May 2014

An article on the website Real Estate Weekly entitled “Construction unions going after alter-ego contractors as profits shrink” recently grabbed my attention.  The article recounts the  familiar tale of a union shop contractor that was forced to pay $6 million for violating its collective bargaining agreement with a Carpenters Local.

The Carpenters accused a New York firm, River Avenue Contracting of creating alter ego companies and using them to hire non-union workers.  River Avenue created RNC Industries and Extreme Concrete Corp., but allegedly kept the same employees and address.  

Therein lies the problem.

As we have written about before, double breasted operations, even if they share a common owner, are completely legal.  The issue that contractors, like River Avenue Contracting, run into in establishing a non-union entity is not common ownership, its common everything else.  Common ownership is but one factor in a series of factors the Court will use to determine whether the non-union entity is an “alter ego” of the union firm.  But, it is hardly dispositive.  More important factors are common employees, common management, common office space, and common equipment.

Unfortunately, for River Avenue Contracting, and many firms like it, they fail to keep the two enterprises truly separate, which is frankly not that difficult.  If River Avenue Contracting’s owners, established a new non-union firm, that had a different management team, different non-union member employees, a different location, and bid different types of work (say residential instead of commercial), then the union would have had an uphill battle with its case and it is unlikely River Avenue would have agreed to pay the $6 million amount.




Readers of this blog know that I have been warning that actions brought under the False Claims Act against contractors violating DBE programs have been increasing.  Last week, I wrote about a False Claims Act case brought by a project manager, employed by a third party subcontractor, that resulted in a $2 million award to him and over $10 million award to the government.

On the heels of that case, is news out of the Southern District of New York of a False Claims Act case brought by the U.S. Attorney for the Southern District of New York, against Moretrench American Corporation, who allegedly used a “pass through” entity to meet its DBE subcontracting goals on the World Trade Center Project.  (Readers of this blog also know that the Southern District of New York is a hot bed of DBE fraud prosecutions, including several high profile cases in the last few years.)

According to the complaint, Moretrench made the common mistake of hiring a certified DBE that performed no commercially useful function.  Instead, Moretrench placed is employees on the DBE’s payroll and had those employees perform work using Moretrench equipment.  Moretrench then submitted payment applications certifying that the DBE performed work for Moretrench.  The complaint seeks only money damages and raises claims under the civil portion of the False Claims Act.  Therefore, Moretrench and its executives are lucky that they are not facing criminal mail and wire fraud charges, which the DOJ could have easily brought given the facts alleged.  (However, the DOJ can always bring additional charges later and we will see what happens.)

The Department of Labor maintains a set of regulations that (a) are the basis for a large increase in enforcement activity, (b) apply to virtual all transportation contractors and subcontractors, and (c) most contractors and subcontractors are not complying with. Those regulations are found at 41 C.F.R. 60-4.1 and are the implementing regulations for Executive Order 11246, an LBJ era order seeking to end discriminatory hiring practices on federal construction projects.  These regulations are sometimes referred to as Affirmative Action regulations.

Why You Should Be Concerned.

The DOL’s Affirmative Action regulations apply to all contractors and subcontractors with a contract value exceeding $10,000 on an federally funded project or project receiving federal funding assistance.  This is critical because many contractors make several false assumptions about the applicability of the Affirmative Action regulations to them.  First, the regulations apply to any contractor or subcontractor working on a federal or federally assisted construction project and not just to those contractors maintaining a direct contractual relationship with the government agency letting the work.  Second, unlike many federal regulations, there is no employee threshold for the regulations to apply because it applies to any contractor or subcontractor holding a contract or subcontract in excess of $10,000 is subject to the regulations regardless of company size.  Third, it applies to any project receiving some sort of federal funding assistance, not just those solely funded by the federal government.  What this means is that it is hard to envision a public construction project that is not subject to the regulations.

Contractors should be concerned because after years of little enforcement activity the DOL’s Office of Federal Contract Compliance Programs is rapidly stepping up enforcement activities.  The regulations permit the DOL to conduct an on-site audit of your firm’s compliance with the regulations and permits the DOL to access a wide variety of records, including payment and payroll records for non-public private projects.  Moreover, unlike an OSHA investigation, this can all be done without a warrant.

What the Regulations Require You to Do.

Generally, the Regulations require you to use “good-faith efforts” to increase minority and female employment within your firm.  The Regulations set forth specific requirements that firms must do to help achieve this goal.  For example, the Regulations require you to keep a record of all female and minority applicants, to actively recruit female and minority employees through various community organizations, and to create and maintain a equal employment opportunity policy within your firm.  The OFCCP publishes a helpful “Technical Assistance Guide for Federal Construction Contractors,” which goes into to much greater detail on the requirements of the Regulations and should be required reading for contractors.  It can be found HERE.

Where Problems Occur.

First and foremost, problems occur because most contractors and subcontractors falsely assume the regulations do not apply to them so they are left completely flatfooted when they receive a letter from the DOL advising that them that they have been selected for EEO audit.

Second, while no doubt laudable, the Regulations (like many federal regulations) sometimes do not consider the real world.  For example, the Regulations require that contractors and subcontractors “provide written notification to minority and female recruitment sources and to community organizations when the Contractor or its unions have employment opportunities available, and maintain a record of the organization’s responses.”  For contractors signed to collective bargaining agreements, such an effort amounts to little more than a waste of time because all hiring must go through the respective union hall.  The regulations also require firms to develop “on-the-job training opportunities’ targeted females and minorities.  Again, this becomes cumbersome, at best, when firms hire through union halls that maintain their own apprentice and training programs.

The Consequence of Non-Compliance.

Beside the cost and expense of a lengthy DOL audit, non-compliant contractors run the risk of fines and sanctions, including debarment, for failing to follow the Regulations.

Because enforcement efforts are increasing, contractor and subcontractors working on public projects should become familiar with the Regulations so that they are fully prepared to respond to a DOL audit.

While criminal prosecutions involving construction company executives violating federal, state, and local disadvantaged business enterprise programs (DBE) rightfully receive most of the attention, of equal or greater concern to contractors should be whistleblower lawsuits brought under the False Claims Act for violations of DBE regulations.  As I talked about in my recent DBE compliance webinar (available for free by clicking HERE) the False Claims Act makes bounty hunters out of disgruntled former employees because the Act entitles the whistleblower to up to 30% of the amount recovered on behalf of the government.

On May 1, 2014, the FBI announced a $12 million settlement against Chicago based McHugh Construction for violations of the DOT DBE program and similar Illinois and Chicago DBE programs.  What is important about the case, is that it was filed under the False Claims Act by a project manager of a subcontractor to McHugh.  The case was then picked up — as is often the case under the False Claims Act – by the Department of Justice.  For his effort in making the initial filing the project manager will receive in excess of $2 million.  Not a bad pay day for the little work that he did in filing the lawsuit.

Now more than ever, contractors cannot ignore their DBE compliance duties.  Like with any other criminal activity, the Department of Justice cannot prosecute every case either because they lack the resources or they decline prosecution because of the size of the matter.  However, under the False Claims Act, the hundreds of people working on a construction project have incentive to sue contractors for violations of DBE rules.

Plaintiff’s attorney are aggressively pursuing whistleblower claims against contractors that violate the DBE regulations.  Moreover, many terminated and disgruntled employees contact an attorney about potentially suing their former employer.  Usually that inquiry involves whether they have a claims for some form of discrimination.  Many are disappointed to learn they do not, however, you can be sure that the attorney they speak with will ask the potential client about any potential False Claims Act claims.  Even when you win a whistleblower action you lose because you are forced to spend significant money defending the action, which is typically not covered by insurance.

Whistleblower actions, yet another reason to make sure your firm is complying with DBE regulations.