New York construction contractors get a new headache on January 4, 2022. New code sections make prime contractors liable if subs don’t pay their employees or independent contractors.
Hold your breath and think about that for a second. Suppose you’ve paid your subs on a project and have a full book of lien releases. Then, surprise! A sub’s employees, tradespeople you’ve never met, sue your company for back wages on the job. That’s an entirely new risk category.
Effective January 4, New York General Business Law § 198-E makes contractors liable for wages owed and not paid by subcontractors at any level. The “Wage Theft” law is very broad – covers both commercial and public works jobs. “Wages” includes both pay and benefits. Only home improvement and residential construction of ten units or less are excluded.
Any employee owed wages by a sub can file suit against the prime contractor and collect both back wages and the cost of bringing suit. And consider this: the right to sue for back wages doesn’t expire for three years. That’s long after the project has been closed out.
Contractors don’t set pay dates or pay policies for subcontractors. They don’t get advance notice when a sub’s running short of cash. Yet, somehow, the new law makes prime contractors responsible if a sub’s employees don’t get paid. How does this make sense?
Here’s how. Effective January 4, 2022, New York contractors have a new responsibility – checking to be sure everyone on the job is getting paid. That’s New York General Business Law § 756-f.
Section 756-f gives contractors the right to demand certified employee payroll records from their subs – covering both employees and those working as independent contractors. Failure to provide these records is a defense to any claim of non-payment.
Problems With the New Law
- Starting in 2022, NY subs and lower-tiered subcontractors can be required to prepare certified reports for every pay period. That takes time and runs up overhead.
- Many subcontractor employees work several jobs during a pay period. A prime contractor isn’t entitled to pay reports on unrelated jobs. Subs without robust accounting systems have to figure out some way to break down pay records by job.
- Consider the moral hazard. Many subs are undercapitalized, little more than labor brokers. A sub about to go belly-up can strip assets out of the business and disappear, knowing full well the prime contractor has to cover debt to employees.
- Nothing in the law gives prime contractors the right to recover legal fees run up defending against claims by subcontractor employees.
- Nothing in § 756-f requires subs to reveal who did NOT get paid on time. That’s what prime contractors really need to know.
- Jobs covered by the new sections 198-E and 756-f aren’t a perfect match. For example, some jobs may have § 756-f rights but no § 198-E obligations.
What You Can Do
- The obvious answer is to use only reliable, well-managed subs able to provide certified pay records for your jobs. That may rule out the lowest bidder.
- Liability for wage claims can’t be waived by subcontract. But it’s easy to add subcontract language that requires indemnity by the subcontractor, both for wage claims and the legal cost of defense. Require subs to pass that same indemnity down to lower tier subs.
- Know more about your subs – especially subs with a short company history. Include in your subcontracts the right to audit books and records. Then get monthly financial reports.