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On the Hook: Maryland General Contractors Responsible for Subcontractors' Wage Violations Under New Law

The Maryland legislature has passed a stunning new law that makes construction general contractors responsible for the failure of subcontractors to pay their employees the wages that they are owed.

This new legislation, modeled after a recent District of Columbia law, is all but certain to have profound ramifications for subcontractors and general contractors alike. It takes effect on October 1, 2018.

Overview of Maryland Wage and Hour Laws

The Maryland wage and hour and wage payment laws are designed to ensure that employees are paid in a full and timely manner. These laws contain stiff penalties for violators. Employers violating the wage payment laws are subject to triple damages plus attorney's fees and other costs if there is a finding that wages were withheld "not as a result of a bona fide dispute." Courts have also expanded the ambit of the wage and hour laws to impose personal liability on individuals in certain situations.

Summary of the New Law

The new law expands the wage payment laws in dramatic ways. Effectively, it makes construction general contractors liable for wage and hour violations of subcontractors.

Significantly, the law imposes liability on construction general contractors "regardless of whether the subcontractor is in a direct contractual relationship with the general contractor." This means that the construction general contractor is responsible for the wage and hour violations of its direct subcontractors, and also for the wage and hour violations of its other lower tiered subcontractors. The law applies to a "general contractor in a project for construction services." "Construction services" is broadly defined to include "building, reconstructing, improving, enlarging, painting, altering, maintaining, and repairing" services performed or provided with respect to real property. 

The legislature, presumably in an attempt to mitigate the impact of the new law on general contractors, included language in the statute 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 unless:

  • The indemnification is provided for in a contract between the general contractor and the subcontractor
  • A violation of the law arose due to a lack of prompt payment in accordance with the terms of the agreement between the general contractor and the subcontractor. 

Takeaways and Practical Consequences

Although the full ramifications of this new law are uncertain at this time, takeaways and practical consequences include the following:

  • Construction general contractors must examine their vetting of subcontractors to ensure only financially stable or fully bonded subcontractors are selected, which will work to the disadvantage of less-established subcontractors.
  • The statute does not require subcontractors to provide construction general contractors with the employee records of the subcontractors. As a result, the statute contains no mechanism for construction general contractors to readily defend wage and hour claims brought against them by the employees of subcontractors.
  • By its terms, the statute leaves open the possibility that general contractors could be sued by the employees of a subcontractor even if the employees themselves do not work on the "project for construction services."
  • Construction general contractors will no doubt attempt to address this new liability exposure by expanding indemnification language in subcontracts and through enhanced bond requirements.
  • Construction general contractors will need to explore whether insurance is obtainable for this new liability.
  • Consumers may ultimately pay for the costs that general contractors will incur if insurance, bond, and other related costs are passed on to them by way of higher prices.
  • Construction general contractors based in jurisdictions other than Maryland who provide construction services for even a single construction project in Maryland will need to determine how the new law applies to them.
  • The statute will impose additional record-keeping requirements for general contractors and subcontractors, particularly in light of the length of time that employees have to file wage claims in Maryland.
  • The statute is unclear whether and, if so, to what extent general contractors (like other employers) will be able to avail themselves of the "bona fide dispute" defense contained in the statute to avoid the imposition of triple damages and/or attorney's fees and costs. 

Conclusion

In an apparent effort to ensure that employees of subcontractors are paid wages in a full and timely manner (and in apparent reliance upon the perceived leverage that general contractors have on subcontractors), the Maryland legislature has opened a Pandora's Box of new, wide-ranging, and unforeseen issues and challenges for subcontractors and general contractors alike.

Whether the new law will actually cause new and greater problems than it purports to solve remains to be seen. In the meantime, contractors should plan with their advisors for any changes in business practices that should be made before the new law takes effect this fall. 

Employment attorney Michael Neary contributed to this article.

Marc Engel is an employment attorney who works with businesses to prevent and defend against employee claims. For more information, contact Marc at mrengel@lerchearly.com or 301-657-0184.

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