Several Construction Companies to Overhaul Payroll and Sick Leave Practices, and Power Design, Inc. to Pay $1.7 Million in Restitution to 1,200 Harmed Construction Workers
D.C. Attorney General Brian L. Schwalb announced Monday that the Office of the Attorney General (OAG) has secured the largest recovery in a workers’ rights enforcement action in District history. Under the terms of the settlement, Power Design, Inc. (“PDI”), a major construction firm, will pay $3.75 million, which includes restitution to construction workers and penalties and fees to the District.
The settlement resolves a lawsuit OAG filed May 4, 2022, against Defendants PDI, John Moriarty & Associates of Virginia, LLC, (“JMA”), K&K Electric & Construction, LLC (“K&K”), JLH General Services, LLC (“JLH”), LAF General Contractors, LLC (“LAF”), and BI&R Services, LLC (“BI&R”) (collectively, “Defendants”), alleging that MBJ, K&K, JLH, LAF, and BI&R were liable as employers as defined in the District’s Workplace Fraud Act (“WFA”) and Minimum Wage Revision Act (“MWRA”) for the following violations:
a. misclassifying workers as independent contractors when they should have been classified as employees in violation of the WFA; and
b. failing to pay overtime to workers in violation of the MWRA
Additionally, the District alleged in its May 2022 lawsuit that PDI and JMA, as upstream contractors, were jointly and severally liable for violations of the WFA and MWRA committed by downstream labor subcontractors MBJ, K&K, JLH, LAF, and BI&R.
“Worker misclassification harms hardworking Washingtonians, deprives the District of tax revenues needed to fund critical city-wide programs, and unfairly undercuts law-abiding competition,” said Attorney General Schwalb. “This landmark settlement reflects the ongoing commitment of my office to holding accountable any company that exploits its workers to boost profits or gain an unfair competitive advantage.”
Ray Cleland, President of Ironworkers Local Union #5 in Upper Marlboro, Maryland, says that the settlement and its injunctive provisions offers hope to an industry long in need of correction. “When dealing with non-union contractors we as union members and companies are ok to compete with each other; we are closer to the same cost. But when we allow a sub of a sub of a sub to be 1099 [misclassification] . . . the state or city loses taxes and reliable work for cheap production. People should look at that lost revenue for the municipalities, I think people would be surprised. The first contractor starts off, say at 65 dollars an hour, then subcontracts to the next sub at 50 dollars, then they sub to another for 35 dollars and its 1099. No taxes come out and what about workman’s comp and warranties on projects? There is no way for legitimate union or non-union companies to compete with that.”
BI&R, LAF, and MBJ are not parties to the Consent Order announced Monday, and PDI and JMA dispute all claims asserted by the District, deny that they are liable, deny that they have violated any of the aforementioned statutes, have actively defended the action, and contend that they are in compliance with District law. Nothing contained in the Consent Order shall constitute or be deemed or construed as an admission of liability or wrongdoing. At the same time, the District’s agreement to enter into the Consent Order does not constitute, and shall not be construed as, a concession that its claims were not well-founded or that any of Defendants’ defenses were valid.
During discovery, the District engaged in an extensive investigation into Defendants and other entities that potentially provided labor on PDI projects in the District, including by serving over 20 third-party subpoenas to non-Defendant subcontractors that had done work for PDI during the relevant period. Following that investigation, the District determined that PDI’s primary exposure originated from their joint-and-several liability with respect to misclassified workers employed by downstream contractors such as MBJ, K&K, JLH, LAF, BI&R, and others identified through discovery and responses to the District’s third-party subpoenas. Additionally, the District determined that certain subcontractors failed to provide paid sick leave benefits to their workers, as required by the District’s Sick and Safe Leave Act (“SSLA”), also subjecting JMA and PDI to potential exposure.
As a result of its own investigation, and in conjunction with good-faith discussions with the District, PDI voluntarily resolved any known claims of unpaid wages, including minimum wage and overtime violations as they became aware of them. On September 14, 2023, and on motion of the Parties, the Court stayed this litigation to allow the Parties to explore a resolution of this case through private mediation.
As a result of their negotiations, PDI and the District agreed that a resolution of the District’s claims pertaining to worker misclassification under the WFA and paid sick leave violations under the SSLA were appropriate. PDI agreed to make payments to workers employed by downstream labor subcontractors for misclassification and paid sick leave violations. Because PDI had voluntarily resolved the alleged MWRA claims already, no payments will be made with respect to those claims, and the District agreed to not pursue them as part of the settlement announced Monday.
PDI has further agreed to certain injunctive provisions aimed at improving compliance and preventing future violations within its contracting chains, including terms requiring enhanced oversight of downstream worker classification, payroll records retention, reporting requirements, and establishing a hotline for workers that wish to report potential violations. These terms, in part, will assist the District in its monitoring of prospective compliance by labor subcontractors.
JMA has also agreed to separate injunctive provisions to bolster compliance by downstream contractors, and the Parties have negotiated injunctive terms for third-party labor subcontractors for future work on PDI projects in the District.
Although SSLA claims were not part of the operative Complaint in this matter, the District intended to file an amended complaint alleging these violations had litigation proceeded. PDI voluntarily agreed to resolve the SSLA claims in the Consent Order.
In addition to PDI and JMA agreeing to separate injunctive terms, the District and PDI notably negotiated injunctive terms for labor subcontractors on PDI projects in the District. The non-monetary terms of the Consent Order are groundbreaking in the District’s effort to protect workers, taxpayers, and law-abiding contractors from the exploitation and unfair competitive advantage that has become synonymous with subcontracting to construction labor brokers.
For example, pursuant to the Consent Order, subcontractors party to any new labor subcontracts with PDI having a projected value of over $50,000 for District projects must now provide PDI certified payroll forms on a biweekly basis (unless using a third-party payroll company compliant with District law), which includes (a) identifying information pertaining to the subcontractor and project, (b) the names of their workers, (c) their classification as employees or independent contractors, (d) their hours worked each day, (e) their rate of pay, (f) paid sick leave accrued, (g) their gross earnings, (h) tax deductions, (i) net earnings, and (j) a sworn certification that the subcontractor is in compliance with the District’s wage and hour laws, and for one year from the date of the Consent Order, PDI shall engage a third-party to review the payroll records for compliance.
By no later than April 1 of the following year, for 2024, 2025, and 2026, PDI subcontractors must provide OAG with (i) all IRS Forms 1099 or W-2 issued to workers for work performed in the District in the prior calendar year, and (ii) a complete list of workers who worked on each PDI jobsite in the District at any point that year (including the jobsite name and address where they worked), and a certification that it has complied with the District’s wage and hour laws, including the Wage Payment and Collection Law (“WPCL”), WFA, MWRA, SSLA, and Unemployment Compensation Act (“UCA”). Of particular note, PDI subcontractors must agree that these injunctive terms shall apply to any and all other companies as to which they are either an owner, officer, or principal.
PDI must retain for at least three years copies of all labor subcontract agreements. Subcontractors of PDI are prohibited from using lower tier subcontractors, must classify tradespersons as employees as required by law, issue itemized payroll stubs with all information required by the WPCL, cover tradespersons with Workers’ Compensation insurance coverage, pay Unemployment Insurance taxes (“SUTA” and “FUTA”) with respect to tradespersons as required by law, withhold payroll taxes and deduct Federal Insurance Contributions Act (“FICA”) taxes and any local taxes/deductions, file any and all statutory filings including IRS Forms 940 Employer’s Annual Federal Unemployment Tax Return (“FUTA”) and 941 Employer’s Quarterly Federal Tax Return, and applicable local/state forms, secure from tradespersons all employment documents including Forms W-4 and I-9, and issue D.C. Wage Theft Protection Act notices to each new employee (and any existing employee who was not provided with notices in the past), provide tradespersons with all tax forms including W-2 Forms as required by law, and PDI subs must work only on a cost-plus or hour fee basis as opposed to lump sum.
PDI must establish a worker hotline or outreach mechanism whereby workers for PDI or any labor subcontractor working on PDI jobsites can report actual or suspected violations of wage and hour laws, and unless prevented from doing so by court order, the Consent Order requires PDI to discontinue its engagement of labor subcontractors who have misclassified workers as independent contractors or failed to pay sick leave under the SSLA and/or have violated PDI’s responsible-subcontractor guidelines as specified in the non-monetary terms of the Consent Order. Of particular note, in conjunction with a robust schematic to ensure prompt identification and remedy of wage & hour violations committed by subs, PDI subcontractors shall indemnify PDI against any third-party claims arising from subcontractors’ non-compliance with labor laws.
The Consent Order’s non-monetary terms between the District and JMA, a general contractor, are perhaps even more groundbreaking in the effort to hold accountable companies that exploit workers to boost profits or gain an unfair competitive advantage. As part of its future subcontracts for District projects, JMA shall include language requiring first-tier subcontractors to notify JMA of the software or company they use to do their payroll, specifying that this requirement flows all the way down the contracting chain, and that the first-tier subcontractor will then pass along that information to JMA. JMA is to retain information received pursuant to these contractual provisions for three years after receipt.
Further, as part of all its future subcontracts for District projects, JMA shall include additional language that the first-tier subcontractor will collect a list of all people who did work on the JMA project whether through the first-tier subcontractor or any lower-tier subcontractor, and that the first-tier subcontractor will be contractually obligated to provide the complete list at the completion of work under the subcontract with JMA. JMA is to retain information received pursuant to these contractual provisions for three years after receipt.
JMA shall also, as part of all its future subcontracts for District projects, include language requiring first-tier subcontractors to provide proof of workers’ compensation and related insurance coverage and encourage second tier subcontractors to review for the same.
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