Practitioner Insights: Don’t Get Stung by an OSHA Citation If Your Subcontractor is Responsible

Many mid-tier construction contractors win contracts to supply labor and materials, then subcontract out the entire labor portion. They frequently encounter problems when Occupational Safety and Health Administration cites them for workplace hazards, contending that the labor subcontractor’s employees are employees of the mid-tier contractor.

This is troubling when the mid-tier contractor has no employees working at the job site, and its on-site appearances are limited to project managers checking up on the labor subcontractor’s progress and work quality. The practice of subcontracting out all labor is common in certain trades. In my practice, I see it most often in masonry, roofing, drywall, and framing.

If cited by OSHA, you or your mid-tier contractor client will have to defend a citation alleging responsibility for safety hazards confronted by workers employed by other employers. In defense of the citation, it is vital to be able to show that another employer, presumably the labor subcontractor, is an independent contractor and the responsible employer.

Upon a credible, evidence-based showing, OSHA can and will withdraw the citation. If withdrawn at the OSHA-area office informal conference, there won’t be any need to file a contest and incur the expense and risk of litigation.

There is no “get out of jail free card” inoculating the mid-tier contractor from an OSHA citation, but wise labor subcontractor selection and monitoring, good drafting of the labor subcontract, and proper payroll reporting can limit the mid-tier contractor’s exposure, if not avoid it entirely.

Burden of Proof

To enforce any OSHA citation, the Secretary of Labor must prove that the cited standard applies; there was noncompliance with the standard; employees had access to hazardous conditions violating the standard; and the cited employer had actual or constructive knowledge of the violative conditions.

Of these four required elements of the secretary’s burden of proof, employer knowledge or awareness of hazardous conditions is usually the critical issue since the other three elements are almost always present. Was there an opportunity for the mid-tier contractor to observe the hazard and employee exposure? Probably not if it had no employees on-site, but the mid-tier contractor should be prepared to prove not only that it had no employees working on site, but also that it had adequate measures in place to ensure and enforce the labor subcontractor’s responsibility to maintain a workplace free of recognized hazards.

Who Employs the Workers?

The standards defining an employer and an employee are absurdly reticulating.

An employer is defined as a business with employees, while an employee is defined as a person employed by an employer. Because these regulatory definitions have no useful application, for purposes of this analysis the conventional master-servant relationship as understood by common-law agency doctrine (Nationwide Mutual Insurance Co. v. Darden, U.S., 503 U.S. 316, 1992) is applicable.

In determining whether a hired party is an employee or an independent contractor, the key issue is the hiring party’s control over the manner and means of accomplishing the work rather than the results of the work. There is no employment relationship if the putative employer lacks the right to hire or fire the workers, or to designate and assign their tasks and has no control over their compensation or schedule. Other factors relevant to this discussion are the source of equipment and tools, duration of the relationship between the parties, method of payment, hired party’s role in hiring and paying assistants, provision of employee benefits, and tax treatment of the hired party.

The Secretary of Labor has the burden of proving that the cited employer is an employer of workers at the job site at the time of the violation. Except in the Fifth Circuit, it doesn’t matter whether the cited employer is the employer of the workers exposed to the hazard. If the workers are employed by the labor subcontractor rather than the mid-tier contractor, the labor subcontractor should be the responsible party.

Selection of Labor Subcontractor

When selecting the labor subcontractor, consider limiting the pool of labor subcontractors to those qualified entities that have demonstrated the requisite training and competency and have the certification to prove it.

The Department of Labor, sometimes in coordination with the Internal Revenue Service, often contends that regular and continuous relationships with the same small group of labor subcontractors make their employees your employees. Know that there is nothing improper about choosing to work continuously and regularly with a few pre-vetted labor subcontractors upon whom you can consistently rely, but you must take adequate precautions to distinguish the labor subcontractor as a separate and distinct independent contractor.

It is best to contract with labor subcontractors that are formally organized entities rather than individual sole proprietors. Sole proprietor labor subcontractors often fail to keep the records that establish their independent contractor status, or they fail to file proper payroll reports. They often hire workers ad hoc, when and as needed. Their lack of proper payroll accounting and records supports OSHA’s effort to lump the sole proprietor with the ad hoc workers in contending that the labor subcontractor is not an independent contractor and that both the sole proprietor and his workers should be deemed employees of the mid-tier contractor.

At minimum, the sole proprietor labor subcontractor should be encouraged to formally organize as either a limited liability company or a corporation. This formal entity will have a federal employer identification number rather than the individual owner’s social security number. Collecting a W-9 Request for Taxpayer Identification Number and Certification from the labor subcontractor helps establish its independent status, but is not by itself conclusive. The labor subcontractor should be required to make payroll records available if the mid-tier contractor is challenged on the employment status of the workers to prove that the labor subcontractor is the employer of the workers at the job site. These records typically include federal payroll employment forms 940 and 941 filed with the IRS, and related federal and state labor reporting forms. Also, 1099s should be issued to all labor subcontractors based on payment by check or electronic draft made payable to an entity. Do not issue checks or other payments to any individuals, in particular those working at the job site.

Drafting the Labor Subcontract

Some mid-tier contractors do sign written contracts with their labor subcontractors, but these contracts are often simple generic forms not intended for or particularly suitable to construction labor. Drafting, executing, and enforcing a good quality written contract is essential for reducing the mid-tier contractor’s exposure.

The contract should put the responsibility for safety compliance on the labor subcontractor. Demand that the labor subcontractor demonstrate training and competency of its employees. Be able to show all training records, including sign-in sheets indicating the workers’ participation in toolbox talks. Get and keep copies of the toolbox talks and sign-in sheets if they were conducted by someone other than the mid-tier contractor.

A labor subcontract also should require the subcontractor to continuously staff the work site with a “Competent Person,” and write the OSHA standard’s definition of this term into the contract to eliminate any doubt as to the level of supervision and responsibility expected for safety monitoring. Collect and maintain documented evidence of the Competent Person’s training and qualification, such as satisfactory completion of 10-hour or 30-hour OSHA programs, as well as course completion certification in areas relevant to the particular subcontract, such as competency in fall protection, scaffolds, trenching and excavation, or confined space.

Require the labor subcontractor to conduct regular and frequent inspections for safety compliance and enforcement, and collect documentation of the inspections and records of any associated enforcement and discipline.

Contract clauses requiring the labor subcontractor to have adequate workers compensation, general liability, and vehicle insurance provide additional evidence of the independent contractor status of the labor subcontractor. Collect and keep proof of the labor subcontractor’s compliance with the insurance coverage requirements of the labor subcontract.

The labor subcontractor should specifically be liable for penalties and defense costs associated with citations originating from its work. Withhold final distribution of retainage if there has been an OSHA inspection of the work site involving a labor subcontractor’s work, and do not release funds until all issues involving a citation or the potential for a citation are resolved.

Conduct at Job Site

OSHA takes full advantage of worker language problems, communications failures, and lack of education.

Workers cannot be relied upon to enunciate the distinction between management of the job and management of how they are doing their work, especially if their English language skills are poor, or if questioning by a government official makes them nervous. When asked by an OSHA compliance officer, workers often will point to the mid-tier contractor’s superintendent or project manager, and acknowledge or state that he is the boss. Accurate or not, the burden has now shifted to the mid-tier contractor to prove otherwise.

To avoid this problem, the mid-tier contractor’s superintendent or project manager should address any quality or job progress concerns directly with the labor subcontractor foreman rather than with the workers in the labor subcontractor’s crew. It is one thing to address problems with the quality of the labor, quite another to micromanage the laborers. Do not attempt to direct the work activities of the labor subcontractor’s employees.

This next point should be obvious, but a job site where the workers are dressed in company-named clothing and personal protective equipment strongly implies that the workers are employed by that company. Avoid distributing caps, shirts, vests, hardhat labels, or other paraphernalia with your company logo or name to the labor subcontractor and its workers. This is not the place for branding and marketing.

Dealing With Flowdown Responsibility

The mid-tier contractor’s labor and materials contract very likely includes flowdown responsibility imposed for compliance with safety and other regulations. OSHA will attempt to use this language in that contract to challenge the mid-tier contractor to demonstrate that it has met its required safety compliance obligations at the job site. Whether OSHA has standing to enforce clauses in the upstream labor and materials contract is an interesting subject for another article, but regardless, the mid-tier contractor can satisfy any purported OSHA safety compliance obligation without engaging in job site micromanagement that places it at risk of a citation.

It would be wise for the mid-tier contractor’s supervisors or project managers to stop by the job site periodically to verify the labor subcontractor’s compliance with the labor subcontract’s safety requirements. Another option is to hire a third-party safety consultant to perform mock OSHA inspections, empowered to issue discipline, or at least to provide the mid-tier contractor with a sufficiently detailed report to enable it to enforce appropriate discipline.

The mid-tier contractor’s employee manual and safety manual should describe and delineate discipline procedures that are separate for employees and subcontractors. The labor subcontract should specifically state the discipline procedures for subcontractors. Maintain a clear distinction between the two types of discipline and of the records supporting them. On sites where the mid-tier contractor does have work crews, the discipline procedures for company employees is applicable. On sites where the mid-tier contractor does not have work crews, the discipline procedures for subcontractors is applicable.

Multiemployer Job Sites

Mid-tier contractors also should be prepared to defend citations alleging that they are a controlling employer at a multi-employer job site. Although OSHA citations often fail to specifically assert multi-employer liability that is the essence of many citations.

At a multi-employer site, all employers have employees on-site, and therefore some level of responsibility to exercise reasonable care to prevent and detect violations. OSHA’s multi-employer citation policy [CPL 02-00-124] defines and describes the degree of responsibility for workplace hazards imposed on creating, exposing, correcting, or controlling employers. The requirements imposed on a controlling employer for hazards confronted by workers of a different employer are less than those required of an employer as to its own employees, especially for creating or exposing employers.

Ideally, the mid-tier contractor subcontracting out all labor successfully defends by showing that it does not fit within any of the employer categories in the OSHA multi-employer citation policy. Not having any employees at the site at the time of the OSHA inspection should settle the matter since the mid-tier contractor would not meet the definition of an employer. It will be difficult for the Secretary of Labor to prove employer knowledge. In the absence from the site of a supervisor or project manager who might have observed hazards and exposure, OSHA will have to allege and prove the mid-tier contractor’s constructive knowledge.

Unfortunately, there are those occasional site appearances by supervisors and project managers who are, after all, employees of the mid-tier contractor. While denying its status as a controlling employer, the mid-tier contractor should be able to rely on the acknowledgment in the OSHA Multi-Employer Citation Policy that a controlling employer need not inspect for hazards as frequently, or have the same level of knowledge of the applicable standards or of trade expertise as its labor subcontractor—the more likely responsible employer.

Conclusion

Successful defense of an OSHA citation requires attention to detail, preparation of quality contract documents, and good records filing and retention. While paperwork and document retention are often not strong suits of construction contractors, it can make the difference between winning and losing an OSHA citation contest. Attention to the details described here cannot guarantee success, but it should provide the framework for a solid evidence-based defense and substantially increase the likelihood of a satisfactory result. At the very least, if the result is not successful, the cost of penalties and defense is deflected to the labor subcontractor.

Andrew N. Gross is a principal, officer and General Counsel of HB NEXT Corp., a regulatory compliance services company based in Atlanta. He represents HB NEXT clients nationwide at all stages of OSHA inspections and citations, from post inspection investigation, to informal conference at OSHA area offices, through hearings, trials and appeals before the Occupational Safety and Health Review Commission and the federal courts. He earned his undergraduate degree at Kenyon College, and has law degrees from New England Law School and Georgetown University. He is admitted to practice in state and federal courts in Georgia, New York, and the District of Columbia.

The opinions expressed here do not represent those of Bloomberg BNA, which welcomes other points of view.