The Construction Advantage – Issue 19

Welcome to the nineteenth edition of The Construction Advantage! In this issue, Mike Bosse discusses a “zombie” lien in Washington state and Kelsey Wilcox Libby from the Labor and Employment Practice Group explains independent contractors under the FLSA.

Zombie Lien in Washington State: The Lien That Just Won’t Die

By Mike Bosse

In Shelcon Construction Group v. Hammond and Anchor Mutual Savings Bank, decided on May 27, 2015, a Washington State Court of Appeals court determined that a mechanics lien filed by Shelcon Construction took priority of an earlier recorded mortgage of Anchor Bank. The work performed by Shelcon started on July 5, 2006, mere hours before the mortgage was recorded in the registry of deeds. The weird part? Shelcon discharged its first mechanics lien covering this work, and signed a lien release, only to record another mechanics lien afterwards when it was still not paid. That second mechanics lien was enforced by the court despite the earlier discharge and lien release. This case stands for the proposition that banks must be very careful in getting appropriate releases of liens and representations of payments by contractors to ensure that its mortgage will not be later trumped by a mechanics lien filed by someone who has provided services or materials to a project site.

In this case, Shelcon had worked on the site of the construction project marking boundary lines at the beginning of the day on July 5, 2006. Later that day, the lendor recorded a mortgage on the property. Two years later, the owner sought to get an additional loan from Anchor Bank but was confronted by Shelcon’s first mechanics lien filed in 2008 for about $300,000.00 for the work that began on the morning of July 5, 2006. In order for Anchor Bank to lend to the owner, it required that Shelcon’s lien be released. Although the owner represented to Shelcon that it would use the proceeds of the loan to pay off Shelcon, it did not do so. Nevertheless, based upon those representations, Shelcon issued a lien release that indicated that it was releasing the lien, but the release did not recite that the owner had actually paid Shelcon. After the lien release, Shelcon recorded a second lien in May of 2009, which again included the work performed on the morning of July 5, 2006.

The court concluded that the work performed on the morning of July 5, 2006 was an improvement to the property such that for purposes of priority, Shelcon’s lien related back to the morning of July 5, 2006, which was before any of the mortgage deeds had been recorded against the property. The trial court also concluded that Shelcon’s lien release did not prevent it from filing a subsequent lien covering the work contained in the first lien filing. The appeals court agreed with the trial court that Shelcon was entitled to record its second lien that included work that it had previously included in its first lien, despite the signed lien release. The court based its holding on the fact that the owner did not take the loan proceeds from the bank and pay it to Shelcon as it had represented that it would do. The appellate court also concluded that the first date of work for purposes of the second lien was on the morning of July 5, 2006, and thus, Shelcon’s lien took priority over Anchor Bank’s deed of trust.

This case contains a couple of important lessons. First, an owner may not be able to rely on a lien release when it is representing that it is securing the money in order to pay for the liened work, and then does not make the payment. Second, from the bank’s perspective, a lender must ensure that a lien release not only indicates that the lien is being released but that the releasor has been paid in full. If that affirmative representation had been made (it could not in this case because payment had not been made), then the bank would have been able to rely on Shelcon indicating it was paid. Instead, with the general contractor not paid out of the loan proceeds, the Washington courts allowed the new lien to be filed and relate back to the original work, thus trumping the lender’s later filed mortgage. This case is an important lesson for priority of mechanic’s liens over a lender’s mortgage interest, an issue that we confront in ME and New England very often in mechanics lien cases.

New DOL Guidance Unveils Heightened Analysis for Establishing Independent Contractor Status Under the FLSA

By Kelsey Wilcox Libby

The issue of employee misclassification has taken center stage lately and shows no signs of moving aside. On July 15, 2015 the U.S. Department of Labor (DOL) issued new guidance explaining where it draws the line between an employee and an independent contractor for purposes of wage and hour matters under the Fair Labor Standards Act (FLSA). The guidance makes clear that the DOL defines “employee” very broadly and it looks beyond the traditional “control” test that is often applied to classification disputes.  Moreover, it states that labelling a worker as an “independent contractor” and issuing a 1099 does nothing to tip the balance in favor of independent contractor status.

The DOL has traditionally used the “economic realities” test to determine a worker’s status. According to the new guidance, “[t]he ultimate inquiry” under this test is “whether the worker is economically dependent on the employer or truly in business for him or herself.” The guidance proceeds to revisit the factors the DOL and courts historically examine in assessing the “economic realities” of a work relationship. These factors include:

• Whether the worker’s managerial skill can affect his or her “opportunity for profit or loss.”  The guidance instructs that fluctuations in the amount of work available and a worker’s ability to simply work more do not count as “opportunity for profit or loss.” On the other hand, “a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables” are indicative of a person with the opportunity for profit or loss who is in business for him or herself.
• The nature and extent of the worker’s investment in the work compared to the employer’s. A true independent contractor, according to the guidance, will make investments in order to “reduce its cost structure, or extend the reach of the independent contractor’s market.”
• Whether the work performed requires “special skill or initiative.” The guidance tells us that this factor requires more than just a skilled trade (e.g. carpentry, plumbing, electrical work) to weigh in favor of independent contractor status. Rather, a worker who exhibits actual “business skills, judgment, and initiative,” is more likely to be an independent contractor than someone with only technical skills.

What this means from a practical standpoint is that it is going to be more difficult to establish that a worker is an independent contractor — unless he or she truly has an independent livelihood doing whatever it is he or she does for you. So, for example, if a contractor brings on college kids to do painting on a temporary basis over the summer, they are likely employees under the DOL standard, even if you give them control over their hours and projects and they provide their own tools.

Note that the FLSA “economic realities” test is also firmly embedded within the ME Uniform Statutory test, which is applicable to unemployment and workers’ compensation. Under that test, it is mandatory that the worker have the “opportunity for profit and loss,” and be “customarily engaged in an independently established trade, occupation, profession or business,” in order to qualify as an independent contractor.

The issue of employee misclassification is not going away, and the associated costs can be disproportionate. This quagmire is complicated by the fact that the FLSA test is just one of several that could apply, depending on which law is in question. For example, the IRS has a well-developed 20 factor test, discussed here: You Call it Sub-Contracting, They Call it Wage Theft. With the coming changes to the salaried –employee standard that were recently announced, we expect DOL enforcement activities and audits of “independent contractor” arrangements to increase. For these reasons, businesses making use of independent contractors are well-advised to reevaluate the realities of those relationships on a periodic basis and consult counsel as needed.

We hope that you have found this article in the nineteenth issue of The Construction Advantage helpful to you in your daily business. Each of the attorneys in our Construction Law Practice Group and Labor and Employment Practice Group is available to answer the day to day questions of your business as you work on projects. As always, we would like to hear from you on the topics in this issue, or any of our other issues, and what you would like us to write about in the future.