By Michael Turturro, CPA - Managing Partner - RBT CPA's 

No one ever said being a contractor would be easy. Rewarding? Yes. A breeze? Far from it. Consider all of the parties involved in any given project: developers, investors, lenders, insurance carriers, architects, engineers, consultants, subcontractors, suppliers, and manufacturers. There is a lot that can go wrong, and there is a lot to worry about. Unfortunately, to add to your list of concerns, New York’s state legislature recently passed a bill that will make general contractors jointly responsible for wage theft violations committed by subcontractors. The good news? Being aware and being prepared can save you a major (and expensive) headache, down the road.

New York Senate Bill S2766C was signed into law this September by Governor Hochul and will become effective January 4, 2022. Before this law, a general contractor would not be responsible for its subcontractor’s wage practices or liability to their employees unless it was found to be a “joint” employer, which, under applicable case law, is a difficult burden to meet. Now, contractors face strict liability for claims associated with the subcontractor’s payroll practices, and it applies to all levels of subcontractors. The limitation period for claims against the general contractor will be three years, while the general limitation for wage claims is six years, which means an individual or representative could file a lawsuit against the general contractor as well as the employer-subcontractor.

This new wage law also adds a section to the New York General Business Law which authorizes construction contractors to withhold payments owed to subcontractors who fail to pay their construction workers or who fail to comply with the law or requests by contractors for payroll information and records required by the law (i.e., certified payroll records and other records regarding names of employees, payments of wages and benefits and dates of work). This provision will allow general contractors to impose significant contract, audit, payment, and indemnity provisions on subcontractors in an attempt to manage and limit their liability for subcontractor wage claims.

The National Labor Relations Board (NLRB) issued its own final rule on the standard for determining joint-employer status under the National Labor Relations Act (NLRA), which you need to be cognizant of, too. To read the full fact sheet and gain a better understanding of your employment circumstances, click here.

Also on a national scale, the U.S. Department of Labor recently rescinded the joint employer rule which was significantly narrowed during the Trump Administration – all the more reason for New York construction companies to be on high alert and identify whether or not they are considered joint employers. The DOL announced on September 20 that its rescission of the prior administration's joint employer rule would take effect on October 5. Now that the DOL has decided to rescind the four-part test that determined whether a business is equally liable for obligations under the Fair Labor Standards Act (FLSA), it will go back to the original pre-2020 rules.

The importance of the “joint employer” doctrine impacts:

·       independent contractor relationships

·       regulation of the contractor’s access to the property and hours of work

·       control of manner and methods of performance of contractors

·       monitoring of quality and quantity of work performed

·       “costs plus” pricing arrangements

·       use of temporary staffing or referral companies

·       franchise relationships

·       insurance companies that require employers to take certain actions with their employees to comply with policy requirements for safety, security, and health

·       banks or other lenders whose financing terms may require certain performance measurements

Ultimately to run a successful business and to mitigate liability, you need to have certainty in the way you structure your business relationships. The key to the updated DOL rule for contractors is that they reserve the right to control— directly or indirectly — one or more of these factors to be considered a joint employer, not necessarily exercise the control. The bottom line? Work with HR personnel or employment counsel to closely monitor whether or not you have joint-employer relationships by examining the multifactor test to minimize overall liability under the fair labor standards act as well as the national labor relations act. In terms of what you can anticipate from the new DOL in the near future, you can look back to a January 2016 interpretation – “Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act” – for an idea of what the future may hold.