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General Contractors in Maryland Beware: Beginning October 1, 2018, You May Be Held Liable for Your Subcontractors’ (and their Suppliers’) Failure to Pay Their Employees.
In September of 2017, I wrote an article warning the construction industry that the Court of Appeals had changed the way indemnification clauses in contracts had been historically interpreted. You can read that article here:
Today, I am writing to warn you about a new law passed by the Maryland General Assembly during the last days of the 2018 legislative session. It essentially allows employees of subcontractors and their suppliers who have not been paid to sue the general contractor directly. This new law effectively imposes strict liability on the general contractor for its subcontractors’ wage and hour violations.
Employers should be aware that the general rule in Maryland was that when an employer fails to properly pay its employees what they are owed for work performed, the employer may be held liable for up to three times the unpaid wages, plus reasonable attorneys’ fees and costs. This law applied only to an employer’s own employees. Beginning in October of this year, however, general contractors can be held liable for up to three times the unpaid wages, plus reasonable attorneys’ fees and costs to all downstream employees.
The pertinent text of the statute states:
A general contractor on a project for construction services is jointly and severally liable for [failure to pay wages] committed by a subcontractor regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.
I was shocked when I read the text of the law – and general contractors should be too. And you should know that “construction services” involve all aspects of construction, i.e., “building, reconstructing, improving, enlarging, painting, altering and repairing.” The expansion of liability for employee wages to non-employers is unprecedented on private projects. My first thought (as a lawyer) was – can this risk be managed? My second thought (as a business owner) was that construction costs may increase as a direct result of this law. (See the recommendations below).
The legislature attempted to give some protection to the general contractor in the form of the requirement by the subcontractor or supplier to indemnify the general contractor for its failure to pay its employees as follows:
A subcontractor shall indemnify a general contractor for any wages, damages, interest, penalties, or attorney’s fees owed as a result of the subcontractor’s violation unless:
- Indemnification is provided for in a contract between the general contractor and the subcontractor; or
- [the failure to pay wages] arose due to a lack of prompt payment in accordance with the terms of the contract between the general contractor and the subcontractor.
What comes to mind is that if the subcontractor is not paying its employees, it most likely would not have the financial wherewithal to reimburse the general contractor for the damages that it may sustain as a result of a lawsuit or other dispute resolution costs and expenses. This “protection” may be meaningless.
The second portion of the so called “protection”, while a bit confusing, seems to allow the general contractor to continue to pay – or not to pay – its subcontractors pursuant to its subcontract. For example, if the contractor has a pay-if-paid clause in its subcontract, and it has not been paid by the owner, it would seem to be able to use its failure to pay the subcontractor as a defense to liability to the employee.
Further, the general contractor is at a disadvantage if an employee sues. Because it is not the direct employer, it will not have the employee records to defend itself against these claims, including potentially fraudulent claims by downstream employees. Having defenses to payment, however, does not solve the problem of increased costs incurred on a given project for downstream wage violations.
General contractors can take several actions:
- Review and revise its indemnification clause in its subcontracts and purchase orders;
- Review and revise its lien and claim waivers;
- Require insurance coverage or bonds to protect against wage and payment claims;
- Require information from its subcontractors regarding its financial solvency, its wage payment practices and wage claim history; and/or
- Increase its oversight regarding downstream employee wages.
Yes, the risk can be managed, but it comes at a cost. Not only to general contractors but to the industry as a whole. The potential costs cannot be overstated.
It’s time to dust off those subcontracts and review your subcontract’s indemnification clause carefully. If you would like to learn more about what provisions to look out for and how to get a contract you can work with, I offer in-house seminars on contract review and negotiation at no cost to your firm.
Tracy L. Steedman, a partner at Adelberg Rudow, specializes in construction law. She partners with small and large construction and design firms in preparing risk mitigation strategies, claims avoidance and counseling, and pre-litigation alternative dispute resolution processes. A large portion of her practice is contract drafting and review, and as a litigator, she is familiar with how the courts interpret contracts. Feel free to contact Tracy at 410.986.0822 or firstname.lastname@example.org.