The law regarding employer liability for the actions of their subcontractors varies from state to state. In many states, general contractors are not liable for the wage violations of subcontractors or independent contractors.
However, in some states, courts impose liability on employers for a subcontractor’s violations if the court finds that the employer should be considered a “joint employer” of the subcontractor. And some states have enacted new laws that expressly impose liability on general contractors to pay the unpaid wages of the employees of subcontractors.
When applying the “joint employer” test, a court looks at several factors to decide if the employer exercises enough control over the subcontractor’s actions to justify imposing liability on the contractor for the wage violations of the subcontractor.
Some of the factors considered by courts include:
- The employer and subcontractor jointly determine which entity has the power to direct, control, or supervise the workers;
- The employer and subcontractor jointly have the power to hire and fire the worker or to modify the terms of the worker’s employment; and
- The employer and subcontractor share the functions that are usually carried out by an employer, such as:
- Dealing with payroll;
- Providing workers compensation insurance;
- Paying payroll taxes; and
- Providing equipment/materials necessary to complete the work.
But the law surrounding the joint employer test is not settled. Rather, it is evolving, due to differing court rulings and new laws enacted recently in some states. Some state courts apply a specific joint employer test, and others have found the joint employer test to be inadequate.
In 2019, the Department of Labor proposed a more straightforward, four-factor test to use when determining whether companies were joint employers of an individual. This test focuses on whether an alleged joint employer:
- Hires or fires the employee in question;
- Supervises and controls the employee’s work schedule or conditions of employment;
- Determines the employee’s rate of pay and the method used to pay them; and
- Maintains the employee’s employment records.
It may be some time before additional guidance is provided on which test will be the standard. However, the important thing is that, in the absence of a statute, the determination of whether a contractor’s liability requires a detailed analysis of the facts of each situation.
Local State Exceptions to the Joint Employer Test
While most jurisdictions use the joint employer test to determine if an employer should be liable for a subcontractor’s wage violations, some jurisdictions have passed laws imposing liability on the general contractor in certain circumstances.
For example, in states with “prevailing wage” laws, general contractors are often made to be responsible for ensuring that subcontractors follow this law and pay prevailing wages. Prevailing wage laws require contractors for public works projects to pay the standard market wage, or prevailing wage, for certain types of work.
In addition, some states have passed legislation targeting specific industries due to frequent violations of workers’ rights in those industries. For instance, in New York and California, clothing manufacturers are liable for the minimum wage violations of their contractors and subcontractors.
California has adopted legislation that makes general contractors and higher-tier subcontractors liable for the wages of workers that go unpaid by the lower-tier subcontractors on both private and public projects.
Maryland has also adopted legislation making contractors and higher-tier subcontractors liable for wages that have gone unpaid to laborers on private projects only. In Maryland, the law is known as the “General Contractor Liability for Unpaid Wages Act”.
The law applies only to general contractors who work on a construction services project, which may include any of the following:
Under Maryland law, employers who fail to comply with wage and hour laws can be made to pay as much as three times the wages owed to unpaid workers, plus attorney fees and costs in the event of litigation..
Many of these statutes also levy penalties of up to triple the amount due to the unpaid employees on contractors who are found to be liable for a subcontractor’s wages. In addition the contractor may have to pay attorney’s fees to the prevailing party. These additional costs can mean that the total bill for $100,000 in unpaid wages becomes a judgment of $750,000 or more.
The State of Virginia adopted a new wage theft law in 2020 that has a similar provision for recovery of up to three times the amount of wages owed, plus attorney’s fees and costs by the employees who are forced to file suit to recover unpaid wages.
Under the new wage theft law in Virginia, any subcontract entered into after July 1 of 2020, for commercial projects with a value of over $500,000 by law is assumed to include a provision that makes the general contractor and all subcontractors. This is true whether higher tiered or lower tiered, jointly and severally liable for paying the wages owed to the subcontractor’s employees. If a subcontractor at any tier fails to pay its employees in accordance with prevailing law, the general contractor may be liable for both civil and criminal penalties.
The new law also gives all Virginia employees the right to file suit against their employer to recover unpaid wages. Previously, employees could only file a claim for unpaid wages with the Virginia Department of Labor and Industry.
The new wage theft law also requires subcontractors to indemnify the general contractor for any damages, interest, penalties, or attorneys’ fees that the general contractor has to pay because of a subcontractor’s failure to pay its employees as required by prevailing wage law. However, the subcontract is not required to indemnify the general if there is an indemnification disclaimer in the subcontract or if the subcontractor failed to pay its employees because the general contractor failed to pay the subcontractor.
Fair Labor Standards Act
In addition to the risk of being found liable in state court, employers may also face legal action by the U.S. Department of Labor under the Fair Labor Standards Act (FLSA) for the wage violations of a subcontractor.
The FLSA is a federal law and therefore only applies to employers engaging in interstate commerce whose annual revenue exceeds $500,000. The FLSA requires that non-exempt workers receive a minimum wage of $7.25 per hour and overtime pay (minimum of 1 ½ times ordinary pay) for working more than 40 hours in a workweek.
If a subcontractor fails to follow these requirements, the Department of Labor may impose penalties such as a monetary fine, on the employer who violates the law.
Should I Consult an Attorney?
Liability on the part of a general contractor for the wage violations of a subcontractor is a complicated issue with several different variations depending on the state in which the project is located. If you are a general contractor who has been named in a lawsuit or labor complaint to recover wages that have gone unpaid by one of your subcontractors, you should consult with an experienced contract attorney immediately.
An experienced attorney can explain the law in your state and inform you of any possible rights or defenses, gather evidence, depose and advocate for your interests in any legal proceedings that may develop.