December 2013

The terms “double breasted” or “dual shop” contractor refers two construction firms often sharing common ownership one of which is a signatory to a collective bargain agreement (the union firm) and the other that is not (the open shop firm).  Here are some frequently asked questions I have received in counseling clients who either already operate or are contemplating establishing a double breasted operation.

1.  Are Double Breasted Operations Legal?  

Yes.  The National Labor Relations Act (“NLRA”) does not prohibit double breasted operations outright.  However, the NLRA does prohibit an employer from interfering with employees’ collective bargaining rights and refusing to collectively bargain with the union representing the employees. Therefore, if the double breasted operation is not properly established, the National Labor Relations Board (“NLRB”) will treat the two entities as the same and, accordingly, the NLRB will impose liability on the union entity for violating the NLRA’s prohibitions on interfering with collective bargaining rights.

2.  Can Both the Union and Non-Union Entity Share Common Ownership?

Yes.  A common misconception is that common ownership invalidates a double breasted operation.  Accordingly, contractors will go to great length to conceal the common ownership of the union and non-union entities.  But, they do not have to.  While common ownership is certainly a factor in determining whether the union and non-union firm should be treated as one in the same under the NLRA (or a collective bargaining agreement), it is not conclusive.  In other words, courts do not simply look to common ownership in determining whether a legitimate operation exists.  In fact, both the NLRB and the courts have repeatedly held that common ownership alone is not dispositive of whether a single employer exists. 

Under the single employer test, NLRB uses four criteria in determining whether the entities are legitimately separate or whether they are actually a “single employer:” (a) interrelation of operations; (b) centralized control of labor relations; (c) common management; and (d) common ownership of financial control.  No one of these factors has been held to be controlling.  In fact,  the Board has stressed the first three factors, which go to show ‘operational integration,’ particularly centralized control of labor relations, are the most important. Therefore, even if both entities of the double breasted operation are commonly owned, an operation may not violate the single employer test if operations, labor relations, and management are kept separate.  

3.  My Collective Bargaining Agreement Prohibits Me from Going Double Breasted.  Can I still establish a non-union construction firm?

Yes,  but it will depend on the language in your CBA.  So called, anti-dual shop clauses appear in many collective bargaining agreements and aim to prevent a contractor from “double breasting” even when it would be permitted under case law.  Anti dual shop clauses are valid if they are lawful “work preservation” clauses. The lawfulness of a work preservation clause hinges on the amount of control the union contractor has over the non-union contractor’s employees. 

Courts apply a two pronged test to determine whether an anti-dual shop clause is valid. First, the agreement must seek to preserve work traditionally performed by employees represented by the union. Second, the contracting employer must have the power to give the employees the work in question, which is known as the “right of control” test.  As with the single employer test, control of labor is a key.  If the union entity has no control over the labor of the non-union entity, the anti dual shop clause is invalid on its face against the non-union entity.  Furthermore, because the contracting employer must be able to control the employees in question for an anti-dual shop clause to apply, any operation that passes muster under the single employer test would in theory not be subject to the anti-dual shop clause.

4.  Is there a downside to establishing a double breasted operation?

Yes.  Contractors that do not properly establish and maintain a double breasted operation face significant liability most notably in terms of ERISA contributions.  If the non-union entity is not properly separated, the firm could own union health and welfare funds benefits for employees whether those employees are union members or not.  This is due to the union security clause in the CBA that the union firm signed and because the CBA also will contain a provision that all employees become members of the union after a certain period of time.  This potential liability should not be taken lightly because the potential ERISA liability could easily reach in the several hundreds of thousands of dollars or more.

The takeaway – there is a tremendous opportunity for construction firms wishing to open a firm that is not bound by the labor rates contained in a collective bargaining agreement.  But that opportunity does not come without risks if the proper steps are not taken.

In an earlier post, we talked about how L&I already has the authority to prevent tragedies like the Market Street building collapse, yet it chooses not to use that authority.  Yesterday, the Plan Philly posted a story about L&I doing just the opposite – requiring something they have no authority to require.

The story involves a town home development at 3rd & Reed Streets in the Pennsport section of Philadelphia known as Constitution Court.  The developer apparently obtained a height variance from the zoning board.  However, neighbors claimed that the development as constructed was 22 inches higher than allowed by the dimensional variance. Therefore, neighbors alerted the Department of Licenses and Inspections who apparently measured the structure and found that it was indeed higher than the variance permitted.  What L&I did next is where things get concerning to not only real estate developers but anyone interested in the rule of law.  It issued a “stop work order” and demanded that the developer remove 22 inches in height from the structure, which the developer plans on doing by jacking the framed out structures and removing 22 inches from the base — at great expense no doubt.

Why is this a concern to the rule of law crowd?  Because under Philadelphia Code (otherwise known as the Law) L&I lacks neither the authority to issue a stop work order because a building is higher than permitted by zoning nor to order the height of the structure reduced.  Under Philadelphia Code, L&I can only issue Stop Work Orders “directing that erection, construction, alterations, installation, repairs, removal, demolition and other activities cease immediately” when: (a) there is a “dangerous or unsafe condition due to inadequate maintenance, deterioration, damage by natural causes, fire, or faulty construction that it is likely to cause imminent injury to persons or property; or (b) work is being performed “contrary to accepted construction practices or in a dangerous or unsafe manner which imperils life, safety or property, constitutes a fire or health hazard, or will interfere with a required inspection.”   As you can see, neither (a) nor (b), cover a situation when a building is out of zoning compliance.

Moreover, the Code is completely silent on whether L&I has the authority to require alterations to a structure for it to comply with a dimensional variance.  Even if it did, there would still be a little issue with something called “due process” which is right granted by the 14th Amendment to the Constitution.  But apparently not to Constitution Court.

 

Daily News reporter Jenny DeHuff has a story about how the $50 million Dilworth Plaza renovation project has been delayed 10 months and that the City is paying the general contractor an additional $5 million because of the delay.  According to Mayor Nutter’s spokesman the reason for the delay is:

“We understand that the project managers and their contractors found some stairwells and other things that were not in the original plans, and that required more time.”

This simply never should have happened. A construction contract should ALWAYS include an “existing conditions” clause requiring the contractor to visit the site and to make itself familiar with the existing conditions, it should require that the contractor immediately alert the owner of conditions that conflict with what is shown on the drawings, and state that the owner makes no warranty as to the accuracy of the as-built drawings. While it is true that a contractor is entitled to compensation for “latent” or hidden defects, stairwells are not latent and are pretty obvious.  In Pennsylvania, as in most other states, failure to resolve such patent conflicts prior to entering into a government contract results in the claim being waived.

It is almost incomprehensible that the owner-contractor agreement would not contain an existing conditions clause or some similar language requiring the contractor to visit and inspect the site and to accept it in its current condition. Perhaps the City of Philadelphia and Center City District are suddenly flush with cash and giving away $5 million is no big deal or perhaps the City does not know what should have been in its contract.

(Update 12/4/13:  If the City of Philadelphia SCR – standard contract requirements were used, then the contract for Dilworth Plaza would have included an “existing conditions” clause.  The City SCR states that “Bidders shall examine the in detail the Project site and shall acquaint themselves with the conditions affecting the work under the contract and the overall Project, and, when applicable, the conditions of walls and foundations of overlaying and adjacent structures, the character of the paving, and the soil and subsurface soil.  The Bid shall be prepared with due regard to the provisions of the Contract Documents and to the conditions existing or to be anticipated at the Project site.”

The SCR also state “If a Bidder discovers or encounters any ambiguity or discrepancy in the Contract Documents in the course of preparing its Bid, the Bidder shall promptly notify the Department of the ambiguity or discrepancy prior to the date and time for receipt and opening of Bids. The City, so advised, may, at its sole discretion determine whether such ambiguity or discrepancy exists and whether any corrective action is necessary.”

Moreover, paragraph 84 of the SCR seems to directly address the issue that caused the City to fork over $5 million.  It states:  “Completeness of Data. The term “structures” used in these Standard Contract Requirements shall apply to all surface, underground, and above-ground structures of whatever character within the Project site or immediately adjacent thereto, including buildings situated in or adjacent to the excavation. Where these structures are shown or indicated on the Plans, the information provided is in accordance with the information in the possession of the Department, but is approximate only. Such data are not warranted or guaranteed by the Department to be either complete or correct, and the Contractor shall and must assume, and adjust its Bid to account for, all risks resulting from conditions in the field that differ from the approximation shown.”

So, either the City’s SCR’s were not used or the City chose to ignore them.  Either way, the question is why?)

Fans of ESPN’s iconic program College GameDay are probably familiar with host Lee Corso’s catchphrase “No So Fast My Friend.”  For the uninitiated, the phrase is usually used to preface Mr. Corso’s disagreement directed towards another host’s seemingly obvious prediction about a game.  The phrase is also an apt preface to describe what transportation contractors should do before terminating a DBE subcontractor.

Like any other non-performing subcontractor, you may need to terminate or replace a non-performing DBE subcontractor.  However, on transportation projects receiving federal funding, Department of Transportation regulations state that you cannot terminate a DBE subcontractor without prior consent of your state transportation agency and you must give notice to the effected DBE of your intent to terminate.

First and foremost you need to give the DBE subcontractor that you intend to terminate written notice setting forth the reason for the termination.  You must copy your state transportation agency with the termination notice and the DBE has five days to respond to the notice.

Second, you must get consent of your state agency by demonstrating good cause for the termination.  According to the DOT, examples of good cause are:

  • The listed DBE subcontractor fails or refuses to execute a written contract;
  • The listed DBE subcontractor fails or refuses to perform the work of its subcontract in a way consistent with normal industry standards. Provided, however, that good cause does not exist if the failure or refusal of the DBE subcontractor to perform its work on the subcontract results from the bad faith or discriminatory action of the prime contractor;
  • The listed DBE subcontractor fails or refuses to meet the prime contractor’s reasonable, nondisrciminatory bond requirements;
  • The listed DBE subcontractor becomes bankrupt, insolvent, or exhibits credit unworthiness;
  • The listed DBE subcontractor is ineligible to work on public works projects because of suspension and debarment proceedings pursuant to 2 CFR Parts 180, 215 and 1,200 or applicable state law;
  • You have determined that the listed DBE subcontractor is not a responsible contractor;
  • The listed DBE subcontractor voluntarily withdraws from the project and provides to you written notice of its withdrawal;
  • The listed DBE is ineligible to receive DBE credit for the type of work required;
  • A DBE owner dies or becomes disabled with the result that the listed DBE contractor is unable to complete its work on the contract;
  • Other documented good cause that you determine compels the termination of the DBE subcontractor. Provided, that good cause does not exist if the prime contractor seeks to terminate a DBE it relied upon to obtain the contract so that the prime contractor can self-perform the work for which the DBE contractor was engaged or so that the prime contractor can substitute another DBE or non–DBE contractor after contract award.

Finally, DOT guidelines require you to utilize the same good-faith efforts in replacing the terminated DBE with another DBE as you did when you solicited DBE bids.

What does this all mean?  Document, document, document.  Document the reasons that giving rise to the need to terminate the DBE. Document the notices you gave to the DBE and the state agency of your intention to terminate (while the regulations only require one notice, several notices is recommended.  We also recommend that you involve your state agency early if it appears that terminating a DBE will become necessary).  Document your good faith efforts in trying to obtain a replacement DBE to complete the terminated DBE’s work.