Client Alert: Construction General Contractor Liability for Subcontractor’s Failure to Pay Wages

If you would like to discuss the contents of this Client Alert with an attorney, please contact Stanford Gann, Jr. or Jody Maier at (410) 321-0600.

Effective October 1, 2018, construction general contractors will be jointly and severally liable for the failure by subcontractors to pay their employees in accordance with Maryland’s wage and hour law.

This newly-imposed liability is significant. Under existing Maryland law, an employer that fails to pay its employees by Maryland’s wage and hour laws may be liable to such employee(s) for up to three times the wages owed, plus reasonable attorneys’ fees and other costs. Before this new law, such liability has generally been imposed only upon the direct employer of the employee(s). Although corporate individuals responsible for controlling the wages and terms and conditions of employees can be deemed as “employers,” separate legal entities are not legally responsible for another employer’s failure to properly pay its employees.

This new law, however, provides that in the event of the subcontractor’s failure to properly pay its employees, the general contractor on a construction services project will be jointly and severally liable. “Construction services” is a broad term, pertaining to reconstructing, building, improving, enlarging, painting, and more. The potential liability imposed by the new law also extends “regardless of whether the subcontractor is in a direct contractual relationship with the general contractor (source).” Thus, a general contractor may be liable for wage and hour law violations committed by its subcontractors, sub-subcontractors, and so on.

The new law provides that a subcontractor must indemnify a general contractor for “any wages, damages, interest, penalties, or attorney’s fees owed as a result of the subcontractor’s violation.” However, such indemnification may be meaningless if the subcontractor is unable to pay such damages and costs. To the extent general contractors may be sued by subcontractor employees, the potential costs subject to indemnification will include the general contractor’s costs of defense.

This new law effectively imposes strict liability upon general contractors for wage and hour violations committed by subcontractors on their projects. This particularly disadvantages general contractors in defending such claims because the general contractor will most likely not have any time and attendance records such as those maintained by the direct employer (subcontractor). Any claims, even fraudulent claims, by employees of the subcontractor will be difficult to defend against without such employment records.

One way for general contractors to address this increased exposure is to require subcontractors to protect themselves against the possibility of wage claims by subcontractor employees by obtaining a bond or insurance. This protection will be particularly expensive for subcontractors as the prudent general contractor will likely require a bond for three times the amount of wages, plus anticipated attorneys’ fees and costs, as well as potential additional protections from sub-subcontractors to subcontractors. Such bonds may be required for up to three years because of the three-year limitations period for wage claims in Maryland. This may hit particularly hard small and new subcontractors who will likely find it more difficult in obtaining adequate bonds or insurance, which may thereby jeopardize them from obtaining work. General contractors may also demand information from subcontractors concerning the subcontractor’s wage payment practices, financial data, wage claim history, and sub-subcontractor similarly-related information.

The ramifications of this new law cannot be overstated. Prudent general contractors should begin now to consider steps they can take to prevent potential liability should a subcontractor—or a sub-subcontractor—be alleged or be found not to have paid its employees properly.

If you would like to discuss the contents of this Client Alert with an attorney, please contact Stanford Gann, Jr. and/or Jody Maier at (410) 321-0600.