Legal and Regulatory

Contractor Liability for Subcontractor Employee Wages

State statutes and the contract may determine whether a contractor is liable when a subcontractor fails to pay appropriate wages.
By Jason Lambert
July 28, 2019
Legal and Regulatory

A lot of thought and care should, and generally does, go into the selection of a subcontractor for a project. Contractors not only need to ensure that the subcontractor can perform the work, but also that they have the proper insurance and financial wherewithal to see the project through to the end.

Contractors may also worry about whether a subcontractor is paying its employees a proper wage and if they can be held liable. There are generally two circumstances where this arises and multiple ways general contractors or higher-tier subcontractors can guard against paying twice for a portion of the work. It is called “paying twice” because if a contractor pays a subcontractor $50,000 to perform a task, and then later has to pay that subcontractor’s employees $10,000 because the subcontractor failed to do so, the contractor has effectively paid twice for a portion of the contract.

The first way a contractor or higher-tier subcontractor can be made liable for the wages paid by a subcontractor to its employees is by statute. Contractors or higher-tier subcontractors working on federal construction contracts in excess of $2,000 are required by the Davis-Bacon Act and Related Acts (collectively, the “Davis-Bacon Act”) to pay their laborers no less than the prevailing wages set forth for the given geographic region by the Department of Labor. "Laborers" in the context of the Davis-Bacon Act includes lower tier subcontractors. Federal contracts in excess of $150,000 or $100,000 (depending on the applicable portion of the Davis-Bacon Act) also require contractors to ensure laborers are paid time-and-a-half for overtime.

Similar statutes also exist in certain states. In January 2018, California passed similar legislation that made contractors and higher-tier subcontractors liable for unpaid wages to subcontractors and lower-tier subcontractors on private projects, in addition to public projects. Later in 2018, Maryland passed legislation making contractors and higher-tier subcontractors liable for laborers unpaid wages on private projects only. Oregon and New York have similar statutes. Notably, many of these statutes also impose penalties of up to triple the amount due to the employees on contractors who are found to be liable for subcontractor wages, plus awarding attorneys’ fees to the prevailing party. These additional costs can quickly turn $100,000 in unpaid wages into a $750,000 (or more) judgment.

Even where a statute does not expressly impose liability on a contractor, there is a second way a contractor or higher-tier subcontractor can be held liable for the wages of a lower-tier subcontractor. If the contractor or higher-tier subcontractor is found to be a joint employer of the lower-tier subcontractor, then the contractor or higher-tier subcontractor can be found liable for unpaid wages even in the absence of a statute. Since 2017, whether a contractor or subcontractor was a joint employer of a lower-tier subcontractor’s employees has rested on the following six factors:

  1. whether, formally or as a matter of practice, the alleged 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 alleged 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 alleged joint employer controls, is controlled by or is under common control with the other alleged joint employer;
  5. whether the work is performed on a premise owned or controlled by one or more of the alleged joint employers, independently or in connection with one another; and
  6. whether, formally or as a matter of practice, the alleged 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.

Earlier this year, the Department of Labor proposed a simpler, four-factor test to use when determining whether companies were joint employers of an individual, focusing on whether an alleged joint employer:

  1. hires or fires the employee in question;
  2. supervises and controls the employee's work schedule or conditions of employment;
  3. determines the employee's rate and method of payment; and
  4. maintains the employee's employment records.

It will likely be late 2019 before additional guidance is provided on which test will continue to be the standard, but the important thing to note is that, in the absence of a statute, the determination of whether a contractor can be liable for a lower-tier subcontractor’s failure to pay appropriate wages is a very detailed and fact-intensive inquiry.

That said, the circumstances of joint employment can arise easily and without a lot of notice in the construction context. Suppose a general contractor has a trim carpenter who does great work. The general contractor uses that company on all its projects installing moldings, doors and hardware and before long, the subcontractor is working almost exclusively for the general contractor. Over time, project managers begin directing how more and more of the work is performed by the subcontractor’s employees. Under these circumstances, an argument could be made that the general contractor has become a joint employer of the subcontractor’s employees.

So how does a company prevent this from occurring? Where a statute is in place, it can be difficult to craft contract language that contradicts or circumvents the purpose of the statute. But in other locations, contract language and diligence in training project managers can make all the difference. For example, contracts with lower-tier subcontractors can include warranties and representations that employees are being paid appropriate wages and language requiring the subcontractor to indemnify the contractor in the event there is a wage claim. Contractors or higher-tier subcontractors may also be able to require subcontractors submit documentation verifying that appropriate wages have been paid. Further, companies can train their project managers to walk the line between directing the means and methods of construction and controlling the way a subcontractor’s employee performs work.

In the end, using the above factors as a guide, or statutory language if applicable, a contractor or higher-tier subcontractor can prevent the unwelcome surprise of being found to be a joint employer of an unpaid subcontractor’s employee.

by Jason Lambert
Jason Lambert is a construction attorney representing contractors and subcontractors at Dinsmore & Shohl, LLP. 

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