Supplemental Conditions

Relax About the Impact of the NLRB’s Browning Ferris Decision on the Construction Industry

Posted in Unions

Before publishing this post, I confirmed that my clients were indeed still in business and planned on business as usual this week.  Despite doomsday like proclamations, Thursday’s NLRB decision in Browning Ferris Industries, which revised the test for finding joint employer status, did not end the construction business as we know it.  The Board’s decision will no doubt significantly impact many industries, but its impact on the construction industry will likely be more muted.  However, there are changes contractors and developers should make to standard industry contract clauses.

1.  The New Old Test

In Browning Ferris, the Board returned to the test the Board applied to joint employer cases before 1984 and as was articulated by the Third Circuit Court of Appeals in another case ironically involving Browning Ferris,  NLRB v. Browning Ferris Industries of Pennsylvania, 691 F.2d 1117 (3d.Cir. 1982).  Under the new old standard, a two part test is employed to determine joint employer status.  First, the Board will determine whether the putative joint employer is an employer under the common law joint employer test.  Second, if so, does the putative joint employer share or co-determines essential terms and conditions of employment, such as, hiring and firing, discipline, supervision, scheduling, seniority and overtime, and assigning work and determine the means and methods of performance.
Additionally, the Board made two critical findings that impact contractors.  First, if the common law does not permit you to be a joint employer, then the inquiry ends.  Second, the putative joint employer does not actually have to exercise its control over the employees in question so long as it retains the right to do so.

2.  Impacts on the Construction Industry

Staffing agreements and subcontracting are the most obvious areas where the decision has the potential to impact the industry.

       a.  Staffing agencies

Much of the hyperventilating about the Board’s decision concern the use staffing agencies.  In fact, the Browning Ferris case involved its use of a staffing agency for employees for a certain portion of its recycling operations.   The use of staffing or employment agencies in the construction industry has been prevalent in recent years.  These firms provide skilled labor to contractors on a project by project basis.  Under a typical arrangement, the staffing agency sets the worker’s rate of pay, handles wages, benefits, and insurance.  However, the contractor utilizing the service retains the means and methods of how the individual will be utilized on the project, such as providing tools, setting work hours, and assigning tasks.  The staffing agency and the utilizing contractor were probably already joint employers of the leased worker under the Board’s old joint employer standard. The user contractor always maintained almost unfettered control over the staffing agency worker ceding only payroll activity to the staffing firm.  In fact, the staffing agency usually plays no role at all once a worker is assigned to a contractor. So, the relationship between staffing agencies and their customers in the construction industry is not likely to change much.

       b.  Subcontractors

The other area that had the construction community up in arms was the decision’s impact on the typical contractor – subcontractor relationship.  Unlike other industries, the use of independent subcontractors have been the accepted industry standard for years.  (Its one of many areas that make labor relations in the construction industry unique from other industries.)  The industry is particularly concerned about the decision’s impact on common situs picketing and secondary boycotts. Under well established standards, labor law protects so called neutral employers from labor protests directed at a primary employer, who is the firm that actually employs the workers subject to the dispute. The fear is that the Browning Ferris decision erodes the line between the neutral employer and the primary employer and, therefore, the long established protections afforded to the neutral employer.

While the expansive definition of joint employer is reason for the industry to take notice, analyzing the typical owner-general contractor or contractor-subcontractor relationship using the Board’s test in Browning Ferris shows that that it is likely to result in far fewer joint employer findings than feared.

As the Board pointed out, the common factor in its two part test is the right of control over the employee.  Among the non-exhaustive list of factors Court and the Board have used to determine whether a construction industry putative joint employer is an employer under common law standards are whether the general contractor (or owner-developer):

(1) had the power to hire and fire the subcontractors employees;

(2) supervised or controlled the subcontractor’s employees work schedules;

(3) supplied the employees with the materials and tools needed to complete their jobs;

(4) maintained their employment records; and

(5) set rates of pay.

In a typical owner – general contractor or contractor-subcontractor relationship on a construction project, most of these factors are not met.  For example, while a general contractor may certainly dictate the outer limits of when work may be performed on a project, it typically does not dictate when a subcontractor’s employees show up and how many hours they work.  A general contractor almost never (at least I have never seen it) determines how must a subcontractor’s employees will be paid.  And, the general contractor certainly does not maintain a subcontractor’s employment records.
Furthermore, even if a general contractor is determined to be a joint employer under the common law test, it still would need to co-determine essential terms and conditions of employment.  The Board pointed out the following as being “essential” terms and conditions of employment: setting wages, dictating the number of workers to be supplied, controlling scheduling, seniority and overtime, and determine the means and methods of performance.  A general contractor and owner – developer almost never co-determine these essential factors.  (Yes, while the general contractor controls the overall project schedule, the subcontractor still retains control over its employees personal work schedules.)
3.  What developers and contractors should do
While construction industry employers can relax (somewhat) over the Browning Ferris decision, it does not mean they should do nothing.  If anything, the decision provides on means of defending against a joint employer claim.
Because the Board has emphasized that potential control, even if when its not exercised, is enough to demonstrate control, general contractors and developers need to be aware of what is in their contracts.  The Board in Browning Ferris, pre-1984 NLRB decisions, and the courts in other joint employer cases have all relied heavily on what the contract said about control over a contractor’s or subcontractor’s labor force.
Most construction contracts grant a developer or general contractor at least some control over a subcontractor’s employees.  Consider the following sections of an industry standard AIA A201 General Conditions:
§ 3.4.3 The Contractor shall enforce strict discipline and good order among the Contractor’s employees and other persons carrying out the Work. The Contractor shall not permit employment of unfit persons or persons not properly skilled in tasks assigned to them.

§ 3.9.3 The Contractor shall not employ a proposed superintendent to whom the Owner or Architect has made reasonable and timely objection. The Contractor shall not change the superintendent without the Owner’s consent, which shall not unreasonably be withheld or delayed.

§ 10.2.2 The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities bearing on safety of persons or property or their protection from damage, injury or loss.

§ 14.2.1.1  The Owner may terminate the Contract if the Contractor . . .repeatedly refuses or fails to supply enough properly skilled workers or proper materials.

All of these sections impact on the essential terms of employment, especially sections 3.4.3 and 3.9.3.  Many contracts go much farther into the control exerted over certain terms and conditions of employment, such as dictating behavior on site, requiring criminal background checks, and certain immigration status before an employee is allowed on a project.  Whether these factors alone will be enough to establish co-determination of essential employment terms is to be seen.  However, parties should consider modifying standard industry contract clauses with an eye towards the Browning Ferris decision or adding a clause that delineates that notwithstanding anything to the contrary, the primary employer retains all control over the essential terms and conditions of its employees’ employment.  While exculpatory language like this will not permit a general contractor to escape joint employer status where the facts do not otherwise exist, it certainly is helpful in mounting a defense to a claim.

NLRB Denies Union’s Alter Ego Claim

Posted in Unions

In a rare blow to Big Labor, on August 17, 2015, the NLRB affirmed an ALJ’s denial of a claim that a non-union electrical contractor was the alter ego of a closed union firm.

In Deer Creek Electric, Inc. and Black Hills Electric, Inc., an IBEW local brought a claim against a non-union firm claiming that the firm was an “alter ego” of a defunct signatory electrical firm.  The ALJ’s decision in that case provides excellent guidance on how to properly establish a double breasted or dual shop firm and, alternatively, how to defeat a union’s claim that a non-union firm is the alter ego of signatory firm.

From 2004 to 2012, Deer Creek was a signatory to the IBEW’s collective bargaining agreement.  Deer Creek was owned by Richard and Sandra Moloney.  In 2012, Deer Creek was forced to close because of lack of business.   After the Deer Creek closed, Richard Moloney began discussions with his sister – in – law about assisting her in opening up an electrical contracting business.  Those discussion lead to the establishment of Black Hills Electric, which was 100% owned by Cheri Jackson, Moloney’s sister-in-law, and which was not a signatory to IBEW’s CBA.  Deer Creek then employed Moloney, who surprised its projects,  purchased certain equipment from Deer Creek, and completed a handful of projects that Deer Creek was unable to complete.

The Judge reviewed the well established test for determining alter ego (and its cousin single employer) status: common ownership, management, business purpose, customers, employees, and equipment. As the Judge explained, no single factor is conclusive.   (Many incorrectly believe that common ownership is the conclusive factor.) While lack of common ownership is usually fatal to a claim of alter ego, it nonetheless can still be found if both companies are owned by close family members or where the old company retains substantial financial control over the new entity.  Another important overarching factor is whether the non-union company was established to circumvent the union firm’s collective bargaining obligations.

The Judge analysed Black Hills’ relationship with Deer Creek using these factors.  First, the Judge found that Moloney familial relationship with Jackson did not warrant a common ownership inference because Moloney exercised no financial control over Black Hills.  Second, the Judge ruled that Black Hills was not established to circumvent Deer Creek’s collective bargaining obligations.

The Judge then addressed whether the firms had common management, supervision, and business purposes. Importantly, the Judge found that they did share those common elements.  Finally, the Judge determined that the two firms did not share common equipment and customers, even though there was some overlap.

Balancing all of the factors the Judge found that “too many of the critical factors” needed to support an alter ego finding were not found.

The Take Away

1.  When establishing a non-union affiliate you need to be cognizant to the factors the Court and the NLRB will employ to determine if you non-union affiliate can operate without violating the NLRA.  The non-union affiliate should be established with the factors in mind with an eye on how you can present evidence favorable to your position in an adversary proceeding challenging the non-union entity.

2.  If you are a non-union company purchase equipment and hiring former employees of a union firm, you should also be aware of the ramifications of that decision and make sure that the purchase of equipment and employment of former employees and principals is structured with the alter ego test in mind.

3.  Union bully tactics can be defeated with facts and evidence.  A union / non-union firm relationship does not have to defeat all of the factors of the alter ego test to be viable if sufficient evidence can be produced to show most of the factors can not present.

Pennsylvania Supreme Court to Consider Significant Payment Act Case

Posted in Construction Law, Contracts

On July 28, 2015, the Pennsylvania Supreme Court agreed to consider an appeal from a Superior Court opinion involving the Pennsylvania Contractor and Subcontractor Payment Act.  To call the case significant is  an understatement because if the Supreme Court overturns the Superior Court, agents and principals of real estate development entities will become personally liable for debts owed to unpaid contractors.

In Scungio Borst & Associates v. 410 Shurs Lane Developers, LLC, et. al., a divided Pennsylvania Superior Court ruled that an individual owner and agent of a real estate developer was not personally liable for Payment Act damages owed to a general contractor.  (The Payment Act permits an unpaid contractor to recover interest at 1% per month, penalty at 1% per month, and reasonable attorneys fees incurred in collecting amounts owed to it from an owner.)  In that case, the the 51% owner of the developer interacted with the contractor, approved change orders, and processed the contractor’s payment requests.  The contractor argued that the plain language of the Payment Act permitted imposition of damages against the individual owner of the real estate developer because Payment Act’s definition of “owner” specifically included “agents of the owner acting with their authority.”

The trial court rejected this argument and granted summary judgment to the individual. The case then went to trial against the real estate developer entity and the trial court awarded the contractor over $1.5 million in damages. The contractor then appealed the trial court’s granting of summary judgment to the individual owner of the developer.

The Superior Court affirmed the trial court.  In affirming the trial court, the majority of the Superior Court explained that the language of the Payment Act was ambiguous on whether it imposed personal liability on the owners of real estate developers.  However, the Superior Court held (I believe correctly) that the Payment Act merely exemplifies contract damages and does not extend liability beyond traditional breach of contract principles.  To hold otherwise would be to impose statutory penalties for breach of contract on non-contracting parties.  Accordingly, the Superior Court rejected the “contention that the General Assembly intended to make every authorized agent of a property owner, or even corporate decision-makers, subject to liability under [the Payment Act] as owners. [Payment Act] liability lies against contracting parties only.”

The Supreme Court agreed to hear the appeal which will resolve the issue of whether the Payment Act makes the owner and“agent[s] of the owner acting with the owner’s authority” liable to contractors.   The ramifications of the Supreme Court’s decision for real estate developers cannot be underscored, especially for smaller developers.  If the Court overturns the Superior Court and holds that the Payment Act can impose personal liability on individual owners of real estate firms, it is hard to imagine when an individual owner of a developer would not be personally liable for non-payment.  The relationship between the 51% owner in Shurs Lane and the contractor – whereby the individual approved change orders and interacted with the contractor – is hardly unusual and is probably the norm on 99.999% of all construction projects.

Conversely, an overturning of the decision would be a boon to contractors and would give them tremendous leverage against developers who fail to pay.  This is especially true because many development entities are “single purpose entities” and unpaid contractors can only look to the assets of the entity itself to satisfy a judgment.  Except for limited circumstances, the individual owners of those firms enjoy immunity from personal liability based on the entities inability or unwillingness to pay.

We can expect a decision sometime next year.

The Summer of DBE Fraud Continues

Posted in Disadvantage Business Enterprises (DBE)

A few weeks ago, I posted about a spat of DBE fraud cases that the Department of Justice announced in June. That post mentioned the trend among prosecutors to use the civil false claims act to combat DBE fraud. Yesterday, the United States Attorney for the Northern District of New York announced yet another DBE fraud case involving the civil false claims act.  A copy of the DOJ’s press release can be found here.

The case involves the HD Supply Waterworks, who the DOJ claims is the nation’s largest supplier of water, sewer, storm drain, and fire protection products.  According to the press release,  Waterworks arranged to have a certified DBE act as a pass through for prime contractors working on DOT and EPA projects.  (As I have blogged about previously, the classic DBE pass through scheme involves a prime contractor utilizing a certified DBE on paper only.  The DBE does not actually perform any work – or “commercially useful function” in DBE regulation parlance.  Instead, the work is actually performed by a non-DBE firm.  For allowing its certification to be used, the certified DBE receives a commission from the non-DBE firm or the prime contractor.) Waterworks agreed to a nearly $5,000,000 settlement with the government.  However, Waterworks may have gotten off easy because, as we have seen in other cases, many DBE fraud cases involve jail time for construction company executives.

Interestingly, the press release makes clear that the prime contractors were complicit in the scheme.  This would expose those prime contractors to criminal and civil penalties and disbarment from bidding on federal projects. We will have to see if additional indictments and guilt pleas follow.

Court Slams Philadelphia Building and Construction Trades Council

Posted in Unions

In 2012 and 2013, a Philadelphia apartment developer was subjected to an unrelenting assault by the Philadelphia Building and Construction Trades (a division of the AFL/CIO) for its decision to construction an apartment building in Philadelphia using a mixed work force of union and non-union labor.

An Order entered by the Third Circuit Court of Appeals indicates that the developer may have obtained a small form of justice.  The Order is a result of an action by the National Labor Relations Board against the Building and Construction Trade’s Council (BCTC).  In addition to violating the National Labor Relations Act, the Board alleged that BCTC’s actions violated previous injunctions entered against the BCTC for actions similar to those inflicted on the apartment developer.   Among other things, the Order requires the BCTC to pay the developer $40,000 in compensatory damages and subjects the BCTC to $150,000 if the Order is violated.  Moreover, the Order requires an employee of the BCTC to pay an individual fine of $7500.

Lunch & Learn September 10 Labor Law in the Building Industry: What You Need to Know

Posted in Construction Law

Labor law in the building and construction industry is unique, both practically and legally. Understanding the nuances will not only assure you are complying with the law, but will help your projects come in on time and on budget. Attorney Wally Zimolong will cover industry topics and trends including the pitfalls of misclassifying workers as subcontractors; what is a collective bargaining agreement and what are your obligations under it; and what a union can and cannot due when picketing a construction site.

Date: Thursday, September 10

Time: Noon

Location: Daltile Design Studio, 2300 Chestnut Street

Suite 150 (ground floor)

This is a free member event but registration is required. To reserve a spot, please email elise@biaofphiladelphia.com.

A light lunch will be provided.

DBE Fraud Investigations Continue

Posted in Disadvantage Business Enterprises (DBE)

Recent announcements from the Department of Transportation’s Inspector General show that authorities’ appetite for DBE fraud cases is not letting up.  On July 7, 2015, the IG announced it had reached a settlement with a certified DBE firm in Georgia that submitted false claims on a DOT funded highway project.  And, on June 30, 2015, the IG announced it had reached an agreement with a Washington contractor that submitted payment applications showing work was done by a DBE firm when it was actually performed by a non-DBE firm.

Prosecutors’ Shifting Focus

In both cases, prosecutors brought claims under the civil false claims act.  Unlike mail and wire fraud claims, which are two of the most common criminal claims brought in DBE fraud cases, prosecutors do not have to prove actual knowledge to show a violation of the civil false claims act.  Under the false claims act, proof of specific intent to defraud the government is not required.  Prosecutors can prove a false claims act violation by showing that a contractor acted with “deliberate ignorance” or “reckless disregard.”  Therefore, the burden of proof in such claims is often lower and demonstrating liability easier.

Both cases demonstrate the need for a strong DBE compliance program designed to identify potential issues before authorities due.  For more information about DBE fraud and DBE compliance, download our free webinar.