General Contractor Liability for Unpaid Wages

Posted on by Michael Hourigan in Labor & Employment, Uncategorized.

The Maryland General Assembly has passed a new statute that marks a dramatic departure from existing wage and hour requirements for general contractors.  The new statute, which took effect on October 1, 2018, makes general contractors responsible for the failure of their subcontractors to pay their employees the wages they are owed.  The statute is modeled after a recent District of Columbia law, and will significantly alter the long established rules among general contractors, subcontractors, and their employees.

The Maryland wage and hour and wage payment laws are designed to ensure that employees are fully and timely paid.  The laws do so by giving employees the right to sue for unpaid wages, and to potentially recover triple damages plus attorney’s fees and other costs if the wages were not withheld as a result of a bona fide dispute.

In a typical construction project, the property owner contracts with a general contractor, which engages a series of subcontractors, who may, in turn, hire additional sub-subcontractors.  Historically, the general contractor and each subcontractor was responsible only for the wages of their own employees.  The general contractor was insulated from wage claims of employees of a subcontractor, except in the unusual case of a “dual employment.”

Now, effective October 1, 2018, the rights of wage earners are dramatically expanded.   Effectively, general contractors have become liable for the wage and hour violations of their subcontractors.  The law applies to a “general contractor in a project for construction services.” “Construction services” are services offered in connection with real property in the following areas: building; reconstructing; improving; enlarging; painting; altering; maintaining; and repairing.

The reach of the statute extends beyond those subcontractors with whom the general contractor directly contracted.  Specifically, the general contractor is liable “regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.”  This makes the general contractor responsible for the wage and hour violations of its direct subcontractors, and for the wage and hour violations of lower-tiered subcontractors, which the general contractor may not even be aware are on the job.  Further, the statute does not require subcontractors to provide general contractors with employee records, meaning that general contractors may lack the documentation (short of a subpoena) to defend the wage claim.

There is some protection built into the law for general contractors.  The statute requires that a subcontractor shall indemnify a general contractor for any wages, damages, interest, penalties, or attorney’s fees owed as a result of the subcontractor’s violation.  However, a general contractor does not have the right to indemnity if it has failed to timely pay the subcontractor.  As with any indemnity right, its value to the general contractor will largely depend on the financial viability of the subcontractor, which may be suspect in light of its failure to pay its employees.

The new statute puts the onus on general contractors to more carefully select their subcontractors and, in particular, to confirm their financial viability.  General contractors would also be wise to monitor the subcontractors hired at lower levels of the project.  Certainly, general contractors should be revising their contracts to allow (even require) access to employment and payment records of their subcontractors.

Finally, the new law is certain to result in increased bonding or insurance requirements for subcontractors.  An unintended but fully predictable result of the law will be that new subcontractors will find it harder to get hired on major construction projects, as general contractors will want to work with companies they trust.  Moreover, increased bonding costs may price new subcontractors out of the market.