In its last legislative session the Maryland General Assembly passed Senate Bill 853 with a delayed implementation date of October 1, 2018. While only one page long, it has great implications, and general contractors throughout the D.C. Metro area are justifiably concerned. In short, this new law makes general contractors jointly and severally liable for the failure of their subcontractors, and tiers below, to pay their employees in compliance with Maryland law. This law is the most onerous of its kind in the country, with California falling a distant second, as it also imposes penalties and legal fees on the contractor for its subcontractors’ faults.
Changes to Current Law
Currently, an employer that fails to pay an employee in accordance with Maryland’s wage and hour laws can be liable to the employee for three times the owed wages, plus attorneys’ fees and costs. Generally, an employee can only recover from its direct employer (with some exceptions, of course). To reach a general contractor, the employee of a subcontractor has to prove that he or she is in fact a statutory employee of the general contractor. If the employee cannot meet this burden of proof, his or her remedy is against the subcontractor – not the general contractor. Under this new law, however, a general contractor performing work on a construction services project is automatically liable to the same extent as the employee’s direct employer.
Perhaps most concerning is the fact that this new law is not limited to first-tier subcontractors. Instead, it applies “regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.” A prior draft of the law was limited to first and second-tier subcontractors. Now, however, the general contractor essentially must be the guarantor of proper wage payments of every subcontractor and all tiers below.
Liability kicks in as soon as two weeks after the subcontractor has failed to make payments to its employees. This liability includes treble damages and attorney’s fees and costs. Additionally, the statute of limitations is three years, meaning that a general contractor can find itself defending a wage and hour claim long after a project is complete, or after a general contractor or subcontractor was terminated or ceased to exist. As time passes, records can be lost or destroyed, and a general contractor can be sued and be the only viable defendant in a wage claim but have no documentation to refute the claim as the claimant’s actual employer no longer exists or has shoddy, or nonexistent, records for the preceding three years. The Maryland General Assembly placed a liability against the general contractor without giving them any protection against this.Indemnification Obligations
The Maryland General Assembly appears to provide a “sugar pill” of sorts, by requiring subcontractors to indemnify a general contractor for its violations – except where indemnification is already provided for in the contract between the general contractor and subcontractor, or except when the violation occurred because of the general contractor’s failure to pay its subcontractor promptly. But if a subcontractor cannot make payroll, it is also likely that it cannot pay for its indemnification obligations. Also, the damage is already done. Regardless of the existence of an indemnification provision, general contractors are likely to be immediately named as defendants for any Maryland wage and hour violations that occur downstream. The general contractor must then seek to enforce the indemnification provision. Even if the subcontractor follows through on its obligations, this increases the costs that a general contractor, and subcontractors, will have to take into consideration in bidding on a project.
In addition to the obvious concerns about being liable for remote subcontractors’ poor business practices, the statute has much more far-reaching effects. For example, proper contractual withholding or termination provisions, with or without cause, under a subcontract could result in the subcontractor being unable to pay its employees and lower tiered trades, who will then be unable to pay their employees. Thus, this entirely valid remedy for dealing with a subcontractor in default now exposes the general contractor to potential liability for which the general contractor has no independent defense such as payment in full per the terms of the contract. Additionally, general contractors will now have to review and likely expand their record-keeping policies, procedures, and contractual provisions.
The other major concern is the likely development of a cottage industry of employment lawyers filing suits on wage claims close to the end of the three-year period, betting on the lack of record-keeping on the part of the direct employer, or that the direct employer no longer exists, leaving no records available to refute the claim. Because a general contractor can be forced to pay attorneys’ fees, on top of the treble damages, such claims can be an attractive way to advance claims when there is little, if any, evidence to refute the claimants’ wage claim with nothing but an upside for both the claimant and his or her lawyer.
Since the passage of this controversial law, the industry has been searching for ways to mitigate liability. Here are some of the ideas for general contractors to consider:
First and foremost, general contractors should have their subcontract agreements reviewed and updated to address the ramifications of the new statute. A specific indemnification provision should be inserted, which addresses the statute and makes direct subcontractors responsible for not only any wage claims made by their employees but also by their suppliers’ and subcontractors’ employees. The provision would include the wages, treble damages and the claimant’s legal fees within the potential remedies, as well as the general contractor’s legal fees.
General contractors should contractually require more detailed and thorough payroll records as prerequisites to progress payments – similar to those required by the Davis-Bacon Act and related federal statutes. While general contractors undoubtedly have enough paperwork to deal with, they should at minimum have an option, to be exercised at the general contractor’s sole discretion, to require subcontractors and their sub-subcontractors to supply records containing this level of detail in the event concerns are raised.
Records Retention Policies
Contracts should also be amended to include a stringent three-year records-retention policy, which would allow general contractors to have necessary documentation in the event of a dispute.
One idea that has been discussed frequently is the requirement of a bond to cover the potential costs, including treble damages, attorneys’ fees, and costs, to be kept in place for at least three years after final completion. Unfortunately, the feasibility of this idea remains uncertain, and it has the following pitfalls:
- Some subcontractors are not bondable. (And subcontractors that cannot make payroll likely fall into that category.) This will essentially exclude a relatively significant segment of the industry from bidding on projects where the general contractor requires a bond.
- This will also increase construction costs throughout the state as general contractors and subcontractors build anticipated costs of a bond into their overhead margins. Owners, who have no such liability, will be hesitant to accept these increased costs leaving the general contractor willing to take the risks without a bond at an advantage.
The insurance and bonding companies will play a critical role in the months to come, as the industry waits to see the solutions that market will generate to alleviate this new liability.
By far the most promising option is for the industry to lobby the Maryland legislature to either backtrack from this new law or at least make it less draconian. Because this affects all tiers of construction – from owners to suppliers – the collective bargaining power of the industry would make a strong impact. We therefore encourage all owners, developers, general contractors, subcontractors, and suppliers to contact their local trade organizations to discuss lobbying as a group.
Overall, the immediate and direct impact of this new law is that construction costs can increase across the board. Industry professionals can expect to see new and more stringent contract provisions regarding payment bonds, record-keeping obligations, and insurance requirements. The full impact remains unknown, and we expect some growing pains as the law takes effect. Asmar, Schor & McKenna PLLC is committed to being in the forefront of the efforts in mitigating the impact of this new law on all its clients and can, in addition to assisting in implementing the contract and bond changes, help clients in their lobbying efforts to make the Maryland legislature see just what a negative impact this new law has created.
Mr. Samuel is a founding Member of Asmar, Schor & McKenna, PLLC and specializes in complex commercial and residential construction contract drafting and litigation on behalf of Owner/Developers and general contractors.