a case involving employee misclassification decided the same day, predate the Department of Labor’s June 2017 rollback of the Obama administration’s restrictive guidelines. However, despite any efforts by the Trump administration to curtail the expanding joint employment doctrine, the Salinas and Hall decisions still control in the Fourth Circuit — and case law in other jurisdiction still controls as well. It’s unclear whether a change in the law is in store anytime soon; however, in January, the United States Supreme Court declined to hear DirecTV’s appeal in the Hall case.

The Salinas court found that a general contractor was considered the joint employer of its subcontractor’s employees and therefore that the general contractor was responsible for wage violations under the Fair Labor Standards Act (FLSA). The Salinas decision and the new standard it set for joint employment represent a significant change from the more than 30-year precedent on joint employment. This means contractors — and other entities who could be considered joint employers — need to understand the risks involved in joint employment and try, to the extent possible, to manage that risk.

Defining Joint Employment

So, what is joint employment? It generally occurs in two scenarios: horizontal joint employment and vertical joint employment. Vertical joint employment is the type at issue in Salinas and the type more likely to be applicable in the construction industry. The typical scenario is one where a contractor arranges or contracts with an intermediary employer to provide the contractor with labor in certain scenarios — in essence, the contractor-subcontractor relationship. Vertical joint employment can also arise when a contractor or subcontractor contracts or engages with a staffing company to provide it with laborers for a certain project or merely to carry out certain employer functions, like administering payroll and benefits.

Due to the Salinas decision, the law in the Fourth Circuit (North Carolina, South Carolina, Virginia, West Virginia, or Maryland) is that alleged joint employers must be “completely disassociated” from the intermediary employer. Otherwise, they will be considered joint employers of the intermediary’s employees. The court set forth six factors that determine whether two entities are not completely disassociated. Here are the factors with some analysis of how they could be applied to a general contractor-subcontractor or contractor-staffing firm relationship:

  1. “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;”

If a general contractor and subcontractor agree — or if they operate in such a way — that the contractor has the authority to direct the subcontractor’s employees, set their schedules and work assignments, enforce project site rules, and/or supervise their employees, this factor would support a finding of joint employment. Similarly, if a subcontractor contracts with a staffing firm for laborers and the subcontractor has the authority to set workers’ hours and locations, and/or dictate how they perform their work, the subcontractor is probably a joint employer.

  1. “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;”

When this factor is applied, any contractor who is authorized to assign a subcontractor’s or staffing firm’s employee to a particular project — or remove the individual from a project site — will likely be considered a joint employer of that individual.

  1. “The degree of permanency and duration of the relationship between the putative joint employers;”

Many general contractors establish long-term working relationships with certain subcontractors and/or staffing agencies and work with the same companies repeatedly on many jobs. These contractors are at risk of being found to be joint employers. Likely at an even higher risk are contractors that have few to no employees on their payroll and instead retain all of their workers through an intermediary, such as a staffing firm. These contractors may believe that using staffing firms reduces or eliminates their liability under federal and state employment laws. While it might allow these companies to delegate administrative functions like administering payroll and benefits, the law in the Fourth Circuit won’t allow them to avoid much liability.

  1. “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;”

This scenario is perhaps less common than the others but appears to apply when a contractor controls a subsidiary or affiliate. The contractor could be considered the employer of the subsidiary, affiliate, or indirectly owned entity.

  1. “Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another;”

Most general contractors or construction management firms are obligated to control and supervise the project site. This factor, as applied to such firms, would establish them as joint employers of subcontractors’ and staffing firms’ employees.

  1. “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.”

This factor pertains to the above scenario where entities try to delegate certain employer functions to staffing agencies. Virtually every staffer/client agreement is one where the parties “jointly determine” who has what responsibility for these functions. Even if the staffing agency is in charge of screening, payroll, workers’ compensation, and benefits, if the client performs any employer functions — like supervision, hiring, firing, and/or providing instructions, tools, or materials — then the client will likely be seen as a joint employer.

Examine Your Business Model

If a court within the Fourth Circuit is faced with any federal employment issue and a joint employment question exists, it will consider the above factors. Such a court would then likely analyze whether the laborers in question are employees or independent contractors — another, separate test. But the Salinas factors alone are enough to cause concern for most contractors who contract for labor.

Because the above factors apply regardless of the terms of any subcontract or staffing agreement, consulting with counsel about how to better draft those agreements is only one step for contractors who are concerned about expanded liability. They also need to consult with counsel about the way they conduct business and whether it still works in light of the expanded joint employment doctrine.

Otherwise, they should understand that they may have more employees than they realized.

 

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.