General contractors must realize the risk of being held liable for a subcontractor’s failure to pay timely and proper wages to their employees and/or lower-tier subcontractors.

Maryland, Virginia, California and the District of Columbia have recently rolled out laws that create a significant risk for general contractors to consider. The laws impose joint liability on general contractors for a subcontractor’s failure to pay timely and proper wages to their employees and lower-tier subcontractors.

As a result, general contractors have the potential to pay twice for labor, in addition to bearing the responsibility for statutory liquidated damages and attorney’s fees that are imposed for violations of these laws, which in some states include treble (three times) damages. Therefore, it is essential for general contractors to understand these laws and develop strategies to protect themselves from violations.

Specific Codes of Law

The D.C. Wage Payment and Collection Law (WPCL), D.C. Code § 32-1301, et seq., requires employers to pay timely wages to their employees; and if they fail, the employer is liable, as liquidated damages, for 10% of the unpaid wages for each working day that the failure persists, or an amount equal to treble the unpaid wages, whichever is smaller. The WPCL goes on to provide that the subcontractor and general contractor shall be jointly and severally liable for these violations.

Similarly, in Maryland, the General Contractor Liability for Unpaid Wages Act (GCLUWA), Md. Code Ann., Lab. & Empl. § 3-507.2(c)(1), states that a general contractor shall be jointly and severally liable for its subcontractors’ failure to pay employees in accordance with Maryland wage laws. The GCLUWA not only applies to the subcontractors, but also applies to lower-tier subcontractors. In addition to being held liable for the unpaid wages, the general contractor will also be held liable for liquidated damages, which is up to an amount not exceeding three-times the wage, as well as reasonable attorney’s fees and other costs.

In Virginia, Va. Code 11-4.6 makes general contractors on construction projects over $500,000 liable for any wages its subcontractors of any tier fail to pay. Further, general contractors are deemed to be the employer of the subcontractor’s employees for the purposes of Va. Code § 40.1-29, which imposes civil and criminal penalties on employers in the case of unpaid wages. The criminal penalties range from misdemeanors to felonies, depending upon the amount of unpaid wages.

In California, Cal. Labor Code § 218.7 holds the general contractor jointly liable for unpaid wages, benefits or contributions that a subcontractor owes to an employee who performed work under the contract. However, the general contractor is not jointly liable for any liquidated damages.

Statutory Protections

The laws do provide some level of protection for the general contractor. For example, the Virginia law includes a good-faith exception, providing that a general contractor may be held liable only if it can be demonstrated that the general contractor knew or should have known that the subcontractor was not paying its employees the wages (Va. Code Ann. § 11-4.6). Therefore, if the general contractor can prove it acted in good faith, it can avoid liability for its subcontractors’ violations.

Additionally, most of the statutes contain an indemnity provision requiring the subcontractor and lower-tier subcontractor to indemnify the general contractor for any wages or fees that it pays as a result of its joint liability. The laws in Maryland, Virginia and the District of Columbia each state that, except as otherwise provided in the subcontract, the subcontractor shall indemnify the general contractor for any wages, damages, interest, penalties or attorney’s fees due to the subcontractor’s violations unless the violations were due to the general contractor’s own violations of prompt payment. (See Md. Code Ann., Lab. & Empl. § 3-507.2(c)(1); Va. Code Ann. § 11-4.6(D); and D.C. Code § 32-1303(5).)

California’s law does not include such protection. Moreover, the value of this protection is dependent on the financial strength of the subcontractor. In other words, if the subcontractor is insolvent, the indemnity obligation is worthless.

Because of the limitations of the statutory protections, general contractors must consider proactive measures to reduce the risks associated with these laws. Although the type of protections will vary depending on applicable laws and the specific subcontractor, the following are recommendations to reduce risks:

• Strengthen the contractual indemnity language to require indemnification for all wage violations.
• Consider requesting personal indemnity from the subcontractor’s owners or other guarantors for such violations.
• Revise subcontracts to contain specific default language for a subcontractor’s or lower-tier subcontractor’s wage violations, and allow for set-off against payments due on other subcontracts.
• Require subcontractors to provide payment and performance bonds that cover wage violations or liability resulting from the same.
• Require subcontractors to provide certified payroll documents along with records confirming payments and require subcontractors to obtain similar documentation from lower-tier subcontractors.
• Ensure proper vetting of potential subcontractors and work with subcontractors that have a trusted past performance history and that have strong reputations.

While these laws are still relatively new, several states and the District of Columbia are making a big push on enforcement. Further, a similar law is currently pending before the Illinois legislature; and it is expected that other state legislatures will follow suit.

General contractors are advised to stay informed of the laws where they are working and take the necessary precautions to avoid the potentially harsh penalties associated with these laws.