California and Maryland Have Enacted Legislation Essentially Making The General Contractor the Guarantor for All Wages on the Project – Should Sureties Be Concerned?

It’s been said that as California goes, so goes the nation.  If so, general contractors throughout the country may soon be taking on more responsibility for the unpaid wages of the workers on their construction projects than they might have expected.  As of January 1, 2018, Assembly Bill 1701 makes general contractors liable for the unpaid wages of any employee who furnishes labor to or through the general contractor in furtherance of the prime contract; no matter the tier.

A.B. 1701 amended Section 218.7 of the California Labor Code so that general contractors on private construction projects “assume, and [are] liable for any debt” of a subcontractor of any tier for unpaid wages, fringe benefits or other employee contributions.  The driving force behind the legislation was the labor unions.  The legislation does not provide for a private right of action to the unpaid employees but instead permits the Commissioner of Labor to file suit on behalf of an unpaid employee(s) and also allows labor unions to sue for unpaid wages or benefits.  There is a one year statute of limitations for such claims.

The law provides the prime contractor with the right to inspect the subcontractors’ payroll records and other information in order to verify payments and limit its liability under the law.  The prime contractor may also withhold payments if the requested information or documents are not provided by the subcontractor.

Opponents of the law say it places an undue burden on prime contractors to police subcontractors of all tiers, and exposes prime contractors to paying “twice” for the same labor.  Also, the burden of having to review substantial payroll records and evidence of payments and the likelihood of delays between requesting and receiving this documentation could result in significant construction delays.  Delays, the potential withholding of payments from subcontractors and the overall increased administrative responsibilities will translate into increased costs.

The State of Maryland passed a similar law called Maryland’s General Contractor Liability for Unpaid Wages Act, which becomes effective on October 1, 2018.  Also sponsored by the labor unions, the Maryland Act applies only to private construction projects and makes prime contractors financially responsible for the unpaid wages of subcontractor employees of any tier.  If an employee is not paid within two weeks of the payment due date, the employee has a private right of action against the prime contractor.  The statute of limitations is three years.  The Maryland law also expressly provides the prime contractor with a right of indemnity against the subcontractor.  The indemnity is ineffective if there is a right of contractual indemnity or if the violation was the result of the prime contractor’s failure to make payment.  Unlike California’s law, the Maryland Act does not provide the prime contractor with the right to audit payroll records or withhold payments.

To mitigate the risks associated with both statutes, prime contractors might strengthen their subcontract forms to include audit provisions extending to all subcontractor tiers; and requirements that subcontractors enter into similar agreements with their sub-subcontractors and so on.  Form subcontracts could also include strong indemnification provisions holding the prime contractor harmless from all such wage claims and providing for a defense and indemnification.  Subcontractors of lower tiers may also be required to indemnify the prime contractor.  Payment procedures can be updated to require the submission of payroll records and evidence of payments to employees as to all subcontractor tiers.  A joint check provision would also provide the prime contractor with the right to pay subcontractors of a lower tier directly if concern arose that wages had not been paid.  Prime contractors could also protect themselves by requiring lower tiered subcontractors to post a payment bond.

A surety’s exposure on a construction project more often than not originates from a payment or performance bond.  Since the two statutes are limited to private construction projects, the surety’s liability under Federal Miller Act and Little Miller Act bonds is not affected.  Oftentimes, sureties write bonds for private construction projects.  Although some states have statutes modifying certain of the surety’s obligations under a private payment bond (e.g. venue for suit, limitation periods, etc.), neither the California or Maryland statutes at issue contain any language extending the surety’s liability for such wages beyond the four corners of the bond or otherwise.

One of the most common payment bonds issued on private construction projects is the AIA A312 form.  The surety’s obligation under the A312 extends to “labor, materials and equipment furnished for use in the performance of the Construction Contract.”  A “claimant” under this bond is defined as:

an individual or entity having a direct contract with the Contractor or with a subcontractor of the Contractor to furnish labor, materials or equipment for use in the performance of the Construction Contract. The term Claimant also includes any individual or entity that has rightfully asserted a claim under an applicable mechanic’s lien or similar statute against the real property upon which the Project is located….

(emphasis added).  In most states, any person who has furnished labor for the improvement of real property has the right to file a mechanic’s lien for unpaid wages.  As such, sureties in Maryland and California may have already been exposed to such claims under the A312 form bond.  In any event, when underwriting public or private construction bonds in these states surety underwriters are well advised to analyze and consider the bond principal’s bonded and non-bonded obligations.

NLRB Pursues Rulemaking to Address Joint-Employer Standard

Whether a general contractor or subcontractor is a joint employer with another company on a construction project for purposes of the National Labor Relations Act can have significant legal and practical consequences, including, but not limited to, potential union bargaining obligations, liability for unfair labor practices committed by a joint employer, and potential impact on day-to-day operations and costs. The National Labor Relations Board’s standard for determining joint employer status has shifted during the past several years creating uncertainty regarding whether a construction company may be a joint employer with another entity. Recently, the National Labor Relations Board indicated it will pursue formal rulemaking on the proper standard to determine joint employer status. A link to a summary of these recent developments can be found here.

Will Strict “No Damages for Delay” Clauses Be Outlawed on New York Public Construction Projects? Stay tuned.

For years, general contractors and trade contractors have faced very strict “no damages for delay” clauses on New York State construction projects. The tides are changing.  If signed into law, S. R. 06686, Reg. Sess. 2017-2018 (NY 2017) will require public entities to allow contractors, subcontractors and suppliers to recover for costs associated with project delays to the extent the delays were caused by the entity’s actions or inactions. Public entities would include, without limitation, any state agency, department, board, bureau, municipal corporation, school district or any instrumentality or public subdivision of the State of New York. Continue Reading

Summary of the Second Construction Industry Roundtable Discussion

Building upon the success of last year’s event, on May 31, 2018 Robinson+Cole’s Construction Group led the Second Construction Industry Roundtable Discussion at its Hartford office. With a variety of representatives from major Connecticut construction industry organizations and other industry stakeholders in attendance, the participants discussed issues affecting the construction industry in 2018 and beyond.

With 2018 being an election year in Connecticut, the discussion began with a question posed to all attendees about anticipated outcomes and impact of the gubernatorial election in November. All agreed that, while the result of the election remains difficult to predict, the next governor will inevitably be required to address continued challenges with the state’s economy as a whole and the burden of state government personnel costs specifically. Several expressed concern as to the State’s perceived unfavorable climate for doing business. As an industry particularly susceptible to influence by the current economic climate, it was agreed that good news for the economy and business growth would certainly be good news for the construction sector. Continue Reading

New York Adopts New Tools to Fight Gender-Based Harassment

The New York State Legislature and New York City Council adopted broad new requirements to combat workplace gender-based harassment. New York State’s new obligations were signed into law on April 12 and take effect at different times over the next 180 days. New York City’s new requirements take effect on April 1, 2019. Continue Reading

Oral Argument Preview: G4S Technology LLC v. Mass. Technology Park Corp.

The Supreme Judicial Court (SJC) is slated to hear oral argument in G4S Technology LLC v. Mass. Technology Park Corp. on Monday, March 5, 2017 – a case with significant implications for construction litigation.

The dispute arises out of a $45 million public works project to build a 1200-mile fiber optic network bringing high speed Internet access to western Massachusetts. Appellee Massachusetts Technology Park Corporation (MTPC), a state development agency, awarded the contract to design and build the fiber optic network to Appellant G4S Technology LLC (G4S). Continue Reading

Are Construction Project Supervisors Exempt from the FLSA’s Overtime Requirements?

The Answer:  It depends on the facts and circumstances of each case.

However, two recent reissued opinion letters from the United States Department of Labor’s Wage and Hour Division (WHD) provide construction companies with guidance regarding the issue of whether project superintendents and project supervisors are exempt administrative  employees under the Fair Labor Standards Act (FLSA). Continue Reading

The Trump N.L.R.B. Gift Giving Season

Acting just days before the term of Chairman Phillip Miscimarra ended on December 16, the National Labor Relations Board issued four decisions overturning landmark cases expending employee and labor union protections.  In a single week, the NLRB returns to pre-Obama-Board standards and upends the apple cart. Each case was decided on a strict, party-line 3-2 vote. Copies of the decisions can be found here.

In The Boeing Company,  the Board reversed a line of cases holding that a facially neutral work rule would be found to violate the National Labor Relations Act if employees could “reasonably construe” the rule as prohibiting conducted protected by the Act even if never applied to ban such conduct. Using this so-called “reasonably construe” standard, the Board has invalided countless work rules and policies without any showing that the rule was applied in an unlawful manner and without regard to the employer’s need for such a rule. In Boeing Company, the Board adopted a new standard and announced that going forward it will review facially-neutral workplace policies both in light of the impact such policies have on employees’ protected rights as well as the employer’s justifications for adopting the challenged policy. Continue Reading

Out with the Old and in with the New: What Technological Trends Can the Construction Industry Expect in 2018?

As we embark upon 2018 we find ourselves not only reflecting on past accomplishments but also looking to  future goals for the upcoming year. Construction is a fast moving and ever changing industry which requires a real commitment to keep apprised of the latest trends and developments.

So what can we expect in 2018? Although there are a variety of opinions concerning expected trends one in particular is the increased use of technology. Construction is not an industry known for being at the technological forefront. But with heightened competition and pressure to efficiently and cost effectively deliver projects, certain technological advances are surely to increase in popularity including the continued use of BIM, project management software, virtual and augmented reality and of course, drones. Continue Reading

New York Paid Family Leave Obligations for Construction Employers

Effective January 1, 2018, employees of construction employers (supplies, architects, contractors, and others) working in New York State may be eligible for paid family leave. The NY Paid Family Leave Law (“PFLL”) is both broader than and more narrow than the federal Family and Medical Leave Act. The PFLL applies to all employees employed by private employers in the construction industry and working in New York State, even if those employers are located outside the State of New York or the employee is working from home (for example, sales employees, estimators, etc.).

Employees working in New York State become eligible for Paid Family Leave (“PFL”) on January 1, 2018 or after the employee (a) works for 26 consecutive weeks (if the employee is regularly scheduled to work 20 hours or more per week) or (b) after 175 days of employment (if the employee is regularly scheduled to work fewer than 20 hours per week). Continue Reading

LexBlog