Legal Alerts Mar 31, 2017

Joint Employer Relationship Between Contractors and Subcontracts Redefined by a Federal Appeals Court

New Standard Puts Employers at Significant Risk

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Sweeping changes were made recently by a federal appeals court to the joint employer standard under the Fair Labor Standards Act that make it difficult for a contractor to avoid being considered a joint employer with its subcontractors. This dramatic change came in the matter of Salinas v. Commercial Interiors, Inc. and J.I. General Contractors, Inc., decided Jan. 25 by the U.S. Fourth Circuit Court of Appeals.
 
Previously, on Jan. 20, 2016, the Wage Hour Division of the U.S. Department of Labor issued an administrator interpretation to construe joint employment under the FLSA “as broad as possible” and to consider the prospect of joint employment where:

  1. the employee works for two employers who are associated or related in some way with respect to the employee (horizontal joint employment); or 

  2. where the employee has an employment relationship with one employer and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work (vertical joint employment). 

Salinas significantly alters the economic realities test. Indeed, even while recognizing that the joint employment doctrine has a “venerable and entrenched position,” the court stated its belief that courts have had “difficulty developing a coherent test distinguishing ‘separate employment’ from ‘joint employment.’” With this in mind, the court scrutinized the controlling precedent in jurisdictions throughout the country on this topic and came to the conclusion that it and other courts should no longer follow those cases and their progeny.
 
In making this declaration, the court unequivocally stated that it was creating a new test for determining whether two persons or entities constitute joint employers for purposes of FLSA. The fundamental question of this new test is “whether two or more persons or entities are ‘not completely disassociated’ with respect to a work 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.” (emphasis added.) To make this determination, the court gave six non-exclusive factors it believed courts should consider:

  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; 

  2. 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; 

  3. The degree of permanency and duration of the relationship between the putative joint employers; 

  4. 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; 

  5. 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; and 

  6. 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. 

The court stated that running afoul of one factor alone can serve as the basis for finding that two or more persons or entities are joint employers because the entities are “not completely disassociated.”
 
Using this new standard, the court found that all of the following facts rendered the contractor and subcontractor joint employers:

  • The subcontractor’s employees performed nearly all of their work for the contractor, on the contractor’s jobsites, and for the contractor’s benefit; 

  • The contractor provided the tools, materials, and equipment necessary for the subcontractor’s employees to work, with the subcontractor providing only small, handheld tools; 

  • On at least one occasion, the contractor rented a house near the jobsite for the subcontractor’s employees to stay during the project; 

  • The contractor actively supervised the subcontractor’s work on a daily basis by having foremen walk the jobsite and check the subcontractor’s progress; 

  • The contractor required the subcontractor’s employees to attend frequent meetings regarding their assigned tasks and safety protocols; 

  • The contractor required the subcontractor’s employees to sign in and out with the contractor’s foremen upon reporting to and leaving the jobsite each day; 

  • The contractor foremen frequently directed subcontractor’s employees to redo deficient work, communicating problems to the subcontractor’s supervisors who translated the information to the subcontractor’s employees; 

  • The contractor’s foremen told certain subcontractor employees to work additional hours or additional days; 

  • The contractor communicated its staffing needs to the subcontractor and the subcontractor based its employees’ assignments on the contractor’s needs; 

  • When the subcontractor performed certain “time and materials” work for the contractor and was paid on an hourly, rather than lump-sum, basis, the contractor told the subcontractor how many of its employees to send to the project and how many hours those employees were permitted to work; 

  • The contractor provided subcontractor’s employees with stickers bearing the contractor’s logo to wear on their hardhats and vests while working on the contractor’s jobsites; 

  • The subcontractor’s supervisors instructed the subcontractor’s employees to tell anyone who asked that they worked for the contractor; 

  • The contractor provided the subcontractor’s supervisors with the contractor’s branded sweatshirts to wear while working on the contractor’s projects; and 

  • On at least one occasion, the contractor required the subcontractor’s employees to apply for employment with the contractor and directly hired those employees. 

What Does This Mean For Businesses?
 
Conceding that these considerations and this new test make it challenging for a contractor to rebut an accusation that it is a joint employer with its subcontractors, the Fourth Circuit offered the following advice to employers: “[i]f everyone abides by the law, treating a firm as a joint employer will not increase its costs.” This statement should be chilling to employers of all types throughout the country.
 
For contractors, the Salinas court’s finding creates many challenges. It is not only commonplace, but expected, that a contractor will actively supervise all aspects of a project, check subcontractors’ progress, request subcontractors to perform work in a certain manner and at certain times, have a subcontractor redo deficient work, or perform many of the other tasks listed above. This is, after all, essential parts of most contractors’ responsibilities.
 
In addition to contractors, this decision has serious ramifications for other businesses. Indeed, if courts use a “not completely dissociated” standard and the factors that the court identified, businesses such as franchisors, insurers, banks, lenders, and other companies that grant access to its facilities for a contractor to perform services, and consumers or small businesses who dictate the times, manner, and methods of performance of its contractors, may also be prone to a joint employer finding.
 
For information on how this decision may impact your organization and strategies to overcome its challenges, please contact the authors of this Legal Alert listed at the right in the firm’s Labor & Employment practice group, or your BB&K attorney.
 
Please feel free to share this Legal Alert or subscribe by clicking here. Follow us on Twitter @bbklaw.
 
Disclaimer: BB&K Legal Alerts are not intended as legal advice. Additional facts or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information in this communiqué.
 


 

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