The New Year often means new labor and employment laws for the construction industry, 2024 is no exception. Federal agencies have been especially active. The Federal Acquisition Regulatory Council, the National Labor Relations Board, and the U.S. Department of Labor have all issued new rules that directly or indirectly target the industry. California, too, has singled out the construction industry with a new, restrictive independent contractor law. Businesses in the industry should be wary and may want to review their existing contracts and practices for compliance with the new rules and laws.

New FAR Rule Requires Project Labor Agreements for Large Federal Projects

On December 22, 2023, the Federal Acquisition Regulatory Council (“FAR Council”) issued a new final rule¹ requiring federal agencies to use project labor agreements (“PLA”) on “large-scale” federal construction projects, which have an estimated cost of at least $35 million. PLAs are pre-hire collective bargaining agreements negotiated between construction unions and construction contractors that establish the terms and conditions of employment for construction projects. In other words, with few exceptions, contractors on large federal projects are now required to enter into collective bargaining agreements.

The new rule follows President Joe Biden’s February 4, 2022, Executive Order on Use of Project Labor Agreements for Federal Construction Projects (Order 14063). That Order introduced the PLA requirement for large-scale federal projects and directed the FAR Council to propose regulations implementing the Order’s provisions, which it did in August 2022. The Order also directed the FAR Council to invite and evaluate public comments on its proposed regulations before issuing a final rule. The FAR Council’s December 22, 2023 final rule made only minimal changes to its proposed regulations.

Under the new rule, all parties involved in a large-scale construction project must negotiate and set the terms and conditions governing the project by way of a PLA. That means that all subcontractors must become a party to the PLA negotiated by the prime contractor.² The new rule also requires PLAs to meet various requirements, such as including dispute resolution procedures and providing guarantees against strikes and lockouts.³ There are exceptions to the PLA requirement, including where “market research indicates that requiring a PLA on a project would substantially reduce the number of potential offerors to such a degree that the Government could not meet its requirements at a fair and reasonable price.”⁴ However, contractors must apply for exceptions, which the government will have discretion to grant or deny.

The new rule went into effect on January 22, 2024. It will almost certainly face legal challenges from construction industry groups. But unless and until those challenges find traction in the courts, contractors on large-scale federal projects should assume their work will be governed by a PLA and plan accordingly.

NLRB’s New Joint-Employer Rule to Impact Contractor-Subcontractor Agreements

On October 26, 2023, the National Labor Relations Board (“NLRB”) issued a new final rule for determining whether two entities are joint employers for purposes of enforcing the National Labor Relations Act. Currently scheduled to take effect on February 26, 2024, the new rule drastically expands the scope of joint employment and imposes collective bargaining obligations.

Under the NLRB’s new rule, an entity is a joint employer of another entity’s employees if it has the “authority to control essential terms and conditions of employment, whether or not such control is exercised, and without regard to whether any such exercise or control is direct or indirect.”⁵ The NLRB lists seven “essential terms and conditions of employment” that it will review in making a joint-employer determination:

1. Wages, benefits, and other compensation;
2. Hours of work and scheduling;
3. The assignment of duties to be performed;
4. The supervision of the performance of duties;
5. Work rules and directions governing the manner, means, and methods of the performance of duties and the grounds for discipline;
6. The tenure of employment, including hiring and discharge; and
7. Working conditions related to the safety and health of employees.⁶

Significantly, the right to control any one of these terms and conditions is “sufficient to establish status as a joint employer, regardless of whether control is exercised.”⁷ And, an entity need not exercise direct control over one or more of these terms and conditions of employment to be deemed a “joint employer.” It is enough to have the right to exercise such control (“reserved” control), even if it can only be exercised through an intermediary (“indirect” control).⁸ The new rule is a departure from the NLRB’s prior final rule, issued in April 2020, which required proof of “direct and immediate” control over workers.

The new rule also expressly requires a contractor to collectively bargain on behalf of all workers it jointly employs.⁹ Specifically, it requires a joint employer to “bargain collectively with the representative of those employees,” but only with respect to “any term or condition of employment that it possesses the authority to control or exercises the power to control (regardless of whether that term or condition is deemed to be an essential term or condition of employment under the rule).”¹⁰ The implications of this requirement are significant. Not only can one joint employer be liable for unfair labor practices committed by the other, but it must collectively bargain on behalf of the other’s employees.

It is important to note that the NLRB’s new joint-employer analysis is limited to enforcement of the National Labor Relations Act and has not yet been adopted by other federal agencies, such as the U.S. Department of Labor. Nonetheless, the new rule will likely impose collective-bargaining obligations and find joint-employer liability in far more situations than the NLRB’s prior rule.

Contractors should review their contracts for language granting them the right to control the terms and conditions of workers’ employment, even if such control is through an intermediary such as a subcontractor or staffing agency. Such language may create an increased risk of being jointly liable for unfair labor practices and impose collective bargaining obligations.

New DOL Rule Makes Hiring Independent Contractors Riskier

On January 10, 2024, the U.S. Department of Labor (“DOL”) published a final rule that imposes a new, six-factor test (see below) for determining whether workers are “independent contractors.”¹¹ The final rule takes effect on March 11, 2024, and will generally make it more difficult for businesses to classify workers as independent contractors, rather than employees.

The DOL’s new rule assigns equal weight to each of its six factors, and no one factor is determinative. The purpose of the test is to determine whether, as a matter of “economic reality,” a worker is economically dependent on a potential employer for work or in business for themselves based on the “totality of the circumstances” of each individual case. If they are economically dependent, they are an employee. Otherwise, they may be classified as an independent contractor.

The DOL’s new rule rescinds the prior 2021 independent contractor rule which considered a multi-factor test to determine whether a worker was economically dependent on an employer but gave greater weight to two “core elements'': the nature and degree of control over the work and the individual’s opportunity for profit and loss. The prior 2021 independent contractor rule also did not consider a worker’s investment or whether the work was integral to the employer’s business as separate factors.

The DOL’s new rule includes the following six factors:

1. The worker’s opportunity for profit or loss depending on managerial skill;
2. Investments by the worker and potential employer;
3. The degree of permanence of the relationship;
4. The nature and degree of the potential employer’s control over the work;
5. The extent to which the work performed is an integral part of the potential employer’s business; and
6. The worker’s skill and initiative.¹²

Notably, this list of factors is non-exhaustive. Other “additional factors” may be considered so long as they “in some way indicate whether the worker is in business for themself, as opposed to being economically dependent on the potential employer for work.”¹³

Because it assigns equal weight to all six factors, the new rule will make it more difficult for companies to classify workers as independent contractors. In anticipation of the new rule’s March 11, 2024 effective date, companies would be wise to evaluate their independent contractor agreements by applying all six factors to workers subject to those agreements. The risks of misclassification include potential damages and penalties for failure to pay wages, failure to withhold payroll taxes, failure to provide benefits, and workers’ compensation issues, among others. Accordingly, companies may want to seek counsel to assist with this evaluation.

California Limits the Use of Independent Contractors in the Construction Industry

As most businesses operating in California well know, the state imposes some of the nation’s strictest independent contractor laws. A new law, Assembly Bill 1204 (“AB 1204”), now specifically targets the construction industry by limiting the number of independent contractors a business may use on a given project.

AB 1204 prohibits a “specialty contractor” from entering into a contract “for the performance of work on the same single project or undertaking with more than one subcontractor in the same license classification” as the specialty contractor unless the subcontractor “employs persons who are classified as employees to perform work in that license classification on the single project or undertaking” or the specialty contractor is a “signatory to a bona fide collective bargaining agreement.”¹⁴ A “specialty contractor” is defined as an entity that holds any one of over forty specialty contractor license classifications, including electrical, drywall, concrete, carpentry, flooring, solar, landscaping, sheet metal, and roofing.¹⁵ This means, for example, that a business holding an electrical contractor license cannot hire more than one electrical subcontractor on a project unless it (a) determines that such subcontractors will use employees on the project, or (b) hires those subcontractors pursuant to a collective bargaining agreement.

The California Contractors State License Board may take disciplinary actions against specialty contractors that violate the new law.¹⁶ Specialty contractors may want to evaluate their subcontractor agreements for compliance with AB 1204 and, when in doubt, seek counsel for assistance.

Footnotes

1. See Federal Register, Vol. 88, No. 245 (Federal Acquisition Regulation: Use of Project Labor Agreements for Federal Construction Projects, issued Dec. 22, 2023).

2. Id. at 52.222-34.

3. Id.

4. Id. at 22.504(d)(ii).

5. Federal Register, Vol. 88, No. 207 at 73948 (The Standard for Determining Joint-Employer Status – Final Rule published 10/27/2023).

6. 29 CFR § 103.40(c).

7. 29 CFR § 103.40(e)(1).

8. 29 CFR § 103.40(c).

9. 29 CFR § 103.40(h)(1).

10. Id.

11. Federal Register, Vol. 89, No. 7 (Employee or Independent Contractor Classification Under the Fair Labor Standards Act).

12. 29 CFR § 795.105(b)(1)-(6).

13. 29 CFR § 795.105(b)(7).

14. California Business & Professions Code § 7035(a).

15. California Business & Professions Code §§ 7035(c)(2) and 7058.

16. California Business & Professions Code § 7035(b).