Beginning on October 1, 2018, construction contractors doing business in Maryland may be held liable if their subcontractors fail to pay their workers. To say that this expanded liability is significant would be an understatement.
First, a bit of background. The Maryland Wage Payment and Collection Law permits an employee who has not been paid in accordance with his or her employer’s regular pay practices to sue the employer for the wages that are due, plus attorneys’ fees and, importantly, up to treble (triple) damages. Accordingly, an employer faces significant penalties if it fails to pay its employees. Under the current law, a subcontractor’s employees could sue their employer – the subcontractor – but would not be able to recover against the general contractor.
The new law changes this. Subcontractors’ employees may sue not only the subcontractor, but also the general contractor, who can be jointly and severally liable for the full amount of any recovery. In short, the general contractor, who has no direct control over subcontractors’ pay practices (and almost never has any contractual relationship with subcontractors’ employees) may now be liable for employees’ unpaid wages and any associated penalties. This, obviously, should be of paramount concern to general contractors for several reasons:
- The law applies to all subcontractors, including those not in privity with the contractor. As such, the general contractor may have very little knowledge of employee problems and whether employees are being paid. Moreover, the contractor may not have access to the subcontractor’s daily reports and other records necessary to defend against employees’ claims. While one would hope that subcontractors maintain accurate records, this is by no means guaranteed.
- The general contractor can be jointly and severally liable. What this means is that the employees can collect the full amount of any judgment from the general contractor without collecting from the subcontractor.
- While the statute provides for indemnity from the subcontractor, such indemnity may well be meaningless as a practical matter. Subcontractors that have not paid their employees probably do not have money available to pay the general contractor. So, a judgment in favor of a contractor against an insolvent subcontractor is little consolation.
- The statute provides that a subcontractor does not have to indemnify the general contractor if the failure to pay wages arose because the general contractor failed to pay the subcontractor in accordance with the subcontract. If the general contractor withholds a payment from the subcontractor, the general contractor should make sure it is on solid legal footing. If the subcontractor later claims it could not pay its employees because of an improper retention by the general contractor and those employees file suit, the general contractor could ultimately be liable for both the money wrongfully withheld from the subcontractor and the employees’ wages (plus up to treble damages and attorneys’ fees).
Going forward, there are several steps general contractors should take:
- Ensure that you regularly audit all downstream subcontractors’ wage payments and obtain from the subcontractors documents supporting proper calculation and payment of wages.
- Determine whether subcontractors’ employees’ wage claims are covered under your and your subcontractors’ current insurance and/or can be added. The insurance limits must also be examined to ensure they cover the enhanced employee remedies and attorneys’ fees.
- Ensure that your subcontracts contain adequate indemnification provisions that are more robust than the statute.
- Require your subcontractors to obtain bonds covering employee wage claims. This, of course, will depend on the availability and cost of such bonds, and will add to the costs of any project. It will also likely serve to exclude new and unestablished subcontractors.
Wage claims can be expensive, and the remedies provided to employees significant. Subcontractors are in the best position to ensure that their employees are properly paid. Going forward, general contractors need to be aware of this potential landmine and do what they can to mitigate risks.