Buyer Beware: Outsourcing Labor Puts You at Risk of Prevailing Wage Violations

March 11, 2019

By Nichole D. Atallah
Practice Area: Labor & Employment Law

Recently, a Department of Labor (DOL) investigation found that four federal contractors were responsible for paying 53 current and former employees a total of $255,474 for violating the Davis-Bacon and Related Acts (DBRA). DOL determined the contractors failed to pay the correct prevailing wages and fringe benefits. In this case, the prime contractor subcontracted with a temporary staffing company that failed to pay cleaning service crews in accordance with DBRA requirements. The temporary employees were misclassified and not paid the required prevailing wage rates. Another subcontractor also failed to pay the correct fringe benefits. Due to the repeated and willful nature of these violations, one of the contractors and its owner have been declared ineligible to bid on federal DBRA contracts for a period of 3 years.

Federal contractors bear a sometimes overwhelming compliance burden in exchange for the privilege of doing business with the federal government. Because of this, it is tempting to outsource labor subject to prevailing wage laws such as the DBRA or the Service Contract Act. Federal contractors should be aware that, if they outsource labor and the staffing agency or a subcontractor fails to comply with prevailing wage requirements, the prime contractor will ultimately face the most risk of bearing back wage liability or even suspension and debarment.

It is not unusual that a prime contractor is caught off guard by the repeated wage and hour violations of subcontractors. Often, we hear of subcontractors that touted their experience with prevailing wage laws as a selling point to a prime contractor. As a prime contractor, it is critical to understand the ultimate responsibility for compliance with wage and hour laws and to protect the business from subcontractor non-compliance.

First, do some due diligence before contracting with an entity. Make sure the subcontractor or staffing company can verify what experience it has with prevailing wage requirements, and see whether they have any history of non-compliance. Second, review the subcontract or service agreement to ensure it has all of the necessary flow downs for wage and hour compliance. For example, subcontracts should have a sufficient indemnity provision, warrant compliance with wage and hour and equal employment opportunity regulations, and provide a mechanism to gather information from the subcontractor in case the prime contractor receives a complaint or notice of investigation. Prime contractor staff should be trained to identify signs of non-compliance such as suspicious entries on certified payroll. Once a complaint is received or non-compliant behavior is identified, it is important to take action to address the matter immediately by contacting counsel and conducting an investigation with the goal of correcting any non-compliance and mitigating risk of a DOL audit or the most severe DOL actions.

About the Author: Nichole Atallah is a partner with PilieroMazza and heads the Labor & Employment Law Group. She may be reached at natallah@pilieromazza.com.
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