Construction businesses must step carefully when hiring on-site labor

It’s no secret that the construction industry has been struggling with a skilled labor shortage for years now. More recent events, such as the pandemic and “the Great Resignation,” have only exacerbated matters.

The situation can drive a contractor to desperation if work really needs to get done and there aren’t enough able hands available. Construction businesses may also encounter financial constraints that dissuade them from adding employees to the payroll, leaving them to consider other alternatives.

Be careful: These factors can add up to disastrous decisions that land companies in serious legal trouble. For an example, one need look no further than the recent case of Walsh v. Resto et al.

Investigation launched

The case in question arose from an investigation by the U.S. Department of Labor’s (DOL’s) Wage and Hour Division (WHD). The investigation found that a construction staffing agency and its owner had hired workers — as finishers, loaders, operators and carpenters — and intentionally misclassified them as independent contractors.

The workers were paid “straight time” for all hours, with no overtime, in violation of the Fair Labor Standards Act (FLSA). The company also failed to maintain proper records of hours worked.

The FLSA requires most employees in the United States to be paid at least the federal minimum wage for hours they work plus overtime for hours worked over 40 in a workweek. The law provides exemptions for employees in some executive, administrative and other professional roles, but such exemptions weren’t applicable to the workers in this case.

Nor did the workers qualify as independent contractors under the three primary factors commonly applied by the DOL and IRS under the FLSA: 1) behavioral control, 2) financial control, and 3) nature of relationship.

Bankruptcy no matter

As a result of the WHD’s investigation, the DOL’s Office of the Solicitor filed a complaint in federal court to obtain back wages and damages from the employer. A U.S. District Court judge entered a consent judgment ordering the employer to pay $139,036 in back wages and an equal amount in liquidated damages to the affected workers.

The employer filed for bankruptcy to try and stop the case. However, the court agreed with the DOL’s argument that bankruptcy couldn’t stop litigation and enforcement. Months of contested litigation ended when the employer agreed to the consent to judgment and to FLSA compliance.

In addition to charging back wages and damages, the consent judgment permanently prohibits the employer and its owner from committing future FLSA violations. It also forbids them from discharging or taking retaliatory action against employees exercising their FLSA rights.

Big time consequences

This case demonstrates the painful legal and financial consequences that can come from a construction company mishandling its obligations under the FLSA — particularly in misclassifying employees as independent contractors.

If you have concerns in this area, ask a qualified employment attorney to review your hiring methods. And feel free to contact us for help assessing whether your payroll processes put you at risk from the IRS or a state tax authority.

Walsh v. Resto et al., No. 2:22-CV-00015, Sept. 14, 2022 (U.S. Dist. Court, Eastern Dist. of Virginia)

©2022 Thomson Reuters

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Elizabeth Huska
Elizabeth Huska

Elizabeth Huska is an Accounting & Assurance Manager for BeachFleischman. Elizabeth has been employed with the firm since 2017, and she provides accounting, assurance, and consulting services to a variety of privately-held businesses.