March 27, 2018

Recent D.D.C. Decision Suggests Potential for Increased Prime Contractor Exposure for Wage and Hour Violations under Certain Federal and State Laws

7 min

On March 5, 2018, the U.S. District Court for the District of Columbia issued an opinion denying in part a contractor-Defendant's Motion to Dismiss several counts alleging wage and hour–related violations leveled by providers of transportation services. See Harris v. Medical Transp. Mgmt., Inc., No. 17-01371 (D.D.C. Mar. 5, 2018). Harris, which involved a unique contractor arrangement, presents interesting considerations for prime contractors who may otherwise not assume responsibility for wage and hour payment to their subcontractor employees, let alone consider themselves an employer of those subcontractor employees. Indeed, while still in the preliminary phases, Harris suggests a potentially broader application of federal and state labor laws that may result in unexpected exposure for prime contractors.

Defendant, Medical Transportation Management, Inc., is a contractor with the District of Columbia to "'manage and administer' non-emergency transportation services for Medicaid recipients." Id. at 1. Pursuant to that arrangement, Defendant contracts with other companies that provide the vehicles and employees for that purpose—akin to the common understanding of a subcontracting arrangement. While Defendant considered itself only a "'broker' of transportation services," Plaintiffs' Complaint alleged that although Defendant is not their "'employer' in the ordinary sense of that word," "Defendant is legally liable for their unpaid wages as a 'joint employer' or 'general contractor' under federal and local laws." Id.

Specifically, Plaintiffs alleged that Defendant had the "authority to regulate and exercise control over the transportation providers in various ways, 'including hiring and firing [of provider employees], the terms and conditions of employment and employees' daily responsibilities, payment of wages, and record retention relating to the employees,'" among others. Id. at 4. Defendant's contract with the District of Columbia also explicitly requires Defendant to "comply with the most recent and future revisions of all federal and District of Columbia laws," including the D.C. Living Wage Act. Id. at 4-5.

These Plaintiffs brought a class action suit against Defendant directly for violations of the Fair Labor Standards Act (FLSA), D.C. Minimum Wage Act, D.C. Living Wage Act, and the D.C. Wage Payment and Collection Law, claiming gross underpayment.1 Id. at 5. In response, Defendant filed a Motion to Dismiss, claiming that it cannot be held liable for such wage violations because it was not a "joint employer" or "general contractor" under the relevant laws, in addition to other arguments regarding applicability of the laws at issue. See generally id.

Concerning the FLSA count, Plaintiffs alleged that Defendant constituted a "joint employer" under the Act, rendering Defendant responsible for the wages paid to Plaintiffs. Id. at 7-8. Following a circuit survey of the various approaches to defining an "employer," see id. at 7-13, the Court "decline[d] to choose a test or conduct a factor-by-factor analysis" because the "question of joint employer status is essentially a fact issue," id. at 13 (internal citations omitted).

Given this fact, and the standard on a Motion to Dismiss that all facts alleged in the Complaint must be taken as true, the Court denied Defendant's Motion on the FLSA count, acknowledging that "Plaintiffs have alleged that Defendants exercised sufficient control over their work at all stages of their employment, from hiring, to performance, to termination, to qualify as a joint employer." Id. at 15.

Defendant fared no better regarding the D.C. wage and hour law counts. The D.C. Minimum Wage Revision Act requires D.C. employers to pay either the FLSA minimum wage plus $1, or the D.C. Minimum Wage, whichever is higher, as well as time and a half for overtime. Id. at 18. Plaintiffs made an argument in the alternative, claiming either that Defendant is subject to the law as Plaintiffs' employer, or that Plaintiffs are, in reality, Defendants' subcontractors, which are also covered by the D.C. law. Id. For purposes of the Motion to Dismiss, the Court found that "Defendant and the transportation companies comfortably fit within the definitions of general contractor and subcontractor, respectively," in part because Defendant's obligation was to ultimately provide non-emergency services to the District, though Defendant was prohibited from doing so directly under the terms of the subject contract, requiring a subcontractor to carry out that "overarching contractual obligation." Id. at 19-20.

While Defendant argued that the differentiation in duties supported its argument that it was not a general contractor, the Court noted that "[t]he opposite is often true." Id. at 20. In particular, "[i]n the construction industry, for example, the primary obligation of a general contractor for a large scale project is to develop a budget for the project and coordinate the construction schedule, not to do the construction itself. The tasks involved in actually erecting the building are performed by subcontractors, such as electricians, plumbers, and the like." Id.

Additionally, Defendant attempted to argue that the Contract's clause prohibiting the broker from subcontracting any portion of the broker's requirements under the contract would "confirm" the "lack of subcontractor-contractor relationship between Defendant and the transportation providers." Id. at 21. However, the D.C. Minimum Wage Act "expressly rejects the notion that a contractual term can alter a party's legal status under the statute," where it states that "unless authorized by law, 'no provision of this chapter shall in any way be contravened or set aside by private agreement.'" Id. at 21 (citing D.C. Code § 32-1305(a)). Thus, the Court concluded, in denying Defendant's Motion on this count, that "Defendant cannot find refuge in a provision barring subcontracting to avoid general contractor liability."2 Id. at 21.

While only decided at the Motion to Dismiss phase, the Harris case may have long-ranging implications for services contracts, particularly in the transportation sector, especially where the contractual relationship is analogous to the one at issue here. Typically, seasoned contractors are aware of the need to contractually specify that subcontractor agreements create only an independent contractor relationship between the prime and subcontractors, rather than an employer-employee relationship, to avoid the prime contractor becoming responsible for the subcontractors' employees as their own, except where otherwise provided by statute or regulation. However, in instances such as Harris, where the relationship between a contractor and another company working collectively toward a project may be considered legally ambiguous, the supposed "prime" contractor faces vulnerability in this regard, especially where state and local laws prohibit "contracting around" their applicability.

Other federal laws, such as the McNamara-O'Hara Service Contract Act (SCA), see 41 U.S.C. §§ 6701, et seq., address this situation more explicitly, where its regulations provide that "the prime contractor is jointly and severally liable with any subcontractor for any underpayments on the part of a subcontractor which would constitute a violation of the prime contract." 29 C.F.R. § 4.114. Thus, the SCA, which generally requires prime and subcontractors holding federal contracts over certain dollar thresholds to pay their employees the federal minimum wage, comply with applicable overtime provisions, and ensure employees' rates and fringe benefits satisfy the local standards or the terms of certain applicable collective bargaining agreements, provides yet another impetus for prime contractors to ensure not only that their own companies comply with relevant labor laws, but also that their subcontractors remain in compliance.

Venable will continue to track the Harris case as it reaches a decision on the merits and keep contractors abreast of the legal landscape surrounding this issue.

[1] Plaintiffs also included counts alleging a common-law breach of contract claim, claiming they are third-party beneficiaries to the contract between D.C. and the Defendant. Id. at 2.

[2] The Court separately determined that Defendant failed to rebut Plaintiffs' count under the Living Wage Act and that Plaintiffs sufficiently stated claims under the D.C. Wage Payment and Collection Law (given that such claim rests on underpayment of wages under the Minimum Wage Revision Act and Living Wage Act counts and the Court found Plaintiff sufficiently stated claims under both of those laws). Id. at 27-28. The Court also separately granted Defendant's Motion to Dismiss on the common law breach-of-contract count, finding that Plaintiffs were only incidental beneficiaries under the Contract and therefore were not entitled to enforce the contract. Id. at 28-29.