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August 30, 2012

Court of Appeals Relieves General Contractor of Liability for Non-Payment of Wages by Subcontractor

The New York State Department of Labor has long taken the position that a general contractor on a construction project is liable for any unpaid wages of its subcontractors based principally on the argument that the general contractor was the "joint employer" of the subcontractor's employees.  In Ovadia v. Industrial Board of Appeals, 19 N.Y.3d 138, 946 N.Y.S.2d 86 (2012), the New York Court of Appeals, New York's highest court, held that the Department of Labor and the Industrial Board of Appeals, at least in that case, had misapplied the joint employer test in holding the general contractor liable for unpaid wages of its subcontractor's employees.

In Ovadia, the general contractor, as part of the construction of two multi-family residences in Queens, hired a masonry subcontractor.  The general contractor did not supervise or control the masonry subcontractor's employees and dealt only with the owner of the masonry subcontractor.  The masonry subcontractor periodically underpaid its employees and then left the job without paying its employees.  When the subcontractor's employees approached the general contractor about getting paid, the general contractor told them that, if the employees stayed to finish the project, they would get paid.  The general contractor ended up hiring a new masonry contractor six days later.  The original masonry subcontractor's employees left the job without getting paid.

Not surprisingly, those employees filed a complaint with the Department of Labor.  After conducting an investigation, the Department of Labor found that the general contractor had assumed the status of the employer of his subcontractor's employees and directed that the general contractor pay $117,000 in back pay representing past due wages for the total time the employees had worked on the project.  On appeal, the Industrial Board of Appeals ("IBA") affirmed the Department of Labor's determination, holding that the general contractor was the joint employer of its subcontractor's employees.  On appeal to the Courts, the Appellate Division, Third Department, affirmed.

The Court of Appeals reversed, holding that, in the typical general contractor/subcontractor context, a general contractor is not an employer of its subcontractor's employees.  The Court went on to hold that the IBA, failing to recognize the realities of a construction project, had misapplied several factors in the federal test to determine joint employer status.  Specifically, the IBA had relied on the fact that the general contractor had supplied the work site materials used by the subcontractors employees.  The Court held that was a common occurrence on a construction project and should not be considered indicative of a joint employer status.  Similarly, the Court also discounted the IBA's reliance on the fact that the subcontractor's employees worked on the project for the duration of the subcontract, finding that was also not unusual on a construction project.   Finally, the Court held that the fact that the general contractor appeared on the job site and inspected the subcontractor's work was another common occurrence in the construction field and could not be considered indicative of control over the subcontractor's employees sufficient to create a joint employer relationship.1  The Court cautioned, however, that there are circumstances where such a joint employer relationship could be found.

Ovadia is an important decision for general contractors faced with defaulting subcontractors.  The case, however, involved a non-prevailing wage project.  Given the express requirement in Section 220 of the Labor Law, that requires contractors and subcontractors to pay prevailing wages, it is unclear whether the holding in Ovadia would be extended to prevailing wage projects.

If you require further information regarding the information presented in this Legal Alert and its impact on your organization, please contact any of the members of the Labor and Employment Practice Area.

1 However, the Court did remit the case to the IBA for a determination whether the general contractor's request to the employees to remain on the project after the subcontractor left created an employer-employee relationship for those six days.


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