Manpower Issues and Using Temporary Labor Have Potential Legal Implications

2020 has been a year like no other for the United States. COVID-19 and its resulting recession have touched nearly every aspect of the economy. While the construction industry has been deemed an “essential” business in many states and jurisdictions, COVID-19 has still impacted the industry. According to a September 2, 2020 report by the Associated General Contractors of America (AGC), COVID-19 has contributed to construction project delays, disruptions, and even layoffs and furloughs, with 60 percent of respondents to a recent AGC survey reporting cancellations or delays. AGC partnered with Autodesk to conduct the survey in August; it polled respondents about the preceding twelve months.

The finding that COVID-19 has prompted delays and cancellations likely won’t surprise many in the construction industry. But also significant is that whatever impact the industry has felt, it hasn’t been enough to counteract the industry’s shortage of skilled craft labor. The labor shortage existed before the recession; on March 16, 2020, the trade group Associated Builders and Contractors (ABC) reported that the construction industry needed to hire an additional 550,000 workers compared with 2019 (up from a 440,000 increase from 2018 to 2019). The September AGC report indicates that, as recently as August, firms in the United States were still struggling to fill skilled labor positions; about 52 percent (down from 80 percent in 2019) reported difficulty filling hourly craft positions and 28 percent (down from 47 percent) reported difficulty filling salaried positions. The survey results revealed some employers cited COVID-related issues, like workers’ health risks and childcare concerns, as contributing to the struggle.

The labor shortage impacts many aspects of the industry; however, this article will attempt to identify potential legal implications and issues for firms to consider as they contract in these unique economic conditions.

Manpower Issues and “Default” Notices

Labor shortages might impact the number and scope of projects contractors choose to take, but unexpected shortages on pending projects present unique legal issues. Most standard agreements entitle owners and general contractors to fast recourse if a contractor or subcontractor fails to perform its obligations due to inadequate manpower. For example, the American Institute of Architects (AIA) A201-2017 General Conditions of the Contract for Construction, in § 2.5, entitles the owner to recourse if the contractor fails to “commence and continue correction” of its failure to “carry out the Work.” A201-2017 § 2.5 affords the contractor ten days to do so following the owner’s notice of default. The AIA’s corresponding subcontract provision (A401-2017 § 3.5) establishes a five-day notice to cure period for subcontractors. Many contractors and subcontractors know, however, that shorter notice periods — commonly, 48 hours — are increasingly routine on commercial projects, with some contracts requiring that defaults be cured or corrected within this period in order to avoid assessment of back charges for supplemental labor. Upon the contractor or subcontractor’s failure to commence or correct the default in question, the owner or upper-tier contractor typically is entitled to proceed with self-correction measures including hiring its own workers or subcontractors to make corrections, or to supplement the labor force of the party in default. The default might also entitle the owner or contractor to terminate the party in default.

In addition to contractual rights to cure defaults, contractors in some states also enjoy a statutory right to an opportunity to cure. Contractors in the many states that have no such statutes may wonder to what extent contractual notice-to-cure provisions are enforceable. Generally, parties on commercial projects are entitled to contract for such provisions, and they are enforceable in court. Courts’ strict enforcement of such provisions can set a high standard of compliance for both the defaulting party and the owner or upper-tier contract. For instance, in a New York case, the upper-tier contractor’s notice to its subcontractor that it “may declare [subcontractor] in default” if the subcontractor failed to correct deficiencies within 48 hours did not necessarily constitute a sufficient notice to later support termination for cause because it only implied that it might default the subcontractor. [See RKI Construction, LLC v. WFF, Inc., No. 14-CV-1803 (E.D.N.Y, Nov. 6, 2020).] In a delay-related case, the Ninth Circuit Court of Appeals has also found that, because the default (a severe delay) could not be cured within 48 hours, a general contractor was entitled to terminate its subcontractor without providing 48 hours to cure per the subcontract terms. [See L.K. Comstock & Co. v. United Engineers & Constructors, Inc., 880 F.2d 219 (1989).] Contractors facing a short default notice window likely should assume that the contract terms will be strictly enforced; if the contract requires them to “commence” a cure within a specific time period, they might take the position that they need not completely cure within 48 hours but merely present a plan to do so.

If owners and general contractors successfully enforce contractual default provisions, what damages can they legally recover? AIA A401-2017 entitles a general contractor to withhold the “reasonable cost” of remedying the subcontractor’s default or neglect. The “reasonable” language is consistent with the common-law duty to mitigate damages that is incumbent upon most litigants in breach of contract actions. This means that the non-breaching party is responsible for taking reasonable measures — such as shopping around to find a competitive price for replacement labor — to minimize its damages arising from the breach. Parties may agree by contract that additional damages, such as liquidated damages where delay is an issue, are recoverable.

Temporary Labor and Related Liability Considerations

Contractors and subcontractors struggling to adequately staff jobs, or perhaps facing a default notice, might have to look to temporary labor to fulfill contractual obligations. Staffing firms can be a lifesaver for contractors in this position, although working with temporary labor poses potentially complex legal issues. Leading up to 2020, federal courts were split on the issue of  whether and when contractors could be considered joint employers of temporary laborers, or even a subcontractor’s employees. Effective March 16, 2020, the U.S. Department of Labor (DOL) has published a final rule in an effort to provide clarity on this issue. Under the rule, a contractor will be found to be a joint employer of a worker when the worker performs work that simultaneously benefits another person who is “acting directly or indirectly in the interest of the employer in relation to the employee.” (See 29 C.F.R. § 791.2.) The DOL rule provides that a worker is acting in the contractor’s interest such that employer becomes a joint employer when the contractor:

· Hires or fires the employee;

· Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

· Determines the employee’s rate and method of payment; and

· Maintains the employee’s employment records.

Being considered a “joint employer” can obligate a contractor to comply with wage and hour laws, workers’ compensation rules, and other employment laws. It is therefore crucial for any contractor considering using temporary labor to consult with an attorney to consider the legal implications of doing so. A written contract establishing terms such as who is entitled to fire, who sets the terms of the employment, and who maintains personnel records is likely important, as well as making clear who is responsible for maintaining workers compensation insurance on the workers in question. 

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at [email protected].

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.