California and Maryland General Contractors Liable for Subcontractors’ Wage and Hour Violations

Thompson Hine Update

Date: June 21, 2018

Key Notes:

  • General contractors are directly liable for any subcontractor’s failure to pay proper wages.
  • Liability provisions apply to private construction projects in California and Maryland.
  • General contractors and subcontractors face additional compliance burdens.

Recent developments in California and Maryland state law have significantly increased general construction contractors’ potential liability for subcontractors’ wage and hour violations. Construction managers and their human resources professionals should understand these developments and be aware of the potential for a national trend in this direction.

As of January 1, 2018, California law holds general contractors directly liable for subcontractors’ failure to observe wage and hour requirements for their employees on construction projects. This liability attaches regardless of whether the offending subcontractor is in a direct contractual relationship with the general contractor or is a lower-tier subcontractor. While similar liability provisions in the Davis-Bacon Act and state prevailing wage laws are limited to publicly funded construction projects, the new California law applies to private construction projects performed in the state, significantly expanding general contractors’ potential liability in the wage and hour arena.

There are, however, certain limitations and controls in place. Most importantly, a general contractor is only responsible for the unpaid wages, interest and benefits owed to a subcontractor’s employee, but not penalties or liquidated damages that may be awarded to an employee. A subcontractor’s employee cannot file a lawsuit against a general contractor, but instead must first take any wage and hour claim to the California Labor Commissioner’s Office. To help safeguard against potential violations, general contractors are now entitled to inspect subcontractor payroll and other records to determine compliance with wage and hour requirements. If a subcontractor refuses to comply with a request for payroll records, general contractors can withhold future payments until such records are provided.

Following in California’s footsteps, the Maryland General Assembly recently enacted similar legislation. Effective October 18, 2018, general contractors performing construction services projects in Maryland will be jointly and severally liable for a subcontractor’s failure to properly pay its employees. Like California’s law, the new law applies to private construction services projects and imposes liability for first-tier and lower-tier subcontractors’ wage and hour violations.

Unlike its West Coast counterpart, however, Maryland’s version does not limit a general contractor’s liability to unpaid wages, but also imposes liability for damages up to three times the wages owed, as well as attorneys’ fees and costs. While the new law is silent on whether a general contractor may withhold subcontractor payments or inspect payroll records, a subcontractor will be required to indemnify the general contractor for wages, penalties, fees and costs paid as a result of the subcontractor’s violations.

These new state laws’ ramifications are sweeping and could create substantial additional costs for both general contractors and subcontractors. General contractors may require additional personnel to not only ensure the contractor’s own compliance with applicable wage and hour obligations, but also to monitor subcontractors’ wage payment practices to confirm that their employees are properly paid. On the other side, subcontractors are likely to face increased requests for payroll and other wage records as general contractors seek to avoid potential liability. General contractors may also impose additional bonding requirements on subcontractors or divide payment in terms of materials and labor-related expenses, putting even more strain on subcontractors’ already tight cash flows. And if these new standards in California and Maryland gain momentum, it could result in a national trend that adds additional compliance and cost burdens to the construction industry in the name of providing greater protection for employees.

Thompson Hine will continue to monitor these developments and provide additional information on any similar legislation in the remaining 48 states.

FOR MORE INFORMATION

For more information, please contact:

Jeffrey R. Appelbaum
216.566.5548
Jeff.Appelbaum@ThompsonHine.com

Daniel M. Haymond
216.566.5896
Dan.Haymond@ThompsonHine.com

Matthew R. Kissling
216.566.5586
Matthew.Kissling@ThompsonHine.com

Benjamin B. McKelvey
216.566.5763
Benjamin.McKelvey@ThompsonHine.com

or any member of our Construction or Labor & Employment groups.

This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.

This document may be considered attorney advertising in some jurisdictions.

© 2018 THOMPSON HINE LLP. ALL RIGHTS RESERVED.