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August 11, 2022

New Laws Related to Subcontractors

[vc_row][vc_column][vc_column_text]With demands of labor and materials skyrocketing, subcontractors are becoming more and more stretched, which can lead to significant challenges related to contracts with the general contractor and the ability to take care of the workforce.

The client and main contractor create a contract, and frequently, subcontractors price both labor and material.  Within this hierarchy, there are many various functions that happen, from payment, project handover, damages, disputes, and more.  All of these functions leave room for payment and legal challenges.

There are some measures that exist and new ones are  being created related to the contractor / subcontractor relationship and that will influence outcomes for all parties involved including construction employees.

The Miller Act

One of the most common issues subcontractors face is non-payment. Sometimes subcontractors have a positive relationship with the prime contractor and resolve the issue amicably. However, when the parties cannot reach an agreement, the subcontractor faces potential ruin. If a subcontractor fails to take prompt legal action, it can lose access to one of the most effective ways to recover the amounts due.

On a private project, a subcontractor may file a mechanic’s lien to secure its right to payment. However, when the owner is the federal government, The Miller Act allows subcontractors to make claims against the bond when the prime contractor fails to satisfy its payment obligations. However, the right to make such a claim does not last forever. The deadlines for a payment bond claim differ depending on who the subcontractor or supplier has contracted with.

The Miller Act identifies four types of parties that can bring bond claims:

  1. A first-tier subcontractor is any subcontractor that has contracted directly with the prime contractor.
  2. A second-tier subcontractor is a subcontractor that has contracted with a first-tier subcontractor.
  3. A first-tier supplier is a material supplier that has contracted directly with the prime contractor.
  4. A second-tier supplier is a material supplier that has contracted directly with a first-tier subcontractor (suppliers that contract with a first-tier supplier have no bond claim rights).

The Miller Act does not allow for claims to be made against the bond by any subcontractor or supplier lower than tier two.

Wage Protections for Employees

In Illinois, two new laws went into effect this year and now private construction contractors are liable for wage claim costs owed by subcontractors. The effort to expand the obligation of primary contractors to guarantee payment of subcontractors’ employees on private projects has recently received strong support in several states around the country from the United Brotherhood of Carpenters and Joiners of America as well as its local chapters.  California, Maryland, Oregon, Virginia, Washington D.C., and New York have all enacted similar laws in the last several years.

Specifically, this newly created liability includes claims for:

  • Unpaid wages
  • Fringe or other benefit payments or contributions
  • Interest owed
  • Penalties assessed by the Illinois Department of Labor
  • Attorney’s fees and costs

This law does create a couple of concerns.

  • Will primary contractors shy away from hiring smaller and less well-financed subcontractors, and to self-perform more of the work, so as to minimize the risk of having to pay twice for their subcontractors’ workers. 
  • Risks to contractors and subcontractors from unexpected claims by subcontractors’ workers could be substantial and difficult to quantify.

New York State enacted a similar law this year.

NY State Senate Bill S2766C  is intended to reduce wage theft claims and amend wage theft prevention and enforcement in the construction industry within the state, on January 25, 2022, and the new law is effective retroactively to January 4, 2022. 

Prior to the new law, a worker could only bring a private lawsuit for alleged unpaid wages against their direct employer. The New York State Assembly asserted that this was a major issue in the construction industry and that subcontractors have sometimes hid assets, changed their corporate identities, or took part in other alleged unscrupulous practices to avoid liability  from a potential wage theft action. The new law that shifts wage payment obligations to prime contractors.

In the case of these laws and many other already on the books or coming soon, prime contracts will need to be amended to include expanded indemnity and additional insured provisions for wage theft actions, compliance provisions from subcontractors, a vetting process to ensure compliance from subcontractors and other lower tier contractors, and adequate financial coverage for the prime contractor.  Prime contractors will also need to provide training to their employees to properly inspect subcontractor payroll records and implement the withholding of payments to their subcontractors if there is a potential violation.

With new laws and guidelines come new needs to manage contracts and avoid disputes. 

Technology can fill the void. [/vc_column_text][/vc_column][/vc_row]

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