General Contractors Risk – Preventing Trouble with Subcontractors

Mismanaging your subcontractors could enable the US Department of Labor (DOL) to put your company in the hot seat.

General Contractor PEO

For general contractors, hiring subs may be riskier than it appears

To demonstrate the employment related challenges for general contractors, let’s create a scenario for our customer Donald, a property developer. Donald develops property all over the USA. For a recent project in Texas, he has hired Ted, a general contractor, to build the building. Ted is a shrewd businessman and recognizes that in order to maximize his profit he will need to bring in several subcontractors that will work as cheaply as possible. Ted sends out bid requests to several plumbing contractors in the area. He gets a bid on the plumbing portion of the project from Marco, a plumbing contractor in the area. Marco’s bid is much cheaper than the others so Ted awards the contract to  Marcos’ plumbing company. Ted is getting a good deal on the plumbing and knows it leaves more money in his pocket.

Problems with workers

As the project moves forward, the building is ready for Marco’s plumbing workers to start on the job. Marco sends in three people who start on the plumbing; Jeb, Carly and John. As the days go by Ted notices that Marco is almost never on the job site and provides little direction to his workers. Ted begins to get frustrated that the plumbing workmanship is shoddy and the project schedule is falling behind. Ted confronts Marco on these problems and Marco apologizes, stating that he is not at the jobsite enough because he is running in an election and that takes up all his time. Marco tells Ted “just tell my workers what you want done and let me know if there are any problems”. Ted is not happy. Ted has been watching the workers and notes that Jeb works very slowly, very low energy. Carly would rather talk all day then get any real work done. John spends most of his time telling everyone about how they did plumbing up in Ohio.

Mistakes are made

In frustration, Ted calls Jeb, Carly, and John into a meeting at the worksite and tells them he expects them there seven days a week from 8:00am to 7:00pm until the job gets done. In addition, he informs them that he will be the one providing them with direction on how to he wants the plumbing installed. Marco is not involved.

Feces strike the rotating air movement device

Two weeks later, the job is complete and Ted has made his final payment to Marco’s plumbing company. All is good until Ted gets a call from investigator Hillary with the US Department of Labor. Hillary explains that several of Marcos workers were not paid overtime and have filed a complaint against Ted’s General Contracting Company. Ted is confused… how can he be liable for wages when they weren’t his employees? That was Marco’s company! Investigator Hillary explains that her investigation has determined that because Ted set work hours and working conditions for Jeb, Carly and John, Ted was actually a considered a “joint employer” with Marco’s Plumbing and was liable for the overtime wages. Of course Ted is flabbergasted that he will be liable for the unpaid overtime and fines from the DOL. After the Department of Labor calculated the unpaid wage liability and assessed the fines, Marco has suddenly disappeared, so the DOL assesses the entire judgement against Ted General Contracting company. His profit on the job just evaporated.

Lessons Learned

While our story is fiction, it is based on real exposures faced by general contractors and virtually any business that hires subcontractors. The Fair Labor Standards Act (FLSA) has recently been used by several federal district courts to put pressure on general contractors to ensure that wage and hour rules are not being violated by their subcontractors. A recent case in Louisiana illustrates the issue. In that case four employees of a subcontractor sued both the subcontractor and the general contractor for violations of minimum wage and overtime claims. A motion to dismiss the claims was denied and the suit proceeded against the GC because the supervisor at the GC exercised direct control over the workers and exercised direct control over their work.

Avoiding the Subcontractor Liability Trap

While complete insulation from FLSA violations is impossible, there are steps GCs can take to minimize the exposure to the employment practices of subcontractors.

  • Require subcontractors to sign and acknowledge their responsibilities under FLSA and mandate the same for any of their subcontractors.
  • Insist on terms in your agreement with the subcontractor that address potential labor issues and insist on indemnity provisions in the event of an FLSA violation.
  • Keep your distance from the subcontractors workers. Do not provide direct supervision of the subcontractor’s workers and do not get involved with hiring/firing or pay issues with the subcontractors workers.
  • Of course always insist that workers’ compensation insurance is place for the subcontractor and that all workers on the jobsite are covered under the policy. Ask the sub for their work comp certification or “cert”.

How joining a PEO can help

General Contractors that join a Professional Employer Organization (PEO) gain access to expertise and best practices for avoiding DOL and labor entanglements. Unfortunately some PEOs (being potential co-employers with the General Contractor) recognize the regulatory risk ($$) associated with GCs and do not allow GCs to join their PEO. Many PEOs have stopped working with GCs due to the increasing joint-employer risk associate with subcontractors. However, other PEOs have developed programs for GCs that when implemented reduce the overall regulatory risk and those PEOs may allow a GC to join their PEO if they meet other workers compensation insurance and company size criteria. StaffMarket maintains a master database of PEOs who will and will not consider working with general contractors. Contact StaffMarket for more information.

Note: All characters in this story are fictional and under no circumstances should this be considered related to any candidates running for the presidency of the USA. ;)

image courtesy of the U.S. Army Corp of Engineers