On Jan. 25, the 4th Circuit Court of Appeals dealt a significant blow to the traditional contractor-subcontractor relationship. In finding that a contractor and subcontractor could be considered “joint employers” of the subcontractor’s workers for purposes of the Fair Labor Standards Act (FLSA), the court’s decision has opened a Pandora’s Box of potential wage and hour issues, including claims for overtime pay against contractors and higher-tier subcontractors from the employees of lower-tier subcontractors.

In Salinas v. Commercial Interiors, Inc. and J.I. General Contractors, Inc., the 4th Circuit held that a general contractor (Commercial Interiors, Inc.) and one of its subcontractors (J.I. General Contractors, Inc.) were joint employers, creating possible liability on the part of the general contractor to the subcontractor’s employees for J.I.’s failure to comply with FLSA overtime requirements. Although the court dismissed the notion that the decision would render the independent contractor concept meaningless in the construction context, all general contractors and first-tier subcontractors should heed the Salinas decision and recognize that they now are potentially exposed to liability for FLSA violations committed by their subcontractors, at least when they exercise significant influence over the subcontractor and its employees.

The facts of the case as alleged by the J.I. employees show that J.I., a framing and drywall installation subcontractor, worked almost exclusively for Commercial, a general contractor. Although J.I. did work for one other general contractor during its existence, it was only when Commercial had no work available for J.I.

In finding that Commercial and J.I. could be joint employers for FLSA purposes, the 4th Circuit focused on various aspects of the relationship between Commercial and J.I., many of which are typical across the construction industry between general contractors and subcontractors.

• Commercial provided the tools, materials and equipment necessary for J.I. employees’ work.
• Commercial actively supervised J.I. employees’ work on a daily basis by having foremen walk the jobsite and check their progress.
• Commercial required J.I. employees to attend frequent meetings regarding their assigned tasks and safety protocols.
• Commercial required J.I. employees to sign in and out with Commercial foremen when reporting to and leaving the jobsite each day.
• Commercial foremen frequently directed J.I. employees, through the J.I. foremen, to redo deficient work.
• Commercial communicated its staffing needs to J.I., and J.I. based specific jobsite assignments on those needs.
• When J.I. performed certain “time and materials” work for Commercial and was paid on an hourly, rather than lump sum, basis, Commercial told J.I. how many of its employees to send to the project and how many hours those employees were permitted to work.

To be sure, the court considered other unique facts that were problematic for Commercial. In particular, Commercial provided J.I.’s employees with hardhats, vests and sweatshirts branded with Commercial’s logo and “instructed plaintiffs to tell anyone who asked that they worked for Commercial.”

In viewing the facts as a whole, it’s not surprising the court concluded a jury had the basis to find the two to be joint employers. What is surprising, however, is that many of the facts the 4th Circuit cited in support of its ruling are part and parcel of relationships between contractors and subcontractors across the country, and the court made a point of indicating that no single fact was necessarily dispositive.

Six Factors to Determine a Joint Employment Relationship
In reaching its decision, the 4th Circuit rejected a longstanding test applied by many appellate and lower courts across the country first set out by the 9th Circuit Court of Appeals in Bonnette v. California Health and Welfare Agency. Instead of applying the four factors set forth in the Bonnette case with respect to the “joint employment” portion of its new two-step test, the 4th Circuit in Salinas directed courts to “consider six factors to determine whether two or more persons or entities ‘are not completely dissociated’ with respect to the workers such that the persons or entities share, agree to allocate responsibility for, or otherwise co-​determine—formally or informally, directly or indirectly—the essential terms and conditions of the worker’s employment,” and therefore potentially render the persons or entities joint employers under the FLSA.

Those six factors are as follows:

• 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 directly or indirectly;
• 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 and conditions of the worker’s employment;
• the degree of permanency and duration of the relationship between the putative joint employer;
• 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;
• 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 another; and
• whether, formally or as a matter of practice, the putative joint employer may 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 4th Circuit noted that the facts pleaded in Salinas demonstrated that Commercial and J.I. satisfied all six factors. The court also declared that it was not necessary to find that a majority of the six factors had been satisfied in order to conclude that a joint employment relationship exists. Indeed, the court specifically stated that one factor could be sufficient for such a finding “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.”

Most significant for contractors and subcontractors in this new test is that the 4th Circuit equates a contractor’s providing “facilities, equipment, tools or materials necessary to complete the work” with handling payroll or providing workers’ compensation insurance for subcontractors. While most general contractors would recognize that subcontractors should handle their own payroll functions to maintain an independent contractor relationship, it is common for general contractors to provide facilities, equipment, tools or materials to subcontractors for the performance of their work.

In addition to a finding that two entities are “not completely disassociated,” there also must be a finding that the claimant in question is actually an “employee” as defined by the FLSA. The parties in Salinas did not dispute that the plaintiffs were employees; however, the court provided little discussion of this part of the two-part inquiry. But it’s no less important to contractors, particularly given the frequency with which independent contractors are used in construction.

What should general contractors and subcontractors do to minimize the risk of liability? The court’s Salinas opinion cautions general contractors against hiring a “fly by night operator” or one who plans to violate the FLSA. In more formal terms, the 4th Circuit gives contractors this guidance: “Either deal only with other substantial businesses or hold back enough on the contract
to ensure that workers have been paid in full.” All of this, of course, is easier said than done.

Arty Bolick is a partner in the Greensboro, N.C., office of Brooks Pierce and John Ormand is a partner in the firm’s Raleigh, N.C. office. For more information, visit brookspierce.com.