On January 4, 2022, a new law will come into effect in New York concerning nonpayment of wages to construction workers on private work (“construction wage theft”). Workers employed by a  subcontractor (at any tier) who are not paid their full wages and fringe benefits on a job can recover from the contractor. Labor Law §198-e and General Business Law §756-f (modifying the Prompt Payment Law).

Getting paid on a construction job is never easy. Those at the top of the construction chain are better able to weather payment failure than those at the bottom. Workers have the least capacity to weather payment failure. The new law intends to prevent payment abuses, such as those caused by labor brokers not paying workers and subcontractors mislabeling their workers as independent contractors.

Making a contractor liable for his subcontractor’s failure to pay workers is not new. The federal Davis Bacon Law and New York Labor Law §220 have long made a public works contractor liable for a subcontractor‘s failure to pay wages and fringes to workers. The new law extends some of these requirements to private work but does not deal with prevailing wages and job classification issues. If a subcontractor shorts his workers’ hours, underpays workers and fails to pay workers’ fringes, the contractor can be liable.

The contractor is additionally liable for liquidated damages equal to the wages and fringes owed, and attorney’s fees. A suit can be brought up to three years after the underpayment.

The contractor can require certified payrolls reports (CPRs) from a subcontractor, reflecting worker hours, wages, and fringes. If the subcontractor does not provide a CPR, the contractor can withhold payment to the subcontractor under the Prompt Payment Law.

One- and two-family home improvement contracts are excepted from the new law.
The New York Governor signed the law on condition that the Legislature enact requirements as to notice to the contractor. We will report on these when signed.

The subcontractor’s failure to pay workers is not an issue that can always be obviated by a contractor’s investigation into its subcontractor’s financial responsibility before subcontracting. Yesterday’s financially responsible subcontractor may be monetarily desperate today, and not pay its workers tomorrow.  
 
Collection of records (first reviewed after claims are made) will not protect a contractor from a bankrupt subcontractor’s workers years after final payment. Even CPRs, a subcontractor’s indemnity and performance bonds are sometimes inadequate remedies to protect a contractor.

Frequent electronic data submission by a subcontractor is one solution. Davis Bacon software exists for regular subcontractor electronic transmittal of worker wage and hour data. Electronic portals need to be established for regular transmittal of such data. Prevention of construction wage theft is easier when records are furnished daily, rather than on a biweekly basis.

There are other techniques: e.g., surprise inspections matching worker faces to job id tags, job gates accessible only with electronic swipe cards. Note, however, simply obtaining signed worker releases will not suffice. The new law voids workers’ written releases of their wage claims.

The law creates tension between prompt payment to a subcontractor and a contractor’s exposure to a subcontractor’s workers’ wage claims. The Prompt Payment Law recognizes cash flow is the lifeblood of the construction industry and encourages early release of retention and final payment. But after release of retainage and final payment, a contractor remains exposed to a subcontractor’s workers’ claims.

Affiliate or parent indemnity for future worker claims can be demanded as a condition to final payment. A retainage bond is another option. But a thinly capitalized subcontractor may have no creditworthy affiliate/parent and may be unable to pay the premium for a retainage bond. A practical alternative would be to require written personal indemnity from a subcontractor’s principals and many of its largest shareholders/members as a condition to final payment—provided it was made a condition of final payment in the subcontract.

Lastly, when a subcontractor’s workman’s claim is received, the contractor should investigate its Employment Practices Liability (“EPL”) insurance. The new law in a broad way makes the worker the contractor’s employee. The EPL policy may provide payment of defense costs, but not an indemnity. EPL exclusions may remove this coverage.

If you have any questions concerning the new Construction Wage Theft Law, contact Eugene H. Goldberg at Gallet Dreyer & Berkey LLP.