New York’s Prompt Pay Act, which sets the standards that govern private commercial construction contracts exceeding $150,000, was amended effective November 17, 2023. The Amendment known as Senate Bill 3539 provides two significant changes which advance the timing of payments from the owner to the contractor. First, Section 756-a now permits a contractor to submit its final invoice for payment to the owner upon substantial completion (as “such term is defined in the contract or as it is contemplated by the terms of the contract”). Failure to release retainage as required by the law will subject the party holding retainage to interest of one percent per month from the date the retention was due and owing. Under the prior version of the law, a contractor had to complete performance of all of its contractual obligations before submitting a final invoice for payment. Second, Section 756-c now provides that no more than five percent retainage may be retained by the owner, contractor, or subcontractor and, in no case, shall retainage exceed the actual percentage retained by the owner. The prior law set no limits for retention and allowed the owner, contractor, or subcontractor to withhold retainage of a “reasonable amount of the contract sum.” The new law applies to all contracts entered on and after November 17, 2023.

In the wake of the U.S. Supreme Court’s decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, 600 U.S. 181 (2023) (SFFA), which limits the reach of race-based affirmative action programs in college admissions, a federal lawsuit was recently filed in the Eastern District of Kentucky alleging discrimination against the U.S. Department of Transportation’s Disadvantaged Business Enterprise (DBE) program: Mid-America Milling Co., LLC v. Department of Transportation, Case No. 3:23-cv-72.

Initially adopted in 1983, the DBE program aimed to address discrimination in federally assisted transportation projects. Most recently, it was reauthorized in November 2021 when President Biden signed the Infrastructure Investment and Jobs Act (IIJA). The IIJA also mandated that 10% of all new surface transportation funding (which amounts to more than $37 billion) shall be expended through small business concerns owned and controlled by socially and economically disadvantaged individuals. The DBE program requires state and local transportation agencies receiving federal assistance to establish overall goals for the participation of disadvantaged business enterprises and contract-specific DBE subcontracting goals. The applicable federal regulations (15 U.S.C. § 637(d) and 13 C.F.R. § 124.103-104) require the local transportation agencies to presume that certain racial and ethnic groups and women are socially and economically disadvantaged when considering bids for federally funded projects.  

The plaintiffs in Mid-America have challenged the use of the DBE presumption when determining whether a person is socially disadvantaged on the grounds that such an affirmative action program giving preference to certain companies based on race and gender constitutes unconstitutional racial discrimination. The plaintiffs allege that such a program prevents them from competing on government contracts on equal footing with firms owned by women and certain racial minorities and should be permanently dismantled under SFFA.

The plaintiffs seek a court order declaring the race and gender-based classifications in the DBE program unconstitutional and an order to enjoin the federal government from applying both the presumption of social disadvantage in the DBE program and the IIJA 10% set aside for socially and economically disadvantaged individuals. Mid-America may be heading toward the U.S. Supreme Court, where the viability of the DBE program will hang in the balance.

This week we are pleased to have a guest post by Robinson+Cole Labor Relations Group chair Natale V. DiNatale.

The NLRB has reversed decades of precedent and made it far easier for unions to represent employees, including construction employers, without a secret ballot election.  Initially, it is important to understand that this new standard applies to traditional “9(a)” relationships, not prehire agreements under 8(f) of the NLRA.  While both types of relationships exist in the construction industry, 9(a) relationships require support from a majority of employees, while prehire agreements do not and tend to be project specific.  The NLRB’s new standard (announced in Cemex Construction Materials Pacific, LLC, 372 NLRB No. 130 (2023)) emphasizes union authorization cards that are gathered by union officials and union activists who often employ high-pressure tactics to obtain a signature.  Employees often sign authorization cards without the benefit of understanding the significance of the cards.  Even if they don’t want a union, they may sign because they feel pressured by a coworker, don’t want to offend a colleague, or want to avoid being bothered.

The new standard still permits an election, but the NLRB will only conduct an election if the employer petitions for an election promptly, usually within two weeks of the union’s demand for recognition.  Even if an employer petitions for an election, the NLRB will set aside that election if the employer commits virtually any misstep during the period leading up to the election.  Thus, if the union loses the election and the Employer commits an unfair labor practice, the NLRB will look to union cards and likely order that the employer recognize and bargain with the union.  The impact of this new standard is that any union that gathers authorization cards from a majority of employees in an appropriate bargaining unit has a relatively easy path to recognition without an election and despite an election loss.

The New Process – Union Demand for Recognition & Employer Response

Under the NLRB’s new standard, once a labor union gathers authorization cards from a majority of employees, it must simply request that the employer recognize it as the representative of employees in an appropriate bargaining unit.  The NLRB did not address what makes a request for recognition sufficient (e.g. verbal or written) or to whom the union must make this request.  Once a union makes this request, an employer must file a petition for an election, “usually within two weeks.”  If it fails to do so, the employer essentially waives its employees’ ability to vote on unionization in a secret ballot election.

If the employer does nothing, a union seeking representation may either file a representation petition (consistent with prior precedent) or file an unfair labor practice (ULP) claiming a refusal to bargain.  If, during that ULP proceeding, the union establishes that it has union authorization cards from a majority of employees in an appropriate bargaining unit, the Board will order the employer to recognize the union, without an election.  In that situation, the obligation to bargain will be retroactive to the union’s demand for recognition, so any changes that an employer makes to working conditions after the demand for recognition would be a separate violation of the NLRA.

If the employer timely files a petition for an election, the NLRB will process the petition according to its new expedited election rules (effective December 26, 2023), which likely means an election in about three weeks from the date that the employer files the petition.

In another dramatic break from precedent, “if the employer commits an unfair labor practice that requires setting aside the election, the petition will be dismissed, and the employer will be subject to a remedial bargaining order.”  Cemex Construction Materials Pacific, LLC, 372 NLRB at 26 (emphasis added).  The standard for ordering bargaining without an election is much broader that the narrow “Gissel” standard authorized by the U.S. Supreme Court in 1969.  Gissel Packing Co., 395 U.S. 575 (1969).  Thus, if the employer commits “unfair labor practices that frustrate a free, fair, and timely election, the Board will dismiss the election petition and issue a bargaining order, based on employees’ prior, proper designation of a representative . . .,” i.e., whether the authorization cards establish majority support.  Cemex Construction Materials Pacific, LLC, 372 NLRB at 28.

For a bargaining order, the question is whether “the employer rendered a current election (normally the preferred method for ascertaining employees’ representational preferences) less reliable than” authorization cards.  While the Board provided certain examples of conduct that erode majority support evidenced by authorization cards (“nip-in-bud” discharges of union supporters; coercive statements; and unlawful granting or withholding of benefits made just before an election), the standard is broader.  Thus, during the “critical period” between the petition and the election, the NLRB has set aside an election based on certain violations unless the “violations are so minimal or isolated that it is virtually impossible to conclude that the misconduct could have affected election results.”  The new standard does not require a finding that every ULP is disruptive of the election process, but requires consideration of all relevant factors, including:

  • number of violations;
  • severity of violations;
  • extent of dissemination;
  • size of the bargaining unit;
  • closeness of the election (if one has been held);
  • proximity of the conduct to the election date; and
  • number of unit employees affected.

Further, the NLRB acknowledged that, under specific factual circumstances, it has found that an employer’s maintenance and dissemination to all employees of certain generally applicable handbook rules and policies have required setting aside an election, which is especially important considering the Board’s new, much stricter standard (announced in Stericycle, Inc. 372 NLRB No. 131 (2023)) for evaluating handbook rules and policies.

Takeaway – The Focus is on Union Authorization Cards

With the emphasis that the NLRB’s new standard places on union authorization cards, it becomes more important for employees to understand their significance.  If an employee does not understand the full legal weight of signing a card or what. it means to have a union, employees who would otherwise reject a union may sign an authorization card to avoid offending their coworkers or because of group pressure.  Also, while it’s improper for union organizers and adherents to coerce employees or misrepresent the nature and purpose of an authorization card, gathering that evidence and establishing it before a judge can be challenging.

It is important to know that employers need not wait.  Employers are permitted to speak with their employees about unions and union authorization cards.  The NLRB specifically recognized that an employer is free and legally permitted to persuade employees with lawful expressions of its views concerning unions.

It is also important to know that employers that accept and examine union authorization cards or that otherwise gain independent knowledge of a union’s majority support are at risk of a bargaining order.  Employers could have a union without employees ever hearing from their employer or having the opportunity to vote in a secret ballot election.

At this critical time, it’s important for employers to gather internal stakeholders (e.g., HR, legal, compliance and senior management) to set priorities, identify risks and develop action items so that a plan is in place before the issue arises.  Employers may want to provide supervisor training so that supervisors understand the simple rules for communicating with employees about unions and ensure that workplace policies comply with the new NLRB standard for evaluating the lawfulness of common workplace policies.  Employers should also consider contacting competent legal counsel to identify, discuss, and mitigate any existing or potential risks.

This post was authored by Jon Schaefer, who is a member of Robinson+Cole’s Environmental, Energy + Telecommunications Group. Jon focuses his practice on environmental compliance counseling, occupational health and safety, permitting, site remediation, and litigation related to federal and state regulatory programs.

On July 20, 2023, the Occupational Safety and Health Administration (OSHA) published a notice of proposed rulemaking to clarify the personal protective equipment (PPE) standard for the construction industry.

Currently, the PPE standard for the construction industry, unlike for general industry or maritime, does not state clearly that PPE must fit each affected employee properly. OSHA’s proposed change would clarify that PPE must fit each employee properly to protect them from occupational hazards. In the notice, OSHA expressed concern over the use of standard-size PPE to protect physically smaller construction workers properly, as well as access to properly fitting PPE, as these have long been safety and health concerns in the construction industry, especially for smaller-stature workers. The proposed rule clarifies the existing standard (29 CFR 1926.95).

While OSHA does not expect the change will increase employers’ costs or compliance burdens, it is reasonable to expect that employers will incur some costs to put in place new protocols, acquire new PPE, and confirm compliance. At the end of the day, OSHA is making it clear that they expect each employee on a construction worksite to have appropriate and properly fitting PPE.

OSHA is accepting comments, and hearing requests, on the proposed rulemaking through September 18, 2023. Comments must be submitted using the Federal eRulemaking Portal and reference Docket No. OSHA-2019-0003.

Most bond forms in use today, including the standard form AIA A312-2010, contain express condition precedents that trigger a surety’s obligations under the bond. Under a performance bond, the bond obligee is required to provide formal notice to the surety that the principal has materially defaulted and that the surety must begin to perform under the terms of the bond.  This principle is grounded in the idea that the surety should have an opportunity to address the default and investigate the claim so as to mitigate its own liability. Failure to provide sufficient notice will discharge the surety of its obligations under the bond.

The critical importance of providing a performance bond surety with notice of a principal’s default was the basis of a recent decision by the Rhode Island Supreme Court.  In Apex Development Company, LLC v. Department of Transportation, 291 A.3d 995 (R.I. 2023), the Court affirmed the grant of summary judgment for the sureties due to the failure of the owner of the project to provide any formal notice of default.  Here, the Rhode Island Department of Transportation (RIDOT) filed a third-party complaint against the sureties for indemnification after a landowner alleged that RIDOT trespassed and damaged its property during the reconstruction of a portion of the I-95 highway.  The sureties filed a motion for summary judgment arguing that the bond only applied to direct construction costs and not to third-party damages.  The sureties further argued that the bond became null and void upon substantial completion of the project, and even if it did not, the sureties’ obligation under the bond was discharged because of RIDOT’s failure to give notice of the alleged contractor default to the sureties.  RIDOT argued that the sureties’ interpretation was too narrow because the public works bond was more expensive than other bonds, and it also covered all the contractor’s responsibilities under the contract, including indemnification. The lower court granted the sureties’ motion for summary judgment, which the Supreme Court affirmed. It reaffirmed the principle that the purpose of a bond is to guarantee the work in question was to be completed and not intended to compensate for indirect losses or for indemnification.  Moreover, the Court also found that the obligations of the sureties under the bond is conditional. Specifically, “[i]n order to trigger surety’s obligation to perform under a bond, it must first have notice of the principal’s default or breach.” In this case, RIDOT failed to meet these conditions as it never notified the sureties of the claims arising out of the contractor’s alleged trespass and, thus, the sureties were discharged from all obligations under the bond.

Most subcontracts include a flow through provision (also called flow down and incorporation clauses) stating that the subcontractor and contractor are bound by the same obligations as set forth in the prime contract between the contractor and owner.  Many jurisdictions interpret such provisions narrowly, as illustrated in a recent case out of New York.  In Amerisure Insurance Company v. Selective Insurance Group, Inc., 2023 WL 3311879, the U.S. Court of Appeals for the Second Circuit affirmed the District Court’s interpretation of a flow through clause in a construction subcontract. The Amerisure case involved a dispute over insurance coverage for a personal injury to a subcontractor’s employee on a construction project.  The owner of the project sought defense and indemnity from the general contractor (GC) and its insurance company, who in turn sought coverage for the owner as an additional insured under the subcontractor’s policy.  The GC based its argument for coverage on the flow through provision in the subcontract.

The prime contract required the GC to procure commercial liability insurance including the owner as an additional insured for claims caused by the GC’s negligent acts or omissions.  The subcontract likewise required the subcontractor to procure commercial general liability insurance but required only that the GC be named as an additional insured.  However, the subcontract also included a flow through clause, binding the subcontractor to the terms of the prime contract and assuming toward the GC all the obligations and responsibilities that the GC assumed toward the owner. However, the subcontract did not expressly require that the subcontractor name the owner as an additional insured, and in order for the owner to qualify as an additional insured under the subcontractor’s insurance policy, the subcontractor must have agreed in the subcontract to name the owner as an additional insured.

The District Court rejected the GC’s argument that the flow through clause in the subcontract incorporated all the GC’s obligations, including the GC’s obligation to provide additional insurance coverage to the owner.  The Court examined the flow through clause under both Virginia and New York law, reaching the same conclusion for each.  It relied on a New York case for its rationale, Persuad v. Bovis Land Lease, 93 A.D.3d 831 (2d Dep’t 2012), which provides “under New York law, incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract bind a subcontractor only as to the prime contract provisions relating to the scope, quality, character and manner of work to be performed by the subcontractor.”  The Court concluded that because the subcontractor did not expressly assume an obligation to name the owner as an additional insured, the flow through clause would not apply to an additional insured obligation, and therefore the owner was not an additional insured under the subcontractor’s policy.

Contracting parties need to be conscious of overreliance on flow through clauses. In jurisdictions like New York, which narrowly construe these provisions, only the obligations pertaining to the scope of work are likely to flow down to a subcontractor.  Disputes involving flow through provisions typically involve important risk management provisions such as insurance, indemnification, and arbitration, which are not necessarily considered to pertain directly to the scope of work.  The better approach to ensure an obligation flows down to a subcontractor, regardless of the jurisdiction governing the contract, is to make sure the subcontract itself specifically includes what the parties agree on.

A common provision often deleted from the standard form AIA documents is the provision in the AIA A201 General Conditions requiring an Initial Decision Maker (IDM) for claims between the contractor and owner. In the A201, the contracting parties have the option of naming their own IDM for the project. If an IDM is not selected (which is typically the case) the architect serves this role by default. While it is in all parties’ best interests to resolve disputes quickly and efficiently, using the architect as the IDM is not the best way to achieve such a resolution.

Several reasons work against using the architect as the IDM. Contractors typically don’t trust architects to be impartial in resolving disputes because the architect is paid by the owner. Most architects don’t have the temperament or any training to facilitate dispute resolution. An architect’s “initial decision” could even drive the parties further apart and lead to further issues later in the project. The architect may also be perceived to be part of the problem that led to the dispute in the first place. Also, many architects simply prefer to avoid serving the thankless role of an IDM altogether. Lastly, inserting the architect into the dispute resolution process as a required IDM adds an additional unnecessary step to dispute resolution, which can delay the overall procedure.

Rather than serving as an IDM, an architect is better suited to facilitate a resolution in a different capacity, as part of a “settlement team.” The architect is readily familiar with the project and can offer insight on and analysis of the facts that led to the dispute. The architect can point out strengths and weaknesses to both sides without taking a position one way or the other.  Moreover, disputes can be resolved or reduced without direct payment of additional compensation and the architect is well-suited to propose and/or evaluate such potential resolutions.

Not all projects and parties are the same and what may work to resolve disputes on one project may not work for another. However, the concept of a team approach to settle disputes (more like that expressed in the Consensus DOCS 200) should at least be considered for every contract. As a general proposition, if a claim cannot be resolved informally, a construction contract should require authorized representatives for the owner and contractor to meet with the architect at an initial settlement meeting.  Such a meeting should be held promptly and made a condition precedent before moving onto mediation or arbitration/litigation. The parties should be required to analyze and exchange their best, good-faith settlement offers, along with the backup supporting their positions, prior to the initial settlement meeting.  Copies should be submitted to the architect as well. The sooner each party seriously examines their respective claims, the more likely a resolution can be reached. Additional provisions can also be added to the contract to incentivize the process.

 If all the issues are not resolved at the initial settlement meeting, either party can immediately move forward with the next step toward dispute resolution. Much of the work required for the next step should already be completed and the parties can quickly line up a qualified mediator to help resolve the dispute short of litigation or arbitration.

New York recently enacted legislation known as Carlos’ Law, which increases penalties for corporate liability for the death of, or serious injury to, an employee.  The bill, S.621B / A.4947B, was named after Carlos Moncayo, a construction worker killed in a trench collapse on a New York City construction project.  Moncayo’s employer repeatedly flouted safety rules and ignored warnings of dangerous conditions on its construction site before failing to properly support the trench that collapsed and killed Moncayo.  Moncayo’s employer was convicted for his death, but the penalty was light.  The company was sentenced to pay only $10,000, the maximum penalty at the time for any company convicted of a felony in New York State. The legislature responded with Carlos’ Law, which increases accountability for “employers,” and expands the scope of “employees” covered.

The corporate criminal law, NY Penal § 20.20(2)(c)(iv), imposes liability on an employer when “the conduct constituting the offense is engaged in by an agent of the corporation while acting within the scope of his employment and on behalf of the corporation, and the offense is . . . in relation to a crime involving the death or serious physical injury of an employee where the corporation acted negligently, recklessly, intentionally, or knowingly.”  An “agent” of an employer is any “director, officer or employee of a corporation, or any other person who is authorized to act on behalf of the corporation.” § 20.20(a). An “employee” now includes any person providing labor or services for remuneration for a private entity or business within New York State without regard to an individual’s immigration status, and includes part-time workers, independent contractors, apprentices, day laborers and other workers. § 10.00 (22).  The penalties for criminal corporate liability for the death or serious injury of an employee now include maximums of $500,000 when centered on a felony, and $300,000 when centered on a misdemeanor. § 80.10(1)(a) and (b).

Construction costs in New York City are already exorbitant due, in part, to current laws and regulations.  Carlos’ Law will increase costs for all construction projects in New York.  Insurance costs will rise to cover the increased risks on all employers, the vast majority of which already consistently enforce and pay for strict safety procedures and protocols for their employees.  These increased costs may put smaller companies out of business and may lead to less overall construction work in the state.  Another concern is the impact on liability insurance coverage for victims.  Insurance companies may be able to disclaim coverage for an injured worker if a criminal proceeding is brought against the employer.  This could reduce an injured worker’s ability to recover damages.  While the increased criminal fines paid to the state sounds good, how much of a fine will go to increasing safety for victims and their families?

When it passed, the legislature represented that Carlos’ Law will have no fiscal implications for state and local governments. (legislative memo in support). This is difficult to believe considering that increased insurance costs on employers typically get passed on to, and paid by, both private and public construction project owners.  There is little doubt that Carlos’ Law will increase construction project costs; hopefully, an increase in worker safety follows suit.

In All Seasons Landscaping, Inc. v. Travelers Casualty & Surety Co., No. DBD-CV21-6039074-S, 2022 WL 1135703 (Conn. Super. Ct. April 4, 2022) the plaintiff, a subcontractor on a state project, commenced a lawsuit against the surety who issued a payment bond on the project two years after the subcontractor last performed any original contract work on the project.  The defendant surety moved to dismiss the action based on the one-year statute of limitation in Connecticut General Statute § 49-42.  The plaintiff countered that it complied with that deadline because it also performed warranty inspection work after the contract was completed and within the limitation period in section 49-42. The issue of whether warranty work or minor corrective work can extend the limitations period in section 49-42 had not previously been addressed by a Connecticut court.

Section 49-42(b) governs the limitation period on payment bond claims on public projects.  It provides in relevant part that “no … suit may be commenced after the expiration of one year after the last date that materials were supplied or any work was performed by the claimant.”  Section 49-42 provides no guidance on what “materials were supplied or any work was performed” by the claimant means, nor is there any direct appellate-level authority in Connecticut on this issue.  What is clear under well-established law in Connecticut is that the time limit within which suit on a payment bond must be commenced under Section 49-42 is not only a statute of limitation but a jurisdictional requirement establishing a condition precedent to maintenance of the action and such limit is strictly enforced.  If a plaintiff cannot prove its suit was initiated within this time constraint, the matter will be dismissed by the court as untimely.

Without any state appellate authority, and since section 49-42 was patterned on the federal Miller Act (40 U.S.C. §§ 270a – 270d), the court looked to federal precedents for guidance.  The federal court decisions applying the Miller Act, which has similar language as section 49-42, have consistently held that warranty work or minor corrective work will not toll the statute of limitations in the Miller Act.  The statute of limitation begins to run when the original contract work is completed.  Remedial or corrective work or materials, or inspection of work already completed, falls outside the meaning of “labor” or “materials” as these terms are used in the Miller Act.  Thus, correction or repair work, even if such work is requested by an owner, does not toll or affect the time constraint to file suit.  The All Seasons Landscaping court adopted this “bright-line” rule for all payment bond suits under section 49-42 in Connecticut.

Interestingly, the deadline for filing suit on payment bond claims on public projects now appears to be more restrictive than the caselaw governing the time limit for filing a mechanic’s lien on a private project.  Connecticut General Statutes § 49-34 requires a mechanic’s lien to be filed in the land records within ninety days after the “performing of services or furnishing of materials.”  Well-established caselaw allows this ninety-day lien period, even after the original contract work has been completed, to start over from the date the owner requests any additional work, even trivial warranty or corrective work, to be performed.

Business relationships often begin before parties execute a written agreement containing the terms and conditions by which the relationship will be governed.  With little more than a Letter of Intent (“LOI”) or Letter of Award (“LOA”) one party is typically pressured to begin investing time and money to start preliminary work on a project.  If such LOI or LOA contains nothing more than an agreement to agree later, the performing party should minimize its investment until the later agreement is executed.  A recent court decision in New York confirmed the danger to the performing party under “agreement to agree” provisions. 

In Permasteelia North America Corp. v. JDS Const. Group, LLC, 2022 WL 2954131 (N.Y. Sup. CT. 7/22/22), the plaintiff subcontractor allegedly performed $1.9 million worth of preliminary work under nothing more than a LOA with an agreement to agree provision.  Issues arose, and the parties never entered any later written agreement.  The general contractor refused to pay the plaintiff anything for its preliminary work. In response, the plaintiff filed suit against the general contractor asserting four counts: foreclosure of its lien, breach of contract, unjust enrichment, and account stated.  All four counts were based on an alleged oral “handshake deal” for subcontract work for the project.  The general contractor’s LOA stated that neither party would be bound “unless and until the parties actually execute a subcontract.” During discovery, the plaintiff admitted that neither party intended to enter into any contract until its potential terms were negotiated, reduced to writing, and signed. Moreover, the plaintiff only offered one set of meeting minutes and a few project agendas to support its alleged “handshake deal.” Once these necessary undisputed facts were confirmed, the defendant moved for summary judgment on all four counts.

The court readily granted the defendant’s motion on all counts based on clear and well-settled New York law.  Where an agreement contains open terms, calls for future approval, and expressly anticipates future preparation and execution of contract documents, there is a strong presumption against finding a binding and enforceable obligation.  An agreement to agree, in which material terms are left for future negotiations, is unenforceable unless a methodology for determining the material terms can be found within the four corners of the agreement, or the agreement refers to an objective extrinsic event, condition, or standard by which the material terms may be determined.  The defendant’s LOA only called for anticipated future preparation and execution of a subcontract, which is not enforceable.  As a result, plaintiff will recover nothing for the work it allegedly performed under the LOA.

In New York, agreement to agree provisions negate the enforceability of anything other than a subsequent fully executed contract.  Under such provisions, one party avoids legal expenses and the risk of an uncertain outcome of a lawsuit based on an oral agreement, and the other party risks nonpayment with no legal recourse to get paid, as happened in the case noted above.