Contractors May Be Held Liable for FLSA Violations of Their Subcontractors and/or Staffing Agencies

February 18, 2016

LABOR AND EMPLOYMENTCONSTRUCTION

On Wednesday, January 20, 2016, the United States Department of Labor (“DOL”) issued new administrative guidance that could put businesses at greater risk of liability for the minimum wage, overtime, per diem, and other Fair Labor Standards Act (“FLSA”) violations of their corporate partners, joint venturers, contractors, subcontractors, and/or staffing agencies. Any business deemed a “joint vertical or horizontal employer” under the new guidance may be held responsible for another company’s violations of the FLSA. As more companies rely on subcontractors and staffing firms to manage functions like hiring, human resources, payroll, and other services, lines of liability have become a growing concern which increases the risk that a firm might be responsible if its contracted worker is not compensated correctly.

In particular, the DOL has seen an alarming growth in FLSA violations among the construction, maritime, and oil and gas industries in the gulf coast region. Violations often involve an employer wrongfully classifying their employee’s wages as “per diem” to reduce the amount owed to the employee for overtime. According to the DOL, most per diem violations occur at temporary staffing/labor agencies that hire workers and then “subcontract” the workers out to industry contractors.

The alarming number of per diem violations together with the newly expanded “joint employer” rules puts contractors in the region at an exceptionally higher risk of liability for FLSA violations.

WHAT IS PER DIEM?

Per diem is a way for employers to reimburse workers for lodging, meals, and other travel expenses incurred on behalf of their employer. Companies violate the FLSA when they wrongfully classify an employee’s regular wages as a per diem expense reimbursement to skirt increased overtime wages, employee benefits, federal and state employment taxes, workers' compensation premiums, and unemployment insurance.

If the DOL determines that “per diem” payments to an employee do not qualify as per diem under the FLSA, the DOL will consider the wrongfully classified payments as regular wages. Those payments will be factored into the employee’s “regular rate of pay” used to calculate required benefits and often increases the employee’s hourly rate of overtime pay. Recalculating the employee’s “regular rate of pay” also carries negative federal and state tax and employment insurance consequences.

In an enforcement action by either the DOL or the employee, the employer may be liable for up to two years of back pay for unpaid overtime (three if the violation is deemed “willful”), liquidated damages, attorney’s fees, and civil penalties. The DOL also refers those matters to various state and federal agencies for separate investigations.

“JOINT EMPLOYER” LIABILITY UNDER THE NEW GUIDELINES

            Liability for violations of the FLSA does not end with the company whose employment practices violate the FLSA. Any company deemed a “joint employer” of the employee may also be held jointly responsible for FLSA violations. The new administrative guidance significantly expands the DOL’s interpretation of “joint employer.” Under the new guidelines, two scenarios for joint employment exist: horizontal joint employment and vertical joint employment.

In a horizontal joint employment situation, there is typically an established employment relationship between the employee and each of the employers. Often, the employee performs separate work, or works separate hours, for each employer. The following example was taken from the new administrative guidance:

  • An employee is employed at two locations of the same restaurant brand. The two locations are operated by separate legal entities (Employers A and B). The same individual is the majority owner of both Employer A and Employer B. The managers at each restaurant share the employee between the locations and jointly coordinate the scheduling of the employee’s hours. The two employers use the same payroll processor to pay the employee, and they share supervisory authority over the employee. These facts are indicative of joint employment between Employers A and B.

  • In a vertical joint employment situation, there is typically an established employment relationship between the employee and only one employer. However, the employee is contracted out to perform labor or services for another company. The vertical joint employment analysis determines, for example, whether a construction worker who works for a subcontractor is also considered jointly “employed” by the general contractor. The following example was taken from the new administrative guidance:

  • A laborer is employed by ABC Drywall Company, which is an independent subcontractor on a construction project. ABC Drywall was engaged by the General Contractor to provide drywall labor for the project. ABC Drywall hired and pays the laborer. The General Contractor provides all of the training for the project. The General Contractor also provides the necessary equipment and materials, provides workers’ compensation insurance, and is responsible for the health and safety of the laborer (and all of the workers on the project). The General Contractor reserves the right to remove the laborer from the project, controls the laborer’s schedule, and provides assignments on site, and both ABC Drywall and the General Contractor supervise the laborer. The laborer has been continuously working on the General Contractor’s construction projects, whether through ABC Drywall or another intermediary. These facts are indicative of joint employment of the laborer by the General Contractor.

LOCAL EFFECT

  • The cumulative effect of the new and expansive joint employer guidelines together with the ongoing multi-year initiative in the gulf coast region to monitor for signs of FLSA violations particularly in the construction, maritime, and oil and gas industries puts regional industry employers at greater risk for potential liability under the FLSA.

Companies in the construction, maritime, and oil and gas industries should review their employment practices with careful consideration to wage and hour policies to ensure compliance with the per diem requirements (and the many other provisions) of the FLSA. Regional industry participants should also consider ways to contractually mitigate the risk of being held jointly liable for the FLSA violations of their parents, subsidiaries, joint venturers, contractors, subcontractors, and staffing agencies.

RECENT DOL ENFORCEMENT NEWS

More Than $1.6M in Unpaid Overtime for 1,543 Workers in the Gulf Coast Recovered by US Labor Department – Ongoing Initiative Reveals Evasive Pay Practices in the Temporary Staffing Industry, U.S. Dep’t Labor (July 10, 2014), http://www.dol.gov/whd/media/press/whdpressVB3.asp?pressdoc=Southwest/20140710.xml.

Prepared by:

Kelley R. Dick Jr.
Associate
Tel: 225.381.0228
kelley.dick@taylorporter.com

 

 

David J. Shelby
Partner
Tel: 225.381.0253
david.shelby@taylorporter.com

 

 

 

Edward J. “Ted” Laperouse, II
Partner
Tel: 225.381.0210
ted.laperouse@taylorporter.com

 

 

 

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