In a recent article, we discussed steps taken by the U.S. Department of Labor ("USDOL") to crackdown on the rampant misclassification of employees as independent contractors.  The USDOL effectively created a default rule that all workers should be presumed to be employees unless and until proven otherwise.  The USDOL's primary goal was to ensure that most workers would be entitled to the protections set forth in the Fair Labor Standards Act ("FLSA"), in particular, minimum wage and overtime obligations. 

If you are among the many who felt the USDOL's approach unfairly expanded the traditional definition of "employee," then you will not be pleased to hear that the Fourth Circuit Court of Appeals (the federal appellate court for North Carolina) has recently taken the USDOL's position one step further by arguably expanding the definition of "employer."  Taking aim at the traditional contractor-subcontractor relationship, the Fourth Circuit recently ruled that both the contractor and subcontractor could be considered "joint employers" of the subcontractor's workers for purposes of the FLSA.  So how could this affect your business?  Under the FLSA, joint employers are jointly and severally liable for complying with the wage and hour laws, including minimum wage and overtime obligations.  Thus, if your subcontractor fails to pay its workers appropriately, then the workers (or perhaps the USDOL on behalf of the workers) will argue you are responsible—even if you have already fully paid the subcontractor in accordance with your contractual obligations. 

Because the Fourth Circuit's expansion of the joint employment doctrine presents a significant risk to any North Carolina business that regularly relies upon subcontractors, staffing agencies, or other contract labor, it is important to understand the basis of the court's decision.

Salinas v. Commercial Interiors, Inc.

The plaintiffs in the recent Fourth Circuit Court of Appeals case, Salinas v. Commercial Interiors, Inc., were a group of individual drywall installers who were engaged to work for a drywall installation subcontractor referred to as "J.I."  The plaintiffs filed a complaint alleging wage and hour violations against both J.I. and Commercial Interiors, Inc. ("Commercial"), a general contractor that subcontracted work to J.I.  Although the plaintiffs were employed directly by J.I., they claimed that Commercial was liable for the wage and hour violations under the joint employment doctrine.

At the district court level, Commercial argued that its relationship with J.I. was nothing more than a typical subcontractor relationship which is a staple within the construction industry.  The district court agreed, holding that Commercial did not jointly employ J.I.'s workers because J.I. and Commercial had entered into a "traditionally . . . recognized," legitimate contractor-subcontractor relationship which was not intended to avoid compliance with the wage and hour laws.  As such, the district court held that Commercial was not liable for any alleged wage and hour violations with respect to J.I.'s employees.

On appeal, the Fourth Circuit rejected the district court's analysis.  The Fourth Circuit held that the "legitimacy of the business relationship" between J.I. and Commercial was not dispositive of whether the two entities constituted joint employers for purposes of the FLSA.  Instead, the court ruled that there is one fundamental threshold question which must be considered in determining whether joint employment exists:

Whether the two 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 answering this fundamental question, the Fourth Circuit stated that it will consider the following six factors:

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 Fourth Circuit noted that the above factors are not exhaustive nor is any one of them individually necessary.  In other words, courts are now permitted to look at any factor that establishes that a purported joint employer shares or codetermines the essential terms and conditions of a worker's employment.  Further, the court clarified that:

. . . one factor alone can serve as the basis for finding that two or more persons or entities are "not completely disassociated" with respect to a worker’s employment if the facts supporting that factor demonstrate that the person or entity has a substantial role in determining the essential terms and conditions of a worker’s employment. 

What Does the Salinas Decision Mean?

Effectively, the Salinas decision means that the deck is stacked in favor of a finding of joint employment.  Indeed, after applying the above standards to the facts in Salinas, the court concluded that Commercial was in fact a joint employer of the plaintiffs.  In so holding, the Fourth Circuit focused on the following facts:

• J.I. worked almost exclusively for Commercial, with exceptions occurring only when Commercial did not have sufficient work available;
• Commercial regularly communicated to J.I. its site-specific staffing needs;
• Commercial (along with the general contractor) typically dictated the worksite and set the schedule which the J.I. workers were required to satisfy;
• Commercial required that the J.I. workers use timesheets (which were retained by Commercial) to sign in and out on a daily basis;
• Commercial required the J.I. workers to attend regular meetings to cover the scope of work and safety issues;
• Commercial instructed the J.I. workers to tell anyone who asked that they worked for Commercial and required the workers to wear hardhats and vests reflecting Commercial's logo;
• Commercial had a foreman on the worksite who would supervise daily activities for quality control purposes; on at least one occasion, the foreman threatened to terminate a J.I. worker for substandard work; and,
• Commercial provided nearly all of the necessary tools and equipment (even though its contract with J.I. represented the opposite).

Commercial argued that the above facts are typical, if not standard, in many contractor-subcontractor relationships within the construction industry.  As such, Commercial reasoned that a finding of joint employment would effectively "render every general contractor a joint employer of its subcontractor's employees and thereby impose unreasonable financial burdens on general contractors." 

As an initial matter, the court disagreed with Commercial's argument, maintaining that it was still possible to avoid a finding of joint employment if the facts established that the contractor and subcontractor were acting entirely independently of each other.  In support of this, the court noted that simply setting "the start and end times for all work on a jobsite or establish[ing] site-wide safety protocols" would not automatically result in joint employment liability "absent additional evidence of the general contractor's codetermination of the essential terms and conditions of the workers' employment."  Further, the Fourth Circuit added that a contractor would not become a joint employer merely "by engaging in the oversight necessary to ensure that a contractor's services meet contractual standards of quality and timeliness."

Nonetheless, it is clear from the Fourth's Circuit opinion that many contractor-subcontractor relationships will result in a finding of joint employment.  In these instances, the Fourth Circuit advises contractors to protect themselves by either: (1) working only with subcontractors who are legitimate and substantial businesses that satisfy their obligations under the FLSA; or (2) holding back sufficient amounts on the contract to ensure that the workers are paid in full.  In support of this position, the Fourth Circuit reasoned:  "Only 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.'"

Conclusion

The Fourth Circuit's decision in Salinas may seem unreasonable, but the court's advice is sound.  North Carolina contractors would be well served to evaluate their subcontractor relationships and confirm that they are working with legitimate businesses that can be trusted to satisfy their wage and hour obligations.  Moreover, these same contractors should verify that they are protected by appropriate indemnification clauses that may serve as insurance in the event they are forced to cover an unexpected wage claim.  Without either of these protections in place, contractors are at risk of substantial liability in the event their subcontractors fail to comply with their obligations under the FLSA.