March 16, 2020 Workplace Chatter

General Contractors: Know Your Subcontractors (and Sub-subcontractors) or Pay the Price

Jessica A. Hill

When selecting various subcontractors for a project, a general contractor should consider whether such subcontractors have the financial wherewithal to finish a project.  Can a potential subcontractor pay its employees’ wages, benefits, overtime, union dues, etc. throughout the span of a project?  General contractors can be in for a big and undesirable surprise if it is found to be liable for the unpaid wages of a subcontractor’s employee.  Claims brought by employees of subcontractors and lower-tier subcontractors against a general contractor range from failure of the subcontractor to pay prevailing wages, failure of the subcontractor to pay any overtime or the correct overtime rate, or misclassification of workers as independent contractors.  These claims are being brought, and many statutes support joint and several liability on a general contractor.

Statutory Liability

General contractors who work on construction projects covered by the federal Davis-Bacon Act and related acts know that a general contractor is jointly and severally liable for wage and hour violations by its subcontractors.  Similarly, some state statutes also hold general contractors responsible for their subcontractors’ unpaid wages with the purpose being that construction workers should receive their agreed-upon payment in full.  California, New York, Oregon, Nevada, Maryland, and the District of Columbia are some examples. 

California law states that a direct contractor making a contract in the state for the erection, construction, alteration, or repair of a building, structure, or other private work is liable for any debt owed to a wage claimant, incurred by a subcontractor at any tier acting for the direct contractor. The direct contractor’s liability extends only to any unpaid wage, fringe benefit, or other benefit payments or contributions – including interest – but does not extend to penalties or liquidated damages.  Notably, unpaid employees do not have any private right of action to bring a claim against the direct contractor for unpaid wages.  Instead, the California Labor Commissioner, or the like, has the right to bring an action against the direct contractor.  As an example, the California Labor Commissioner’s Office issued citations of nearly $600,000 in unpaid wages and penalties against a general contractor, which was jointly and severally responsible for a portion of those citations.  The Labor Commissioner’s Office stated that “[g]eneral contractors who choose subcontractors that do not pay wages owed will pay a hefty price.”

In New York, it is recognized that in public works contracts “a subcontractor’s employees have both an administrative remedy . . . as well as a third-party right to make a breach of contract claim for underpayment against the general contractor.” This differs from California in that the employee can make a direct claim against the general contractor.   Oregon has a similar statute regarding public works projects.  Damages under the Oregon statute include backpay, including all fringe benefits, and an additional amount equal to the unpaid wages.  Nevada also allows all employees to sue the general contractor for unpaid wages on any projects within the State; however, damages include backpay, costs, reasonable attorneys’ fees, and interest.

Maryland law makes general contractors jointly and severally liable for the failure of their subcontractors, and sub-subcontractors, to pay their employees in compliance with state law on private construction projects.  Note that this is regardless of whether the subcontractor is in a direct contractual relationship with the general contractor. The Maryland statute makes a general contractor automatically liable to the same extent as the employee’s own direct employer.  Maryland, similar to New York, Oregon, and Nevada, allows an employee to sue its direct employer as well as the general contractor.  Penalties for a violation in Maryland are steep.   They include any damages to which the individual may be entitled, i.e., backpay plus an additional amount up to three times the amount of any such damages, reasonable attorneys’ fees and other costs, and any other appropriate relief.  Similarly, in Washington, D.C., the general contractor is jointly and severally liable to the subcontractor’s employees for violations of local wage and hour law.  Damages are harsh in D.C. as well.

Although not as explicitly stated as in the states’ statutes above, an Ohio court held a general contractor liable for the violation of prevailing wage law by lower-tier subcontractor under its prevailing wage statute.  On the other hand, Illinois, despite statutory language that could support liability, has not yet found that a general contractor is liable for its subcontractor’s failure to pay wages based upon statutory language.

Tips for Mitigating Liability

  1. Familiarize yourself with state and local laws concerning wages in your area.  Follow all wage and hour provisions applicable to your project.
  2. arefully craft indemnification language in contracts to specifically address state laws regarding liability for employee wage claims.  Perhaps even require subcontractors to provide periodic statements ensuring compliance with such wage laws.
  3. Require a statement of financial capability with subcontract documents to ensure that the subcontractor can complete the project fiscally.
  4. Require more detailed payroll records from subcontractors and assign someone to prudently review such records.  Maintain these records in the event of any dispute.
  5. Draft language in your contract to allow you to withhold payment from a subcontractor if the subcontractor refuses to provide access to payroll and other records to confirm compliance with hour and wage laws.
  6. Actively monitor your company’s (and your subcontractor’s) payment practices as well as any classifications of workers.
  7. Determine whether you need additional insurance in order to protect yourself against the possibility of lawsuits regarding unpaid wages.
  8. Determine whether you want to require subcontractors to obtain bonds to guarantee they can and will cover wage disputes prior to beginning the work on the project.

Conclusion

The key takeaway is to make sure you are doing business with reputable subcontractors.  Check all necessary prequalification lists (if doing business with public entities that require prequalification).  Review various databases that are accessible online, such as the Better Business Bureau or simply checking to make sure the subcontractor is registered to do business in the state and carries a valid license, if one is necessary.  You may have access to more thorough reports through your company.  Do a quick search on social media.  Reach out to those who have previously worked with a particular subcontractor.  Know who you are doing business with because ultimately you may end up liable for their actions and inactions.

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Jessica A. Hill

Dave O’Mara Contractor, Inc., North Vernon, IN, Division 6 (Labor & Employment)