As of Jan. 4, 2022, general contractors and construction managers in New York became liable for the failure of subcontractors to pay wages to employees.
Previously, contractors were often not liable for wages due to the employees of subcontractors, unless the contractor had a direct employer-employee relationship. However, a newly enacted Section 198-e to the New York State Labor Law now imposes joint liability for unpaid wages on ”any person, firm, partnership, corporation, association, company, organization or other entity, including a construction manager, general or prime contractor, joint venture, or any combination thereof, which enters into a construction contract with an owner.”
Construction contract is broadly defined. It includes any agreement, oral or written, that “causes a building, structure or improvement, new or existing, to be constructed, altered, repaired, maintained, moved or demolished or that causes land to be excavated or otherwise developed or improved.”
A “construction contract” subject to the statute does not include public works contracts (which have their own obligations), nor home improvement or construction contracts involving a single-family home.
This obligation for unpaid wages extends to any employee of a subcontractor performing work on a project, including sub-subcontractors and subcontractors with whom the general contractor does not have a contract.
The statute further provides that a general contractor’s liability for unpaid wages exists for a three-year period preceding the date that a claim is filed.
In order to protect themselves, general contractors will need to review and, in most cases, revise existing and future agreements with subcontractors. First, all agreements with subcontractors should be in writing, and should contain all material terms of the engagement. Handshakes and oral agreements inevitably result in expensive and unpredictable legal results whenever a dispute arises.
Under the new law, a general contractor may demand payroll information from its subcontractors and withhold payment to the subcontractor if the requested information is not provided. That option should become mandatory language in all construction subcontracts.
Revised agreements should require that certified payroll records be provided to the contractor for each payroll, or at least biweekly, during the period that a subcontractor is on the job. The contract should also require subcontractors to maintain complete and accurate payroll records for a three-year period following the completion of any subcontract.
Certified payroll records should identify all subcontractor employees and independent contractors, including their name, Social Security number and I-9 status. The certified records should provide proof of payment of all wages and fringe benefits to third parties, as well as proof that all required withholding payments have been made. The identity of any unions and collective bargaining agreements for subcontractor employees should also be disclosed, along with proof that all union contributions have been made. Records should also be provided to substantiate the classification of any entity or individual as an independent contractor rather than an employee.
In addition, revised subcontractor agreements should contain requirements that mandate the disclosure of all sub-subcontractors and should contain language denying access to the job site for any unidentified subcontractor.
It is recommended that the subcontract contain affirmative representations from the subcontractor that they are not in default on any obligation to pay wages, either to an employee, union or independent contractor. The affirmative representation should also include a requirement that a subcontractor promptly disclose the existence of any labor or wage dispute to the general contractor. In addition, these affirmative representations should be verified, either by the use of a background search company, or by a simple search conducted by the general contractor using available internet searches such as Google, PACER (federal court search) and NYSCEF (NYS Supreme Court search).
The subcontract should expressly state that the failure to provide any of the above information will result in the withholding of payment to the subcontractor.
Further, it is strongly recommended that all agreements with a subcontractor contain a wage theft indemnification clause. If a subcontractor’s employee files a claim for unpaid wages and names the general contractor as a responsible party under the new law, it is only fair for the general contractor to have the right to recover from the subcontractor any funds it pays to settle the claim, including legal fees.
A general contractor may not include provisions in any subcontractor agreement which limit the rights of employees to recover under the new law. For example, a clause that limits a general contractor’s obligations to a subcontractor after a job is completed cannot be drafted or construed to limit the right of a subcontractor’s employee, union or the New York State Attorney General to claim unpaid wages for a three-year period preceding the claim.
The new law may be waived by a collective bargaining agreement with a bona fide building and construction trade labor organization representing persons performing work on a specific project, if the agreement specifically references Section 198-e of the Labor Law, and does not otherwise limit the rights of employees to recover unpaid wages.
If you have any questions about the new law or its applicability to your company or employment, please feel free to contact me directly.
Smith, Buss & Jacobs LLP, founded in 1991, is an AV-rated, 22-lawyer firm that represents clients in the areas of corporate law, real estate law, commercial trials, federal and state appeals, renewable energy, intellectual property and cooperative and condominium law.