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Client Alert: BUT THEY’RE NOT MY EMPLOYEES?! – Fourth Circuit Holds that General Contractor Is Liable for Subcontractor’s Wage and Hour Violations

By T. Cullen Stafford

Client Alerts Labor & Employment

The Fourth Circuit Court of Appeals (which encompasses North Carolina, South Carolina, Virginia, West Virginia, and Maryland) recently held that a general contractor was liable for its subcontractor’s failure to comply with the minimum wage and overtime requirements contained in the Fair Labor Standards Act (“FLSA”). In Salinas v. Commercial Interiors, Inc., the Fourth Circuit adopted a new test for determining “joint employer” liability, which will likely expand the definition of who constitutes a joint employer under federal employment laws. The Fourth Circuit’s decision also constitutes yet another sign that courts and administrative agencies are stepping up enforcement against “joint” or “integrated” employers.

Background

Under the FLSA and equivalent state statutes, employers are responsible for ensuring compliance with minimum wage and overtime requirements. Under these laws, it is possible for a worker to be jointly employed by two or more employers who are both simultaneously responsible for compliance.

In Salinas v. Commercial Interiors, the plaintiffs worked as installers for J.I. General Contractors, a drywall installation subcontractor. J.I. provided nearly all of its services to a single general contractor, Commercial Interiors (“Commercial”). Commercial’s foremen routinely supervised the plaintiffs’ work and provided regular feedback and instruction to the plaintiffs through J.I.’s supervisors. Commercial also set schedules for the subcontractor’s employees, filled out paperwork related to the plaintiffs’ work hours, and provided all of the necessary tools and equipment to the plaintiffs. J.I.’s employees were also required to wear Commercial-branded sweatshirts while working on Commercial’s construction projects.

In 2012, the plaintiffs filed a collective action in the United States District Court for the District of Maryland, alleging that J.I. failed to pay plaintiffs’ wages, including overtime wages, in violation of the FLSA. The plaintiffs also alleged that they were jointly employed by Commercial, and that Commercial was therefore liable for J.I.’s wage and hour violations. The lower court granted Commercial’s motion to dismiss, based on the general contractor’s argument that it did not “employ” the plaintiffs. In its motion to dismiss, Commercial also argued that its contractor-subcontractor relationship with J.I. was “normal and standard in the construction industry.”

The Fourth Circuit Adopts a New Multi-Factor Test

On January 25, 2017, the Fourth Circuit overturned the lower court’s ruling and held that Commercial constituted a joint employer under the FLSA. In reaching its decision, the Fourth Circuit held that to determine whether two entities constitute joint employers, lower courts must engage in a “two-step” analysis. Specifically, the court stated that a joint employment relationship exists when: “(1) two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of a worker’s employment; and (2) the two entities’ combined influence over the essential terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.”

Importantly, the Fourth Circuit noted that in the first step of its joint employer analysis, courts should focus on the relationship between the two putative employers – not on the relationship between the individual employee and the putative employer. This holding represents a break from every other federal circuit, all of which apply some variation of the “economic realities” test to determine whether the putative employer exercised sufficient “control” over the individual employee.

In its decision, the Fourth Circuit also embraced the Department of Labor’s (“DOL”) expansive definition of joint employment. Specifically, DOL regulations state that a joint employment relationship exists when employment by one employer “is not completely disassociated from employment by the other employer.” Although the Fourth Circuit’s decision in Salinas suggests that this “completely disassociated” standard is not as broad as its name suggests, plaintiffs are nonetheless likely to seize on this expansive definition to justify asserting claims against any entities that are affiliated with their primary employer.

To determine whether employers are “completely disassociated,” the Fourth Circuit also held that lower courts should apply a test consisting of six non-exclusive factors. These six factors are as follows:

  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, 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.

Applying these factors to the facts of Salinas, the Fourth Circuit held that Commercial and J.I. constituted joint employers under the FLSA. The court also noted that the fact that “Commercial and J.I. engaged in a ‘traditional,’ ‘normal,’ or ‘standard’ business relationship has no bearing on whether they jointly employ a worker for purposes of the FLSA.”

Bottom Line

The Salinas decision reflects a national trend, in which courts and administrative agencies have sought to broaden the definition of joint employment under state and federal employment laws. In fact, the Fourth Circuit’s decision comes only one year after the DOL’s new Administrator’s Interpretation related to the joint employer doctrine, which also greatly expands the definition of joint employment under the FLSA. For more information related to the DOL’s Administrator’s Interpretation, please see Wyrick Robbins’ Spring 2016 Newsletter, available here.

In light of these trends, employers should carefully re-examine their relationships with staffing companies, subcontractors, and other business affiliates, to determine whether a potential joint employer relationship exists. After the Fourth Circuit’s decision in Salinas, it will be much more difficult for North Carolina employers to avoid joint liability simply by arguing that their business relationships reflect the “standard” or “custom” in their particular industry. Employers are also advised to consider re-examining and possibly revising their existing contracts with staffing companies, subcontractors, and independent contractors, to minimize potential liability.

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