On January 4, 2022, New York law will change dramatically to provide wage protection to workers employed by a subcontractor. If workers of a subcontractor (at any tier) are not paid their full wages and fringe benefits (known as construction wage theft) on a nonpublic job, then they will be able to make a claim directly against the contractor. The worker may recover liquidated damages and even attorney’s fees.  They will have this right even if the owner has not paid the contractor. The law applies to all nonpublic construction contracts on New York property except for certain contracts involving one- or two-family owner-occupied dwellings.  The new law makes the contractor strictly liable.  The contractor has an absolute duty to each worker to see that the worker is paid.

The law, signed on September 6, 2021, is intended to prevent payment abuses, such as those by unscrupulous subcontractors and labor brokers who do not pay their workers, Although the law does not say so explicitly, it is also designed to provide some protection to subcontractor workers who are incorrectly labeled as independent contractors.

The new law expands existing federal and state laws that have long made a public works contractor liable for a subcontractor’s failure to pay wages. Workers on private construction contracts now have the same protection against wage theft. If a subcontractor understates a worker’s hours, underpays the worker, or fails to pay required fringe benefits, the contractor will be liable. Workers have three years after the underpayment to commence a lawsuit.

The law allows the contractor to force the subcontractor to provide certified payrolls reports reflecting worker hours, wages and fringes, but this is only monitoring data, not proof of payment. If the subcontractor does not provide a required certified payroll report, the contractor can withhold payment to the subcontractor. However, the contractor has no protection if the dishonest subcontractor also lies on the certified payroll report.
Contractors need to take steps to protect themselves against liability. Obviously, careful selection of a financially viable subcontractor is important, but even the honest subcontractor who is financially responsible today may not be able to pay its workers tomorrow.

Unfortunately, the law does not give contractors a defense based upon their reasonable belief that a subcontractor has paid its workers. If the workers have not been paid, then acting in good faith is irrelevant. We recommend that contractors consider the following steps to provide them with additional protection:

• Requiring that a subcontractor submit frequent wage data provides some protection. Software exists to facilitate this task. Prevention of construction wage theft is easier when records are furnished daily, rather than on a biweekly basis.
• Due diligence and a good dose of “if it sounds too good to be true, then it is” is an important component of protection. Surprise inspections matching worker faces to job identification tags, and job gates accessible only with electronic swipe cards, should be considered.
• A contractor typically will not pay a subcontractor until the contractor receives from the subcontractor partial releases from the subcontractor’s suppliers and sub-subcontractors conditioned on payment.  The new law cannot be avoided by demanding signed  releases from workers.  The new law renders worker releases unenforceable.  Nonetheless, signed worker receipts are some evidence of payment.  There is an exception for union workers:  their collective bargaining agreement can make releases effective. 
• Require proof of actual payment of wages, such as electronic payment verification, payroll service company reports, or bank statements with cancelled checks.  Cash payments to workers should be prohibited. 
• Retainage and performance bonds may provide some protection if worker claims come in, but be sure that they cover the subcontractor’s nonpayment of wages. A subcontractor with questionable financials may be unable to obtain a bond or pay the premium. 
• Indemnities from owners and officers, large shareholders and their spouses, parent companies or affiliates for worker claims, defense costs, liquidated damages, etc., can be demanded as a condition to final payment if the contract so provides.
• Contractors should investigate their Employment Practices Liability insurance. That insurance may provide coverage, but exclusions may remove coverage, so a conversation with a knowledgeable insurance broker before a claim arises is appropriate.

The law creates tension between prompt payment that a contractor is required to make to a subcontractor and a contractor’s exposure for a subcontractor’s failure to pay wages. New York’s Prompt Payment Law requires that a contractor must pay a subcontractor within seven days after receiving payment from the owner. Seven days may not be enough time to verify the payment of wages, so contractors need to start seeking proof of wage payments before receiving money from the owner.  

Furthermore, the Prompt Payment Law is not triggered until the contractor receives payment from the owner. However, a contractor has no such protection when it comes to subcontractor worker wage claims. A bankrupt owner with a construction loan in default may cause a contractor to delay paying a subcontractor, but it provides no protection against wage claims from unpaid workers.

The Governor requested that the Legislature further amend the law to require worker notice to the contractor before suit. If the law is amended, we will report on the additional requirements.

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