A 1099 May Not Be Enough For Contractors To Avoid Liability Under The Fair Labor Standards Act For Their “Independent Contractors.”

In the construction industry, it is not uncommon for subcontractors or labor providers to classify general laborers or workers as independent contractors. However, this simple classification as an independent contractor may not be enough.

Standard Procedure for Worker Classification on Construction Projects

Whether because of the somewhat erratic nature of labor, to reduce overhead costs or tax withholding headaches, or even for liability purposes, classifying workers or laborers as independent contractors is the simple historically used for paying straight time only and not withholding applicable payroll taxes, instead shifting that burden from the payor to the payee. Further, classifying laborers and workers as independent contractors is an natural effect of the general contractor’s relationship with subcontractors and labor providers; subcontractors and labor providers are treated as independent contractors, so why not their workers? Finally, there is an obvious financial benefit. Generally, laborers and workers (depending upon the construction project) will work in excess of 40 hours per week, which increases labor costs by up to 50% when it happens. As most subcontractors and labor providers understand it, classifying workers and laborers as independent contractors and simply issuing them Form 1099 allows the subcontractors or labor providers to avoid paying this premium for overtime work.

The Fair Labor Standards Act and the Construction Industry

Over the past decade, there has been a resurgence of the Fair Labor Standards Act, the seminal law that created the forty-hour workweek, national minimum wage, overtime pay for certain kinds of work, and helped eradicate child labor.  Although enacted in 1938, the past 15 years has shown a 362% nationwide increase in Fair Labor Standards Act cases filed, from 1,744 to 8,070. Under the Fair Labor Standards Act, an “employer” is responsible for paying an “employee” minimum wage and overtime for every hour worked over 40 hours in a workweek. Any failure to do so operates as a violation of the Fair Labor Standards Act, which requires payment of these unpaid wages and can result in stiff penalties for willful violations. Additionally, the Fair Labor Standards Act allows multiple “employees” to band together in a collective action to prosecute what would otherwise be small amounts into a form that can create significant liability and justify bringing lawsuits to prosecute these claims. What are the two largest areas responsible for the rise in Fair Labor Standards Act cases? Construction and warehousing.

Classifying Subcontractors and Labor Providers as Employers under the Fair Labor Standards Act

The real concern for subcontractors and labor providers is how the Fair Labor Standards Act and courts interpreting it decide who is an “employer.” While the Fair Labor Standards Act does recognize that individual workers or laborers can realistically be independent contractors, the Fair Labor Standards Act focuses on the “economic reality” of the worker’s situation, regardless of whether they are classified as an independent contractor and issued a Form 1099 by the subcontractor or labor supplier. The crux of this fact-based analysis looks at how a worker and the alleged “employer” actually interact. Is the worker directly supervised by the company? Does the company control the worker’s schedule, hiring and firing, rate of pay, and other items that suggest the existence of an actual employer-employee relationship? If so, then regardless of whether the worker is classified as an independent contractor, subcontractors and labor providers may be found to be “employers” under the Fair Labor Standards Act – – which is a different standard than under other laws – – and therefore be responsible for the payment of overtime.  Although somewhat counterintuitive, it is becoming a real issue that is catching subcontractors and labor providers unawares.

General Contractors Must be Aware of the Fair Labor Standards Act

And it is not limited to subcontractors or labor providers. General contractors have also been implicated, particularly when there is thin actual separation between a subcontractor and a general contractor (separate companies may not be enough if there is shared ownership, shared employees, or a lack of actual separation between them) or where the general contractor directly supervises the subcontractor’s workers or laborers. In these cases, there is enough factual support to implicate a general contractor, making them incur significant cost to defend these lawsuits even in the potential absence of liability.  The larger, more serious trend that is in its primordial stages is the potential argument that indirect supervision, i.e., what a general contractor does for every subcontractor and supplier on a construction project, may create Fair Labor Standards Act liability to ensure all workers and laborers are paid minimum wage and compensated for overtime work.  This larger issue, although technically not fully formed, exists. In January 2016, the Department of Labor issued Administrator’s Interpretation No. 2016-1, and stated that “if a drywall subcontractor is not actually an independent contractor but is an employee of the higher-tier contractor, then all of the drywall subcontractor’s workers are also employees of the higher-tier subcontractor.”  Although the Department of Labor withdrew this interpretation in July 2017, it goes to show that the dynamics of the construction industry and what is considered a “vertical joint employment” relationship is not immune from potential liability under the Fair Labor Standards Act.

Safeguards

Before simply classifying laborers or workers as independent contractors, issuing a Form 1099, and considering that sufficient to pay only straight time and withholding no tax, it may be important to explore the potential risks that may arise under the Fair Labor Standards Act. Feel free to call the attorneys and counselors at Shields | Mott L.L.P. to be advised of the potential pitfalls and to help structure your relationship with workers, or even other companies, to help guard against these potential risks and other employment law issues that arise during construction projects.