Update: Texas Court Freezes DOL’s New Overtime Regulation

Posted December 1, 2016 by laurieandbrennan
Categories: Construction Law

In Nevada v. U.S. Department of Labor, a federal judge in the Eastern District of Texas ordered a nationwide injunction on a new rule from the Department of Labor (DOL) that would have required many employers to pay overtime to employees who make less than approximately $47,000 per year.  Laurie and Brennan published a blog entry about the rule back in July, available here, describing how the new rule could have extended overtime pay to more than 4 million workers.  However, the court’s injunction – issued on November 22, 2016, just over a week before the rule was scheduled to take effect on December 1, 2016 – determined that the DOL overstepped its authority when it increased the minimum salary for employees who are exempt from the Fair Labor Standard Act’s overtime requirements. Consequently, the DOL’s new overtime regulation is in limbo pending an appeal to the Fifth Circuit, Congressional intervention, or a shift in the DOL’s position under the new administration.

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TEXAS FEDERAL COURT BLOCKS CONTRACTOR BLACKLISTING RULES

Posted November 16, 2016 by laurieandbrennan
Categories: Construction Law

On October 24, 2016, a Texas federal judge issued a preliminary injunction preventing Executive Order No. 13673 (“EO”) and its rules (FAR Rule and DOL Guidance) – commonly referred to as the “contractor blacklisting rules” – from going into effect. The blacklisting rules would have imposed new – and in the Court’s opinion – onerous reporting requirements regarding labor law violations on contractors that are bidding for certain federal contracts.

Specifically, blacklisting rules would have required contractors bidding on projects in excess of $500,000 to report formal allegations and decisions against the contractor for violations of fourteen federal labor laws, including FLSA, OSHA, NLRA, and the EEO. Contractors would have been under an obligation to report “violations” going back three years from the date of the bid, and would be compelled to report not only proven violations, but also non-final administrative merit determinations, non-adjudicated complaints and unproven allegations. Based on those reports, contractors could be disqualified from consideration for certain federal contracts or required to enter into labor compliance agreements based on their alleged violations to obtain or retain federal contracts. The information would be used by federal employees to make a determination as to whether the bidders were “non-responsible” based on a “lack of integrity and business ethics” and thus not eligible to be awarded a bid on certain federal contracts.

In a thorough and scathing opinion in the case entitled Associated Builders and Contractors of Southeast Texas, et al. v. Rung, Judge Marcia Crone granted the Plaintiffs’ request for a preliminary injunction on three major grounds: 1) The EO, FAR Rule and DOL Guidance exceeded executive power and/or were preempted by existing federal labor laws; 2) the blacklisting rules violated contractors’ First Amendment rights through compelled speech; and 3) the rules would likely violate contractors’ due process rights.

In finding that the blacklisting rules exceeded executive power and were preempted by existing federal law, the Court took particular issue with the blacklisting rules’ disregard for “Congress’s explicit instructions dictating how violations of the labor law statutes are to be addressed.” “It defies reason,” the Court stated, “that Congress gave explicit instructions to suspend or debar government contractors who violate these government-specific labor laws only after a full hearing and final decision, but intended to leave the door open to government agencies to disqualify contractors from individual contract awards without any of these procedural protections.” In short, the blacklisting rules conflicted directly with all the labor laws they claimed to invoke and this formed part of the basis for granting the injunction.

The second major reason the court granted the injunction was that the blacklisting rules would infringe upon contractors’ First Amendment rights in the form of compelled speech. The requirement to make contractors publicly disclose controversial matters – including allegations that are unproven or perhaps even completely false – is a form of compelled speech not allowed under the First Amendment.

Finally, the Court granted the injunction partially on the basis that the blacklisting rules would violate the due process rights of contractors’ bidding on certain federal contracts. The Court’s concern was that contractors would be required to report and defend against non-final allegations of labor law violations without being entitled to a hearing at which they could challenge such allegations.

For these reasons, as well as several others, the Texas federal court enjoined the blacklisting rules from being enforced because the rules had the potential to cause irreparable harm to contractors and create significant financial costs (with little to no clear benefit) both to contractors and to the federal government.

CONTRACTUAL INDEMNITY: IT STILL MATTERS

Posted September 23, 2016 by laurieandbrennan
Categories: Construction Law

The Illinois Appellate Court recently issued an important opinion regarding indemnity provisions in construction contracts. In 933 Van Buren Condo. Ass’n v. W. Van Buren, LLC, 2016 IL App (1st) 143490, a condominium home owner’s association (HOA) sued the condominium developer for various claims based on warranty and fraud theories following the discovery of a leaky roof.   The developer then asserted claims against two roofing contractors that it hired for the project – Illinois Roof Consulting Associates, Inc. (IRCA) and Total Roofing & Construction Services, Inc. (Total) – asserting that both had a contractual duty to indemnify the developer against the HOA’s claims.  The trial court dismissed the indemnity claims because the HOA’s complaint was based on the developer’s failure to disclose the leaks (rather than the defective construction that led to the leaks) and, in any event, the indemnity clauses were not enforceable under the Construction Contract Indemnification for Negligence Act (the “Act”).  See id. at ¶ 23. The Illinois Appellate Court reversed in part and remanded the case. See id. at ¶ 62.

As a threshold matter, the Illinois Appellate Court found that the indemnity provisions from the roofers did not violate the Act.  See id. at ¶¶ 38, 41. This Act provides that a contract provision purporting “to indemnify or hold harmless another person from that person’s own negligence is void as against public policy.” 740 ILCS 35/1 (West 2012). The court noted that IRCA’s indemnity provision with the developer was broader than Total’s, and that IRCA’s contract with the developer “could be construed as indemnifying [the developer] from any party’s negligence, which could include the negligence of itself.” Id. at ¶¶ 6, 36. Nevertheless, the court refused to follow such a construction because Illinois law presumes that parties enter into contracts with full knowledge of the law—including the Act—and because “a construction of a contract which renders the agreement enforceable rather than void is preferred.” Id. at ¶¶ 33, 36, 38. Thus, the indemnity provisions did not violate the Act.

The Illinois Appellate Court further held that the roofing companies had a duty to indemnify the developer against the HOA’s claims for breach of warranty and breach of the implied warranty of habitability, but did not have to indemnify the developer for the HOA’s claims rooted in fraud theories. See id. at ¶¶ 1-2. The HOA’s breach of warranty allegations against the developer arose from faulty work on the leaky roof attributable to IRCA and Total’s scope of work, thus triggering the indemnification provisions.  Id. at ¶¶ 51, 53-54. However, the court found that IRCA and Total did not need to indemnify the developer against the HOA’s fraud claims against the developer because those claims were based on the developer’s intentional misconduct rather than the misconduct of others that could otherwise trigger the indemnity provisions.  See id. at ¶¶ 47-49.

This case demonstrates that courts are inclined to construe contract provisions to have an enforceable meaning rather than invalidate the provisions.  Nonetheless, it is important to be aware of the Act and draft in compliance with the Act rather than rely on serendipity from a court.

LAURIE & BRENNAN WELCOMES NEW PARTNER – RYAN HISS

Posted August 17, 2016 by laurieandbrennan
Categories: Construction Law

Laurie & Brennan is pleased to announce that Ryan A. Hiss has joined us as a partner in the firm.  Throughout his 20+ year career, Ryan has focused his practice on asserting and protecting the legal rights of those involved in the construction industry.  He strives to effectively advocate on behalf of his clients and favorably resolve disputes as efficiently as possible – so his clients can focus on the building process, instead of legal issues.    Ryan is well-known for his tough but practical advocacy for his clients.  We are excited about adding Ryan to our team and look forward to providing even better client service to the construction industry. To learn more about Ryan, feel free to review his biography on our website at http://www.lauriebrennan.com/attorney-ryan-hiss.html

New Overtime Regulations From the U.S. Department of Labor

Posted July 19, 2016 by laurieandbrennan
Categories: Construction Law

On May 18, 2016, President Obama and Secretary of Labor Perez announced the publication of the Department of Labor’s final rule updating the overtime regulations. The Department of Labor states that this will automatically extend overtime pay protections to over 4 million workers within the first year of implementation.

The Department of Labor states the Final Rule focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt as follows:

  1. The Rule sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker). This is the so-called automatic overtime limit. This is more than double the amount previously set back in 1975;
  2. The Rule sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004); and
  3. The Rule also establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.
  4. Additionally, the Final Rule amends the salary basis test to allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10 percent of the new standard salary level.

The Final Rule becomes effective December 1, 2016. As a result of this regulation, businesses should immediately start tracking hours for all employees making less than the $47,476 threshold—regardless of whether such employee is currently considered “hourly” or “salaried.”

 

Owner and Contractor Play “Hot Potato” with Design Error Claim

Posted July 7, 2016 by laurieandbrennan
Categories: Construction Law

The Fifth Circuit recently handed down an important lesson to building owners: if you ask contractors to point out potential design errors, make sure you are prepared to resolve them.  In reversing the district court’s grant of summary judgment in Dallas/Fort Worth International Airport Board v. INET Airport Systems, Inc., 819 F.3d 245 (2016), the Fifth Circuit held that a contract between an airport and a contractor placed the risk for defective design on both parties, and that it was not clear from the record which party had impeded the resolution of a design defect flagged by the contractor.  While contracting parties can allocate the risk of design defects as they see fit, it is imperative to adopt an explicit procedure for resolving flagged defects and to expressly indicate which party has the burden of moving the resolution process along at each stage of the process.

INET Airport Systems, Inc. (INET) entered into a contract with the Dallas/Fort Worth International Airport Board (DFW) for the installation of rooftop air handling units in the passenger boarding bridges in Terminal E of the DFW Airport.  The contract required INET to follow the design specifications provided by DFW, which Campos Engineering (Campos) had prepared for DFW.  INET was prohibited from substituting any materials or designs from Campos’ specifications without prior authorization from DFW, and had a contractual obligation to notify DFW immediately of any apparent defect in the plans or specifications.  The parties were to remedy these design defects through a written change order issued by DFW and agreed to by INET.

INET initiated the change order process in a construction kick-off meeting in October, 2009 when it noted that the rooftop units specified by Campos were potentially incompatible with systems already in place at the airport.  After receiving no immediate response from DFW, INET submitted a Request for Information (RFI) asking how it should proceed.  INET, DFW, and Campos conferred on a resolution to the design error, ultimately generating two proposals.  INET admittedly rejected one of these proposals, as it determined that it would not effectively solve the problem, while DFW failed to fully respond to a second RFI submitted by INET asking for more information regarding the second proposal.  DFW eventually notified INET that INET had failed to meet the substantial completion deadline specified in the contract, declined to pay at least one invoice submitted by INET, and eventually had the work completed by a substitute contractor in July, 2013.  DFW sued INET for breach of contract, and INET countersued claiming entitlement to the money DFW refused to pay and for unjust enrichment and money had and received on the part of DFW.

The Fifth Circuit reversed the district court’s grant of partial summary judgment in favor of INET, finding disputes of material fact regarding which party prevented performance by failing to fully cooperate in arriving at a solution once INET discovered the error.  While the district court focused on determining which party was the first to breach, the Fifth Circuit concentrated on the respective obligations of the two parties once the error was flagged.  The court found that the language of the contract placed the risk of, and obligations to address, defective designs on both parties. The contract charged INET with pointing out potential defects, and DFW was responsible for issuing the change order with a resolution.  However, this change order was not a unilateral power wielded by DFW – it had to be accepted by INET.  Accordingly, the court remanded the case to the district court for a factual inquiry into which party obstructed the change order process, breaching their agreement to work together towards a resolution.

FALSE CLAIM ACT: THE SUPREME COURT RECOGNIZES IMPLIED CERTIFICATION LIABILITY

Posted June 21, 2016 by laurieandbrennan
Categories: Construction Law

In a unanimous decision delivered by Justice Clarence Thomas, the Supreme Court recently recognized the “implied false certification theory of liability” under the False Claims Act (FCA).  The FCA imposes civil liability on “any person who…knowingly presents, or causes to be presented, a false or fraudulent claim for payment” for services rendered to the Government.  The implied false certification theory admits FCA liability where a defendant makes certain representations in submitting a claim but fails to disclose noncompliance with material statutory, regulatory, or contractual requirements that renders these representations misleading.

In Universal Health Services, Inc. v. United States ex rel. Escobar, http://www.supremecourt.gov/opinions/15pdf/15-7_a074.pdf, a mental health facility operated by a subsidiary of Universal Health Services, Inc. submitted Medicaid reimbursement claims for services rendered to the decedent daughter of the respondents.  After their daughter died due to an adverse reaction to a medication prescribed by a purported psychiatrist at the facility, respondents discovered that few of the facility’s employees were actually licensed to provide the services rendered.  A qui tam suit was filed in 2011 relying on the implied false certification theory of liability, alleging that Universal Health defrauded the Government by submitting Medicaid reimbursement claims that “made representations about the specific services provided by specific types of professionals, but that failed to disclose serious violations of regulations pertaining to staff qualifications and licensing requirements for these services.” While circuit precedent had previously embraced the implied false certification theory of liability, the District Court dismissed the case for failure to state a claim because the regulations Universal Health violated were not express conditions for payment under the Medicaid program.  The United States Court of Appeals for the First Circuit reversed on that point, and the Supreme Court granted certiorari to resolve a circuit split over the validity and scope of the implied false certification theory of liability.

The Court first looked to the text of the FCA, noting that by failing to define what makes a claim “false” or “fraudulent” under the statute, Congress incorporated the well-settled common-law understanding of the terms.  Accordingly, the Court held that the claims in this case fell “squarely within the rule that half-truths—representations that state the truth only so far as it goes, while omitting critical qualifying information—can be actionable misrepresentations.”  The parties agreed that misrepresentations by omission can be the basis for liability, but Universal Healthcare argued that it had made no representations—and therefore no misrepresentations through half-truths—in submitting its claim.  The Court did not reach respondents’ counter-argument that every claim implicitly represents that the claimant is legally entitled to payment.  Instead, it held that Universal Healthcare’s claim did make such representations because it used special payment codes that correspond to specific counseling services and because its claim used National Provider Identification numbers that correspond to specific job titles.  The Court recognized the validity of the implied false certification theory where the claim submitted makes “specific representations about the goods or services provided” and the “failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.”

The Court, however, circumscribed the potential scope of implied false certification theory with its treatment of the issue of materiality.  At first, the Court rejected Universal Healthcare’s contention that FCA liability for failing to disclose violations of legal requirements should only attach where those requirements were designated as express conditions of payment.  The Court found nothing in the text of the FCA, nor a valid public policy reason, for so restricting liability.  On the other hand, the Court disagreed with the Government’s contention that the designation of a requirement as an express condition of payment automatically triggers liability, nor would it find that the Government’s legal entitlement to refuse payment were it aware of the violation qualifies the violation as material.   Instead, the Court found a middle ground, holding that the designation of a specific legal requirement as an express condition of payment was relevant, but not singularly dispositive, of the requirement’s materiality.  After Escobar, the FCA’s materiality requirement tracks that of other areas of the law, looking to whether the statement or omission has an “effect on the likely or actual behavior of the recipient of the alleged misrepresentation.”  In this case, the Government surely would have acted differently had it known of United Healthcare’s failure to operate its health facility with licensed staff, but the Court remanded the case for reconsideration under the now-clarified standards of FCA liability.


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