Contractors Liable for Unpaid Wages — Is This a National Trend?

September 12, 2018 Sarah Lorek

The cost of construction is a constant issue facing clients and contractors alike. With tight profit margins and the potential for unforeseen delays thrown into the mix, it’s vital for general contractors (GCs) and subcontractors to streamline their efforts and control costs wherever possible.

However, there are forces beyond the contractor’s control that can impact costs, and the laws of the land are among the most powerful. Recent laws that have passed in both California and Maryland have dealt a significant blow to construction project cost control, and they may be a sign of things to come nationwide.

 

What are the California and Maryland wage protection laws?

Both these laws share some basic traits, but there are also key differences between them. We’ll summarize both pieces of legislation before breaking down the impact contractors in those states can expect, and what it may mean for contractors in other states in the near future.

What they have in common

The wage protection bill that became effective January 1, 2018 in California (AB 1701) and the bill that will become effective October 1, 2018 in Maryland (HB 1539 / SB 853) share the following large-scale changes to the status quo:

  • Their purpose is the same: to ensure construction workers who enter into work on a given project in good faith can be confident they will receive their agreed-upon payment in full.

  • Under both laws, general contractors can now be held liable for unpaid wages, benefits, and employer contributions owed to any employee working on a project. That means, not just those employees hired directly by the general contractor, but those employed by subcontractors all the way down the line.

  • Both laws leave GCs potentially liable to pay every construction worker twice — once via payment to the subcontractor, then again directly to the employee if the subcontractor fails to pass payment along appropriately.

  • This legislation applies specifically to private construction projects (as opposed to previous legislation in California that required this type of wage protection on public works projects only. Maryland currently has no wage protection law in place for publicly-funded construction projects.)

Where they differ

These two laws differ in many ways, giving us a wider view of potential copycat legislation we may see popping up in other states:

  • The general contractor’s maximum responsibility
    Under California’s law, the GC is liable (at most) for contracted wages, benefits, and accrued interest. In Maryland, the GC can be forced to pay up to three times the amount owed, plus applicable legal fees if nonpayment is not related to a legitimate dispute already on record.

  • The general contractor’s right to indemnity
    California’s law does not shield the general contractor from having to cover unpaid wages and benefits — even if the subcontractor has taken payment in full but failed to pass it along to its employees. The GC can attempt to recover those payments from the subcontractor after the fact. Maryland’s version requires subcontractors to indemnify the general contractor if failure to pay contracted wages can be traced to the subcontractor’s own violations. (However, this does little to protect GCs if the subcontractor has no means to pay those wages since the law holds the GC ultimately responsible regardless.)

  • The general contractor’s right to protect themselves
    GCs operating in California can now demand access to subcontractors’ payroll and other records to confirm compliance with hour and wage laws. They’re also allowed to withhold payment to the subcontractor if the sub refuses access to those records. Maryland’s law neither expressly provides or denies those protections.

  • How employees pursue payment
    Employees in California cannot sue contractors directly under the wage protection law, but must instead bring their claims to the Commissioner of Labor within one year of the alleged breach of contract. In Maryland, employees have the right to sue both their direct employer and the GC up to three years after payment was initially due.

 

How wage protection laws will affect construction costs

No one can deny that construction workers deserve to be fairly paid for their time and effort, and no legitimate contractor would ever intentionally work against that. However, these wage protection laws are highly controversial because they are certain to increase the cost of construction projects even if no one ever files a claim. Here’s why:

  • Insurance - General contractors already spend a considerable amount on various forms of insurance due to the liabilities inherent to construction work. With these laws in place, impacted contractors will need to take on additional insurance in order to protect themselves from the possibility of wage protection lawsuits up to three years after every job is completed.

  • Labor - GCs will also likely need to bring on additional back-office help to protect themselves by reviewing subcontractor payroll records and ensuring compliance.

  • Bonding - On the subcontractor’s side, it’s very likely GCs will also want subs to obtain bonds to guarantee they can and will cover wages in order to protect the GC’s interest prior to beginning work. This will place even more strain on subcontractors’ already tight cash flow.

In the end, of course, all these cost increases will trickle down to the clients who hire the general contractors, and eventually the end user of whatever building or infrastructure project is being built: the homeowner, customer, and taxpayer.

At this point, the future of construction wage protection laws in the United States is unknown. Oregon has its own law on the books, but it only holds the GC responsible if the subcontractor has not been paid in full for completed work.

Will other states lean toward California’s take — expanded liability with controls and protections in place for the GC — or Maryland’s, where the GC essentially takes on all the risk? Or, will they fall somewhere in between?

We don’t know. What is clear, however, is that general contractors need to follow developments in wage protection law closely and incorporate needed adjustments into their cost control strategies.
 

 

 

About the Author

Sarah Lorek

Sarah is the Global Content Manager/Editor for Constructible and Trimble MEP. She has worked on many large scale marketing campaigns for Fortune 500 companies, helping them define their story and shape a compelling narrative. Now, she focuses on creating and sourcing valuable thought leader content for our readers.

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