4e construction industry has faced a skilled labor shortage over the past several years. One study found that the number of workers ages 25-54 dropped 8% over the last decade. At the beginning of 2022, one predictive model estimated that the industry would need more than 650,000 additional workers to meet demand. As a result of this labor crunch, many business owners have been forced to subcontract portions of their work to remain competitive in a tough industry with aggressive bidding and strict project deadlines. Subcontracting presents its own challenges for many construction businesses, which may find themselves having to work with unfamiliar and unproven companies. One significant challenge is that a construction company could face potential liability if a labor subcontractor (any of its lower-tier subcontractors down the chain) fails to comply with all applicable federal and state wage payment laws. For instance, a contractor might be surprised to learn that it could be legally responsible for a subcontractor not paying its employees.

Such potential liability arises from the Fair Labor Standards Act (FLSA), a federal law that applies nationally. For construction projects, courts have developed a multifactor balancing test to determine a contractor’s liability, which turns on whether there is an employment relationship between the contractor and the subcontractor’s employees. Courts may find that a relationship is formed regardless of whether or not they are the contractor’s formal employees, depending on how much control a construction company exercises over any laborers working under it. Based on the relevant facts of this test, these business owners could be on the hook for unpaid minimum wages, overtime pay, liquidated or treble damages, attorneys’ fees, and court costs. Thus, it is crucial for contractors to limit their liability exposure by ensuring that their downstream subcontractors are paying all of their employees working on the contractor’s project.

Determining Legal Responsibility

Courts consider the economic realities of a worker’s relationship to the putative employer in determining if a worker is an employee covered by the FLSA rather than an uncovered independent contractor. If a worker is jointly employed, courts usually apply a version of the economic realities test to assess if the worker is economically dependent on the putative employer or is in the business for his/herself as a matter of economic reality. To determine if a jointly employed worker constitutes an employee or independent contractor, the United States Court of Appeals for the Fourth Circuit developed a six-factor test that considers:

1. The degree of control that the putative employer has over the manner in which the work is performed;
2. The worker’s opportunities for profit or loss dependent on their managerial skill;
3. The worker’s investment in equipment or material or their employment of other workers;
4. The degree of skill required for the work;
5. The permanence of the working relationship; and
6. The degree to which the services rendered are an integral part of the putative employer’s business.

Federal courts in the Fourth Circuit (which include Maryland, Virginia, North Carolina and South Carolina) pay particular attention to the degree of control, the permanence of the working relationship, and the degree to which the worker’s services are an integral part of the putative employer’s business. Critically, because no single factor is dispositive and courts are directed to look at the totality of the circumstances, determining liability requires consideration of a wide range of factual circumstances. For a contractor facing liability, they would likely be forced to face the protracted and expensive discovery process in litigation.

Additionally, states have their own wage and hour laws that may provide equivalent or greater protection to employees than under the FLSA. For example, state courts in New York, New Jersey and Maryland follow their own versions of the economic realities test.

A Hypothetical Under the FLSA

Let’s take a fictional scenario to illustrate a door framing contractor’s hypothetical exposure under the FLSA and the Maryland Wage and Hour Law (MWHL). The contractor, Stanford Glass and Mirrors, Inc. (SGM), was hired by the general contractor, Maria Holmes Contractors (Holmes), to supply and install metal doors and frames in connection with the Big City Expansion project in Maryland. SGM engaged Bradshaw Windows and Doors, LLC (BWD) to supply labor for the work, but the two companies did not execute a formal contract to memorialize their agreement. BWD is owned by Elisa Gonzalez, who is also the company’s president. After a few bi-weekly paychecks bounced, some of the individual workers (the plaintiffs) brought legal action against Holmes, SGM, BWD, and Gonzalez in her individual capacity. The plaintiffs alleged that they were not paid minimum and overtime wages as required by the FLSA and the MWHL. Thus, all contractors upstream from BWD and Gonzalez faced potential liability under those statutes.

SGM, the door frame contractor, will be liable if the plaintiffs were “employees” on the project rather than “independent contractors” under the economic realities test. Additionally, SGM would have to be considered a “joint employer” with BWD. This is governed by yet another multifactor test that examines if a purported joint employer shares or codetermines the essential terms and conditions of a worker’s employment. Among other factors, the court would assess if the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means. Another factor is whether the work is performed on premises owned or controlled by one or more of the putative joint employers. While many contractors in SGM’s situation may reject the very notion that they could be considered a joint employer of a labor subcontractor’s employees, courts have held contractors in a similar scenario liable under these two multifactor tests.

Ways to Limit Exposure Under the FLSA

One of the best ways for a contractor to limit liability is to consider whether the risks of subcontracting out work are worth it. Given current market labor conditions, however, this may not be feasible. If a contractor must look to subcontract its labor work, it can limit its liability exposure under the FSLA by including specific clauses in formal agreements with the subcontractor. For instance, in its agreement with any subcontractor, a business owner/contractor could require the subcontractor to comply with the relevant wage laws, agree to identical indemnity language, provide all payroll records and additional information, and permit the contractor to review all of the subcontractor’s books and records in the event of a suspected violation of law. It also may be prudent to ensure that the subcontractor has an ongoing duty to supplement any relevant disclosure(s). Further, clauses could guarantee that failure to provide information in the format required by the contractor constitutes a reason for withholding payment to a subcontractor. Importantly, an owner/contractor could also guarantee that similar terms are implemented in a subcontractor’s agreement with any of its respective sub-subcontractors.

Conclusion

Federal and state wage and hour laws support the notion that a construction owner/general contractor may be jointly liable for its subcontractors’ or sub-subcontractors’ failure to pay the minimum wage or other benefits to their workers. The extent of their liability will be determined by the relevant jurisdiction’s legal test. Construction entities can and should limit their liability by consulting with legal counsel on how to limit liability, as well as including certain clauses in their contracts with their subcontractors.