How This Court Decision Could Affect Contractor Joint Employer Liability

Labor law is complicated, and you can be forgiven for not thinking about it very often. After all, it’s a dry subject, and as long as you treat your employees well and pay them on time, you should be in the clear, right?

Unfortunately, a recent court case could have a big impact on your liability to your employees — and even to subcontractors you don’t consider to be your employees at all.

An Important California Court Case

Back in January, the Fourth Circuit Court of Appeals heard a case known as Salinas v. Commercial Interiors, Inc. and J.I. General Contractors, Inc. In this case, Commercial Interiors was the general contractor that subbed out drywall work to J.I. General Contractors on a regular basis. Employees of J.I. sued over missing overtime payments as a violation of the Fair Labor Standards Act (FLSA), and the court decided that it wasn’t just their direct employer — J.I. — that was liable for these violations. The court also ruled that the the general contractor that hired J.I. as a sub was jointly liable for making sure J.I.’s workers were paid fairly.

If you’re finding yourself in a bit of a panic and thinking, “Wait! Now I’m legally responsible for FLSA rules for every subcontractor I hire?” — well, you’re having the same reaction that rippled out through the entire construction industry when this ruling came down. Plenty of people have argued that making general contractors responsible for their subs makes the entire concept of independent contractors meaningless — is everyone an official employee now?

Not exactly.

In this particular case, the general contractor — Commercial Interiors — and the subcontractor — J.I. — had a particularly close working relationship that muddied the waters of what independent contracting should actually look like, according to the court. For example, J.I. employees used tools and even branded clothing provided by Commercial Interiors while on the job, and they were they only firm Commercial ever used to do drywall work. They also worked almost exclusively on Commercial Interiors’ projects, only taking on outside work when there there was no available job at Commercial and they needed the money.

To clarify the relationships between contractors, the court provided a new six-factor determination test to decide if general contractors are jointly liable for subs:

The Six-Factor Test

If at least some of these apply to your business arrangement with subcontractors, you could be held jointly liable as the employer of your sub’s people:

1. You and your sub share power over directing or supervising the sub’s workers.
2. You and your sub share power over hiring and firing individual workers or in changing their contract terms or working conditions.
3. Your relationship with your sub is long-term and/or permanent.
4. You have an ownership interest or management power over your sub.
5. Work is completed on property you own or otherwise control.
6. You perform at least some duties of an employer for your subs, whether it’s payroll, worker’s comp, providing tools, clothing, etc. to workers.

It’s important to note that you don’t have to have a formal agreement or contract spelling out these items in your relationship with your subs for it to “count” — the ruling takes into consideration the history of your actual business practices as well. You also don’t need to meet all or even a majority of these six conditions to be found liable for your sub’s employees. If a court finds that your business practices meet part of these standards, you’re likely to be on the hook for overtime pay and other violations of the FLSA.

Changes at the Department of Labor

One of the biggest labor law issues facing contractors today is how to classify their workers. Are they employees, or are they independent contractors — like freelancers — who work for themselves? If your sub doesn’t classify their workers properly, that’s when things can get complicated for you when it comes to joint employer liability. You could be financially on the hook for their mistake, whether it was a genuine misunderstanding or one brought about by trying to cut corners and save a little cash.

On this front, the Department of Labor (DOL) under the Trump administration has removed two “Administrator’s Interpretation” letters put in place in 2010 under President Obama. These letters had provided detailed guidance on the legal meaning of “independent contractors” and ‘Joint employers” in a way that many businesses thought was expensive and onerous. Without these guidelines, a more traditional definition of what it means to be an independent contractor/freelancer/subcontractor will likely be the norm once again.

The Bottom Line

So, is the main contractor responsible for sub contractors or not? Maybe. Your best bet for dealing with the changing legal landscape is to keep an eye on those six standards listed above and do your best to disentangle your business from your subs’ businesses. Let them handle their employees and provide the tools, etc. You can also minimize your risk by working only with well-established subs that have no labor violations to avoid being caught up in a messy liability case as well.