Court Finds General Contractor Liable for Subcontractor’s Employees

In a decision with potentially huge ramifications for the construction industry, the Fourth Circuit Court of Appeals found that employees of a framing and drywall subcontractor were also the employees of a general contractor for purposes of federal employment laws. Therefore, contractors might find themselves on the hook for their subcontractors’ violations of the law, even if the general contractor had nothing to do with the alleged violation.

In Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (2017), several employees of J.I. General Contractors, Inc. (“Subcontractor”) filed a lawsuit against Subcontractor and a general contractor, Commercial Interiors, Inc. (“GC”) for Subcontractor’s failure to pay the employees proper overtime wages. The issue before the Court was whether GC was a “joint employer” of Subcontractor’s employees. Since Subcontractor was defunct with no money to pay a judgment, the GC was their only means of recovery.

The trial court dismissed the case against the GC because the GC and Subcontractor entered into a “traditionally … recognized,” legitimate contractor-subcontractor relationship that did not attempt to avoid the law. This rationale is consistent with industry expectations that when a general contractor hires a subcontractor to do work, although there is some supervision required of the subcontractor, the general contractor does not take on legal responsibility for the subcontractor’s workers.

However, on appeal, the Fourth Circuit found that the GC was a joint employer and stated that the legitimacy of the business relationship was not the most important factor. Instead, a general contractor (or any other company) is a joint employer when (1) it shares responsibility for the terms and conditions of a worker’s employment, and (2) the two entities’ combined influence renders the worker an employee rather than an independent contractor.

The factual allegations supporting the Court’s decision were as follows:

  • GC threatened to fire a Subcontractor employee on at least one occasion;
  • On some jobs, Subcontractor employees worked directly for GC, blurring the distinction between the two;
  • GC had close control over the schedules of the Subcontractor’s employees; and
  • Subcontractor’s employees wore GC’s clothing/logo while on site.

What does all this mean? This decision is scary for general contractors because it could signal the beginning of the end of the legal distinction between your employees and your subcontractor’s employees on a particular job. However, the more likely (and hopeful) explanation is that this case is an outlier because of the particular facts.

Regardless, there are a couple of important takeaways for construction companies:

  • Make sure your contracts are airtight with the correct language on the independent contractor relationship, strong indemnification provisions, and robust insurance requirements; and
  • Avoid actions like those taken by the GC in the Salinas case that could be interpreted as controlling the subcontractor’s workers.

IRS Pressing Forward with ACA Penalties

Yesterday, the IRS reiterated that employers violating the ACA can expect penalty letters in late 2017 and also updated that portion of its website dedicated to the Employers’ ACA obligations here. The update explains the form of notices employers can expect to receive as a result of IRS penalties pursuant to the ACA. Those notices are listed below with a brief description:

1) Letter 226J

  • Alerts the employer that a penalty is owed and why
  • Provides a table of applicable monthly penalties
  • Addresses the means of submitting penalty payments
  • Explains when employers may appeal and what action is required

Note – a response is required within 30 days after receiving a Letter 226J or the IRS will proceed with its stated action.

2) Letter 227

  • Response an employer will receive from the IRS acknowledging an appeal
  • Deadline for employers to request a pre-assessment conference with the IRS Office of Appeals

3) Notice CP 220J

  • The notice and demand for payment describing how payments will be made

Note – Payments will NOT be made on the ALE’s tax returns.

The October 31st NYC Attack and the Diversity Immigrant Visa Program

As many mourn the loss of the victims of the October 31st NYC attack, a parallel conversation surrounding immigration reform has emerged. Immigration reform has been President Trump’s long-standing campaign promise, but has found fierce judicial opposition since January. We have covered these developments in prior posts.

As details emerged regarding the suspect in the NYC attack, the Administration directly attacked the rarely-discussed Diversity Immigrant Visa Program, or the “diversity lottery.” Based on available information, the suspect in the NYC attack entered the United States from Uzbekistan on a diversity visa in 2010, and subsequently became a permanent resident, i.e., green card holder.

The diversity lottery was created in 1990, and issues up to 50,000 visas each year from a specified list of countries that are traditionally underrepresented in the United States. Applicants from these specified countries may register for the lottery at no cost. Thereafter, the Department of State randomly selects applicants from the pool based on the allocations of available visas in each region and country.

The Department of State has published its 2015 statistics for the selected entrants under the lottery. Some of the most represented countries under this program by region include Egypt, Cameroon, Cambodia, Iran, Russia, Turkey, Uzbekistan, Ukraine, Australia, Fiji, Cuba and Paraguay. The complete data set may be accessed here.

The unique aspect of this program is that unlike DACA, which was a result of executive action by President Obama, the diversity lottery is legislation passed by Congress, and therefore, Congress will have to act to amend or eliminate the program. Republican Senators Tom Cotton and David Perdue have introduced a bill that would eliminate the diversity lottery.

Join us for our upcoming Employment Law Seminars

Haynsworth Sinkler Boyd’s Employment Group is pleased to announce the schedule for our upcoming Employment Law Seminars.

HR professionals are invited to join us for a program that will cover current issues in Employment law in a fast-paced, plain-English way. These complimentary seminars qualify for 3.0 hours of continuing education credit with CLE, SHRM and HRCI credit available.

Our attorneys will present on the following topics:

  • LGBTQIA: What Human Resource Professionals Need to Know
  • Immigration Law Update
  • Politics in the Workplace
  • Wage & Hour update
  • Recent Trends with the ADA
  • DOR & the Unemployment Insurance Tax Rate

Join us for one of our seminars in a location near you:

November 30 – Hood Center, Rock Hill
8:30 am – 12:00 pm
Click here for details and to register.

December 5 – Marina Inn Grande Dunes Myrtle Beach
8:30 am – 12:00 pm
Click here for details and to register.

December 6 – SiMT Florence 
8:30 am – 12:00 pm
Click here for details and to register.

Please contact Keely Yates for additional information.

More ACA: President Trump’s Termination of Cost-Sharing Reduction Payments

Late Thursday evening after President Trump issued an Executive Order earlier in the day directing various administrative agencies to take suggested actions for the hope of reducing the cost of health insurance, discussed here, the Trump Administration announced it would terminate cost-sharing reduction (“CSR”) payments based upon guidance to the Administration by the Department of Justice indicating that there is no federal appropriation for the CSR payments. The CSR payments are made by the Secretary of Health and Human Services to insurance companies to help offset the cost of providing reduced cost insurance to low income individuals who qualify for them on the Exchange. Insurance carriers providing products on the Exchange have already indicated significant premium hikes for their products if CSR payments are not made in 2018. Many industry experts fear this action would dramatically increase premium costs for those Exchange participants who can afford to remain on the Exchange if this change were to take effect, while leaving other individuals and families who cannot afford the premium increases no options for affordable coverage, discussed here. Although the Administration stated the payments would stop immediately, there really was no guidance as to when they would cease. Any cessation if implemented should not impact 2017 premium amounts as they have already been established but would be anticipated to apply to any 2018 premium amounts even though open enrollment has already begun. Already there are reports of anticipated litigation to oppose the action brought by insurers who are the recipients of the reimbursements as well as nineteen states who oppose the action. Congress has been considering legislation that would fund the CSR payments and the President’s action on Thursday evening may well prompt a quick response.

I received a few questions after last Thursday’s Executive Order asking if the Trump Administration’s actions did indeed nullify the ACA. The Administration is clearly trying to obfuscate the ACA after Congress failed to repeal it. However, employers and others charged with ACA compliance must keep in mind that the ACA remains a federal law that can only be repealed by Congress. As Chief Justice Roberts aptly noted in the Court’s majority opinion in King v. Burwell, “[w]e must respect the role of the legislature, and take care not to undo what it has done.” Those same constitutional constraints apply to the executive branch of government. The Trump Administration’s efforts last Thursday serve to deflate but not undo, or nullify, the ACA. However, this action, as compared to this Administration’s Executive Orders issued to Administrative Agencies regarding the ACA this year, has greater potential to put a chink on the ACA’s armor.

Travel Ban & DACA Updates

In a one page opinion, the United States Supreme Court remanded one of the two “travel ban” cases pending SCOTUS review. The Order remanded Trump v. International Refugee Assistance Project back to the 4th Circuit Court of Appeals because the case is now “moot” – the Court found no controversy because the challenged Executive Order 13780 “expired on its own terms.” The Court provided no opinion on the merits of the case.

In earlier posts, we also covered Trump v. Hawaii, another challenge to President Trump’s “travel bans.” This case remains pending because the challenged provisions of the March 6th Executive Order have not expired, unlike Executive Order 13780. Specifically, the March 6th Executive Order placed restrictions on the refugee program that remain in effect. The expiration date for this Executive Order is October 24th. We expect to see another iteration of the refugee restrictions or other immigration-related restrictions by October 24th.

More recently on September 24, 2017, President Trump also issued a Proclamation limiting entry into the United States from individuals from six countries – Iran, Libya, Somalia, Syria, Yemen, Chad, North Korea, and Venezuela. Unlike prior Executive Orders, this Proclamation is relatively more nuanced and does not contain a blanket ban on all travelers from the listed nations.

Shifting gears to the Deferred Action for Childhood Arrivals (DACA) controversy: Attorney General Jeff Sessions’ announcement last month ending DACA was followed by multiple lawsuits against the Administration. Several states including New York, Massachusetts, Washington, Connecticut, Delaware, Hawaii, Illinois, Iowa, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Virginia, California, Maine, Maryland, and Minnesota, and D.C all filed suits against the Administration citing Constitutional challenges, among others.

An estimated 800,000 individuals relying on DACA will face uncertainty as a result of DACA’s termination. The deadlines for first time and renewal applications have passed. Therefore, barring Congressional or Executive action on the matter, no individual currently working as a result of DACA may be permitted to legally work in the United States once their work permit expires.

Independent of the legal and political debate, ending DACA is likely to have an enormous economic impact on both DACA-authorized employees and their employers. Employers are called to maintain contingency plans should those working under DACA lose their work permits, and ensure continued compliance with immigration laws.

Can the President Nullify the Affordable Care Act by Issuing Executive Orders?

President Trump issued an Executive Order yesterday which purports to suggest three avenues for offering health insurance at a decreased cost to small employers and consumers for the overall goal of reducing healthcare costs on the grounds that the Affordable Care Act (ACA) has limited consumer choice resulting in an increase in healthcare insurance cost. The Order charges various administrative agencies to act within 60 days.

First, the Executive Order directs the Department of Labor (DOL) to issue proposed rules that would permit small employers to join together and create what can be likened to multi-employer plans for the purpose of obtaining the same discounts for insurance offered to large employers, interestingly one of the two premises behind creation of the ACA Exchanges, by expanding access to Association Health Plans. The proposed plan of action would rely on a “broader interpretation” of a provision of the Employee Retirement Income Security Act (ERISA) that permits multi-employer plans for employers who have a “commonality of interest.” ERISA is statutory law modifiable only by Congress although the Employee Benefits Security Administration (EBSA), a division of the DOL, is charged with enforcing ERISA as they pertain to employer’s healthcare plans.

The Executive Order directs the DOL, Department of Treasury and Department of Health and Human Services (HHS) to issue rules that permit healthcare coverage to be offered through short-term limited duration insurance which is not subject to the ACA by extending the allowable coverage under these types of plans for longer periods and permitting consumers to renew them. The Executive Order also directed the agencies to issue regulations applicable to Health Reimbursement Accounts (HRA) that increased the usability beyond what HRAs already offer.

One concern is the less costly healthcare insurance offered under AHPs or short-term limited duration insurance plans may not contain all of the coverage protections required by the ACA. As a reminder, the ACA requires that all healthcare plans offer coverage for essential health benefits and that the insurance plan provides minimum value (namely covering the cost of covered treatments up to a certain percentage of the total cost). Another concern regarding the proposals are that the changes would result in violations of other federal laws which prohibit disparity in premiums between younger, healthier workers or individuals as compared to premiums charged to those who are older or sicker.

The Executive Order identifies a number of statistics about healthcare insurance costs and coverage all to show that health insurance is becoming less affordable for consumers and too costly for carriers to offer resulting in a decrease of competitive healthcare insurance plans and an increase of uninsured.

President Trump also criticizes the consolidation of providers as a reason healthcare costs have increased, suggesting that the consolidations interfere with healthy competition, and requiring the Federal Trade Commission, along with DOL, HHS and Treasury, to report to him within 180 days on federal and state policies limiting competition and choice in the healthcare industry.

Similar to his January 31, 2017 Executive Order in which he asked enforcement agencies to soften penalties under the ACA where the law allowed, any agency attempting to comply with the admonishment cannot simply and quickly issue new rules that then become enforceable regulations. Finally, as a practical matter, because it is October, most calendar plan years are already engaged in the open enrollment process so the earliest any enforcement changes could be implemented for those plans would be 2019. The Executive Order can be found here.

In the meantime, employers should continue to abide by the ACA. The IRS anticipates issuing its first penalty letters to employers for noncompliance this December.

Responding to SCDEW: The Payoff for Employers

There are several ways that employers can keep their unemployment insurance (UI) tax rate down. First, it is beneficial to learn how the South Carolina Department of Employment and Workforce (“SCDEW”) determines the employer’s experience for tax rate assignment.

Generally, employees are entitled to UI if not working through no fault of their own, including lack of work, reduction of hours, reasons other than cause or misconduct, quit for good cause “in connection with employment,” and substandard performance beyond claimant’s control. SCDEW maintains an account for each employer and records data on unemployment claims to determine the employer’s “experience for rate assignments.” UI benefits paid to an eligible individual will be charged against the account of the most recent employer.

SCDEW calculates the experience rating by taking the total benefits charged against an employer’s account in an applicable time period and divides the employer’s taxable payroll during that same period. In other words, a higher benefits ratio indicates a higher usage of the unemployment system, which results in higher taxes. Generally, an employer will receive an experience rating as of June 30th if it has completed a minimum of 12 consecutive months from the date in which it accomplished liability.

Each year, SCDEW ranks employers based on their benefit ratio percentage. Each employer is then categorized equally among twenty (20) rate classes, with each class consisting of five percent (5%) of the taxable wages of all employers eligible for a rate computation. New employers are assigned to rate class twelve (12). SCDEW then determines the tax rate for the following calendar year by estimating the amount of benefits payments, loan payments, loan interest payments and the “trust fund solvency target.”

Nonprofit organizations and state and local government entities are considered employers liable for payment in lieu of contribution, meaning that they may elect to make payments to the SCDEW. This payment can be made in one of two ways: (1) at the end of each calendar quarter, SCDEW can bill each organization for an amount “equal to full amount of regular benefits plus one-half of the amounts of extended benefits paid during that quarter”; or (2) pay two percent (2%) of the quarterly taxable payroll of that organization within 30 days after the close of each calendar quarter. At the end of the year, SCDEW will then determine whether the total payments for each year made by the organization is less than, or in excess of, the total amount mentioned in the first option. The organization is liable for the unpaid balance if it is less than the amount above. If in excess, all or part of the excess may either be refunded or retained in the fund as part payment for the next year.

So what can an employer do in order to keep the UI tax rate down?

First, implement clear policies and keep records to ensure that sufficient evidence of cause or misconduct can be produced. For instance, be sure to maintain records of employee orientation, trainings, negative counseling, etc.

Second, respond timely. When employees file, employers have the opportunity explain the reason why the claimant is no longer employed. To prevent improper payment, the employer has to respond within 10 calendar days of the notification of appeal tribunal’s decision.

Third, respond adequately and effectively. Your response may come to light in subsequent litigation, so be careful how you respond and consider consulting legal counsel. If the employee was terminated, employers should generally provide SCDEW with the name and title of the employee, a description of the final events leading to termination (with dates and times), a list of warnings given to employee during final year of employment (with dates and times), and how the employee’s actions impacted the company’s operation.

Finally, understand the eligibility and appeals process. Not participating in the appeals process can adversely affect taxes.

About the author: Demetrius Pyburn is employed at Haynsworth Sinkler Boyd, P.A. in Greenville, SC. He is a graduate of the University of South Carolina School of Law in Columbia, SC, Class of 2017 and anticipates becoming a member of the South Carolina Bar in November 2017.

Reminder: Join us for our Fall Employment Law Seminars

Haynsworth Sinkler Boyd’s Employment Group is pleased to announce the schedule for our upcoming Employment Law Seminars.

HR professionals are invited to join us for a program that will cover current issues in Employment law in a fast-paced, plain-English way. These complimentary seminars qualify for 3.0 hours of continuing education credit with CLE, SHRM and HRCI credit available.

Our attorneys will present on the following topics:

  • LGBTQIA: What Human Resource Professionals Need to Know
  • Immigration Law Update
  • Politics in the Workplace
  • Wage & Hour update
  • Recent Trends with the ADA
  • DOR & the Unemployment Insurance Tax Rate

Join us for one of our seminars in a location near you:

November 30 – Hood Center, Rock Hill
8:30 am – 12:00 pm
Click here for details and to register.

December 5 – Marina Inn Grande Dunes Myrtle Beach
8:30 am – 12:00 pm
Click here for details and to register.

December 6 – SiMT Florence 
8:30 am – 12:00 pm
Click here for details and to register.

Please contact Keely Yates for additional information.

Federal Judge in Texas Issues Final Ruling Striking Down New Overtime Rule

By now, employers are certainly well aware that on November 22, 2016, a federal judge in Texas issued a preliminary injunction that effectively prevented the implementation and enforcement of the new Department of Labor (“DOL”) regulations regarding the exemptions from overtime for bona fide executive, administrative, or professional (“EAP”) employees. See Nevada, et. al. v. U.S. Department of Labor, et. al., 218 F. Supp. 3d 520, 534 (E.D. Texas 2016).  As we previously blogged, the November 22nd ruling was not final and was effective “pending further order” of the court.

That “further order” came on August 31, 2017, when the same federal judge who issued the November 22, 2016 order issued a final ruling concluding that the new regulation “is invalid.” The judge determined that Congress intended the EAP exemption to apply to employees who perform executive, administrative, or professional duties, and that the new regulation fails to carry out that intent because it improperly uses a salary-level test that effectively eliminates the “duties” test.

It should be noted that the November 22, 2016 ruling is still on appeal with the Fifth Circuit, and the August 31, 2017 ruling is also subject to being appealed. However, the DOL has indicated that it does not intend to pursue the salary level of $913 per week that was a part of the new regulation.  As noted in our blog post dated July 26, 2017, the DOL has requested notice and comment before issuing a revised proposed regulation.  It will be interesting to see how the court’s treatment of the duties test in the August 31, 2017 ruling impacts the DOL’s revised proposed regulation regarding the EAP exemption.

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