Shifting Liability: A Lesson for General Contractors

Jeanette Luna | Goldberg Segalla | May 13, 2019

Imagine this, you, a general contractor based in New Jersey, just secured a project from one of the biggest retailers to do some work at its warehouse in New York. Given the magnitude of the project, part of the work is subcontracted to another New Jersey company that guarantees it has workers’ compensation insurance. The project begins and you are unfamiliar with the number of subcontractor employees on-site, their day-to-day work responsibilities, or how work tasks are assigned.

Several weeks later, one of the subcontractor’s employees is gravely injured when a pipe he was removing from a ceiling falls on his head. The injured worker has suffered a skull fracture requiring surgery and faces an undetermined amount of lost time and medical treatment. Naturally, he retains counsel and files a New York State workers’ compensation claim. The subcontractor denies the claim, raising as its first defense “no NYS workers’ compensation coverage.”

Immediately, the claimant’s counsel raises Workers’ Compensation Law Section 56 and that is when you first become aware of the claim. Section 56 imposes liability on a general contractor in the event that a subcontractor is uninsured and one of its workers gets injured while performing work for the general contractor. If the law judge rules that Section 56 applies, the general contractor or its carrier is liable for workers’ compensation benefits of the uninsured subcontractor’s employee. Essentially, the general contractor has to assume responsibility for the subcontractor’s failure to secure proper insurance, as well as the consequences including substantial fines and penalties.

The implications become more serious when the claim is controverted by both the subcontractor and general contractor’s respective carriers. In that situation, the general contractor may be barred from asserting key defenses such as no employer-employee relationship or no accident arising out of the scope of employment. Therefore, the general contractor may have to rely on counsel for the subcontractor to litigate those issues before it is determined whether it will be held liable for the life of the claim. The general contractor has to trust someone with unaligned interests to properly defend it. This situation is a catalyst for further litigation outside the compensation landscape.

This situation can be avoided by implementing the following best practices:

  • Mandate that workers’ compensation coverage is required as part of any subcontractor agreement.
  • Request a copy of the workers’ compensation policy and certificate of insurance.. Cross reference not only the work locations but the dates the subcontractor will be doing work for you. If the work crosses state lines, then a policy is needed for each state. If the subcontractor’s policy only covers it until June 2019 but your work extends until August 2019, request that a renewed policy be produced.
  • Put it in writing. In the subcontractor agreement include clear and concise language identifying the workers’ compensation policy and the dates and locations covered.
  • When in doubt, check the New York State Workers’ Compensation Board’s website and conduct a coverage search under the subcontractor’s business name to confirm coverage.

Taking these steps may appear tedious or redundant, but in the long run, it can save a lot of time and money and prevent unnecessary litigation.

Illinois Considers Following Trend Toward Making General Contractors Liable for Wages of Subcontractors

James Rohlfing | Construction Industry Counselor | April 23, 2019

A bill pending in the Illinois legislature (HB2838) exemplifies a nationwide trend in the construction industry to hold a contractor who has a direct contract with an owner (“Direct Contractor”) liable for the unpaid wage and fringe benefit obligations of its subcontractors on a private project. Direct Contractors already have liability for employee wages owed by their subcontractors on public projects covered by the Davis Bacon Act, and the same responsibility is owed under the prevailing wage acts of many states. Direct Contractors may also have liability for subcontractors’ wages on private projects pursuant to some states mechanics lien acts, as well as obligations contained in union collective bargaining agreements to which a Direct Contractor may be signatory.

The effort to expand the obligation of Direct Contractors to guarantee payment of subcontractor employees on private projects received a kick start last year when California and Maryland enacted laws making Direct Contractors responsible for the unpaid wages and fringe benefits of all workers in the construction chain. A review of the California and Maryland laws, as well as the bill pending in Illinois, suggests states should be cautious in enacting such laws while they weigh the benefits against the difficulties that might result.   

In California, a Direct Contractor contracting for the construction of a private building project as of January 1, 2018 is liable for any debt owed to a wage claimant, or a third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting in furtherance of the Direct Contractor’s contract with the owner. The Direct Contractor’s liability includes unpaid wages, and fringe benefits, such as health and welfare contributions, plus interest and attorneys’ fees, but not penalties. Interestingly, under the California law, employees may not bring an action to enforce the law. Instead, a complaint may be brought by: 1) the California Labor Commissioner; 2) a labor-management cooperation committee; or 3) a labor union to collect unpaid fringe contributions. The property of a Direct Contractor may be attached to satisfy a judgment entered against it. Direct Contractors have the right to request payroll records from their subcontractors and to withhold payment if the request is not fulfilled.

A Maryland law which became effective October 1, 2018 also provides that Direct Contractors are liable for the wage obligations of subcontractors at any tier. The Maryland law permits an action to be brought at any time within three years after wages are due, while the limitations period in California is one year. In addition to liability for interest and attorneys’ fees, as provided by the California law, a Maryland Direct Contractor must pay a penalty of three times the unpaid wage. Though Maryland’s law requires a subcontractor to indemnify a Direct Contractor for liability under the law, that is little conciliation for the Maryland Direct Contractor. The subcontractor has already failed to pay its own workers, and in any event, a right to indemnification likely is available under common law. Finally, Maryland’s law does not expressly require a subcontractor to furnish payroll records to a Direct Contractor, though that right could be established by contract.

The bill pending in the Illinois legislature closely resembles the California law. It would impose liability on Direct Contractors for wage claimants of subcontractors at any level on private projects, and a claim could not be brought directly by a wage claimant. Also, as in California, Illinois would charge a Direct Contractor interest and attorneys’ fees but not penalties, and an action would have to be brought within one year from when payment was due.   

Illinois might be well served to first study the effect of recent enactments in other states before launching a similar law. Specifically, the Illinois proposal leaves the following questions unanswered:

  • Would Direct Contractors require all subcontractors to furnish payment bonds to guarantee wages are paid?
  • Would smaller and newer subcontractors who cannot provide bonds be unable to compete on most private commercial projects?
  • How much additional administrative work would be required to track whether subcontractors were paying all employees?
  • Would the payment process be slowed for all subcontractors, while proof of payment by lower tiers is gathered, putting further pressure on cash flow?
  • What role would politics play in whether a labor management cooperation committee would bring suit against one of its large contractor members?
  • Does the word “subcontractors” include material suppliers, as it does under the Illinois Mechanics Lien Act, or does it only include subcontractors covered by the prevailing wage act?
  • Are jobs paid for by public funds on private property or projects on public property using private funds included as “private” projects?
  • If attorneys’ fees are awarded to a prevailing wage claimant, should they also be available to a successful Direct Contractor?
  • Does the provision permitting the attachment of a Direct Contractor’s property to collect a judgment differ from existing law and if so, in what way? 

For hundreds of years, American jurisprudence has recognized the distinction between independent contractor and agency law. Illinois and other states interested in following the examples of California and Maryland should examine the experiences in other states with such laws to help grapple with those questions.

The Court of Federal Claims Provides Guidance on Differing Site Conditions and Superior Knowledge Claims

Traeger Machetanz | Davis Wright Tremaine LLP | April 22, 2019

A recent case from the Court of Federal Claims provides us instruction on differing site conditions and superior knowledge claims. The case arose out of a maintenance dredging contract issued by the United States Army Corps of Engineers (“USACE”). In North American Landscaping, Construction and Dredge Company, Inc. v United States, 17-903C (March 15, 2019), the contractor failed to timely complete its dredging contract and was assessed liquidated damages. In response, the contractor filed a claim for an equitable adjustment and requested a time extension for excusable, compensable delay. The Contracting Officer denied the contractor’s claim and the contractor then filed its lawsuit in the Court of Federal Claims.

The contractor and USACE each moved to dismiss or obtain summary judgment dismissal of several of the other party’s claims. In ruling on the cross-motions, the Court observed that the contractor’s claims relied principally upon the theory that the tug and barge traffic was far greater than indicated in the solicitation documents (a Type I Differing Site Condition), with a secondary emphasis on the theory that the government withheld critical information from it (the superior knowledge doctrine).

With respect to the Type I differing site condition claim, the Court stated that the solicitation documents gave no indication of the amount of tug and barge traffic that the contractor would experience during its dredging operations. Consequently, the Court held as a matter of law that the contractor could not prove that the conditions encountered were materially different from those indicated in the contract, and dismissed the contractor’s differing site condition claim.

The Court then turned to the contractor’s superior knowledge claim. The Court noted that the four elements of proof required to obtain relief on a superior knowledge claim are: (1) a contractor undertook to perform without vital knowledge of a fact that accts performance costs or duration; (2) the government was aware the contractor had no knowledge of and had no reason to obtain such information; (3) any contract specification supplied misled the contractor or did not put it on notice to inquire; and (4) the government failed to provide the relevant information. In this case, the Court held that the contractor made no showing that USACE was aware that the contractor was unaware of the frequency of barge traffic at the project locale. Accordingly, the contractor failed to prove the second element of a superior knowledge claim as a matter of law.

The Court then stated that more importantly, the solicitation noted the existence of barge traffic and periodic performance delays due to barge traffic, so the contractor was on notice that it had a duty to inquire as to the conditions of performance and was expressly invited to do so in the solicitation (site investigation clause). Because the solicitation provisions did not mislead the contractor, and because the solicitation put the contractor on notice to inquire as to conditions of performance, the contractor could not establish a breach of contract claim under the superior knowledge doctrine.

The Court also dismissed the contractor’s claim for excusable delay for unusually severe weather on the basis that it was time-barred due to its untimeliness. Finally, the Court held issues of fact precluded summary disposition of the contractor’s re-dredged quantity costs claim.

The teaching point from the decision is that contractors should conduct site investigations when they are invited to do so pursuant to the terms of the solicitation. Failure to do so can undermine both a differing site conditions claim and a superior knowledge claim. 

Stopping A Zoning Enforcement Action In Court

John Armentano | Farrell Fritz | April 23, 2019

Builders, developers and property owners are often cited for zoning violations that become the subject of criminal enforcement proceedings in court (i.e. appearance tickets).  Certainly, a party can have the court decide the matter, however, an appeal to a Board of Zoning Appeals can be used to stay any and all court enforcement proceedings.  This can be a particularly useful tool, when a property owner or developer is cited for zoning code violations that may shut down activities and force a timely and protracted court battle.

In fact, New York Town Law Section 267-a(6) provides a clear path for a stay to have zoning issues resolved before local zoning boards rather than in a judicial proceeding.  N.Y. Town Law Section 267-a(6) and its correlating village and city law sections provide as follows:

6. Stay upon appeal.  An appeal shall stay all proceedings in furtherance of the action appealed from, unless the administrative official charged with the enforcement of such ordinance or local law, from whom the appeal is taken, certifies to the board of appeals, after the notice of appeal shall have been filed with the administrative official, that by reason of facts stated in the certificate a stay, would, in his or her opinion, cause imminent peril to life or property, in which case proceedings shall not be stayed otherwise than by a restraining order which may be granted by the board of appeals or by a court of record on application, on notice to the administrative official from whom the appeal is taken and on due cause shown (emphasis added).

In People v. Bell, 183 Misc.2d 61 (Justice Ct., Village of Tuckahoe 2000), the Village building inspector issued appearance tickets returnable in the Village’s Justice Court for (1) no certificate of occupancy, (2) change of use of land without obtaining a certificate of occupancy, (3) no site plan approval, and (4) no screening of activities.  A jury trial was scheduled for September 28, 1999.  On September 27, 1999, Bell Atlantic appealed the subject matter of the appearance tickets to the Zoning Board and claimed a stay under section 7-712-a(6) of Village Law (the correlating provision of Village Law regarding stays).  The appeal by Bell Atlantic sought, among other things, to “overturn decision of the Village of Tuckahoe Building Inspector that the present use of the premises is a change of use that requires site plan approval and a certificate of occupancy for the premises.”

In Bell, the Village did not question Bell Atlantic’s ability to appeal the building department’s determination to the Board of Zoning Appeals, but challenged the stay of criminal proceedings in the Village Justice Court.  In upholding the stay, the court rejected the Village’s position as exalting form over substance.  The Court reasoned that the statute mandates a stay when the issue before the court and the Board of Zoning Appeals are the same, because the purpose of the statute is to obtain a definitive ruling from the Zoning Board of Appeals before making a judicial determination.  This avoids conflicting rulings from a judicial determination and the Board of Zoning Appeals.  The fact that the appeal did not originate with a denial of an application or notice of violation is immaterial.  Id.

Based on Bell, it appears that any action or decision of the building department, even a criminal enforcement proceeding, is automatically stayed by appealing such action to the Zoning Board of Appeals, as a matter of law.  This can be a powerful tools, when a property owner is faced with a potential court proceeding for zoning violations.  This ability to “stop the clock” may in turn provide an ability to negotiate a practical solution.

It must be noted that appeals of decision by a zoning enforcement officer cannot be neglected.  Such an appeal must be taken within sixty days after the filing of any order, decision, interpretation or determination of the administrative official, by filing with such administrative official and with the board of appeals a notice of appeal.  See, Town Law Section 267-a(5)(b).

When is a “Willful” Violation Willful (or Not) Under California’s Contractor Enforcement Statutes?

Garret Murai | California Construction Law Blog | March 4, 2019

The enforcement statutes applicable to the California Contractors’ State License Board aren’t exactly models in clarity. A few examples:

  1. Business and Professions Code Section 7107:  Abandonment without legal excuse of any construction project or operation engaged in or undertaken by the license as a contractor constitutes a cause for disciplinary action.
  2. Business and Professions Code Section 7109: A willful departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, unless the departure was in accordance with plans and specifications prepared by or under the direct supervision of an architect.
  3. Business and Professions Code Section 7110: Willful or deliberate disregard and violation of the building laws of the state, or any political subdivision thereof, . . . or of the safety or labor laws or compensation insurance laws or Unemployment Insurance Code of the State, or of the Subletting and Subcontracting Fair Practice Act, or violation by any licensee of any provision of the Health and Safety Code or Water Code, relating to the digging, boring, or drilling of water wells, constitutes a cause for disciplinary action.

We’ve had lively, late-evening debates in my office over what constitutes “abandonment without legal excuse” under Business and Professions Code Section 7107, what a “willful departure” and  “in any material respect” under Business and Professions Code Section 7109 are, and what “willful or deliberate disregard” under Business and Professions Code Section 7110 really means.

The exciting lives of construction attorneys. At least, on occasion, it’s followed by a beer.

While it’s the job of a lawyer to argue over what a statute means and how it should be applied, it’s the judiciary’s job to play referee and actually make those calls. And the judiciary has made a call, at least with respect to one of these code sections.

In ACCO Engineered Systems, Inc. v. Contractors State License Board, 2nd District Court of Appeals, Case No. B282944 (Nov 15, 2018), the Court of Appeal wrestled with the meaning and intent of the term “willful” under  Business and Professions Code Section 7110 and whether a violation required “specific” or “general” intent.

ACCO Engineered Systems, Inc. v. Contractors State License Board

In 2014, ACCO Engineered Systems, Inc. received notification of a complaint filed with the California Contractors State License Board alleging that ACCO had replaced a boiler at a commercial building in Los Angeles, California without obtaining the required permits. Upon receiving notification of the complaint, ACCO conducted its own investigation and determined that permits should have been obtained for the boiler under Los Angeles’ municipal building code, belatedly obtained the necessary permits in July 2014, and informed the CSLB that the failure to obtain the necessary permits was due to the inadvertence of a lower-level employee.

The CSLB later issued a citation imposing a $500 civil penalty against ACCO for violating Business and Professions Code Section 7110, which provides, in pertinent part, that the “[w]illful or deliberate disregard and violation of the building laws . . . constitutes a cause for disciplinary action.” ACCO appealed the decision and an administrative hearing was held in September 2015.

Following the administrative hearing, the administrative law judge issued his decision finding that ACCO’s failure to obtain a permit before replacing the boiler was not “deliberate” within the meaning of Business and Professions Code Section 7110, but that ACCO’s conduct was “willful” under the statute, notwithstanding ACCO’s argument that its failure to obtain necessary permits was an inadvertent mistake. Noting that ACCO took efforts to immediately remedy the situation, however, the administrative law judge reduced the penalty from $500 to $200.

Legal fees apparently being no impediment, ACCO filed a petition for writ of administrative mandamus, appealing the decision to the Superior Court. ACCO’s petition, however, didn’t fall on kind ears. The Superior Court denied the petition finding that the term “willful” as used in Business and Professions Code Section 7110 only requires a showing of “general,” not “specific,” intent and that when ACCO’s project manager made the decision to proceed without a permit without first consulting with ACCO’s in-house permitting coordinator, as company policy required, he acted with general intent.

ACCO appealed.

The Appeal

The 2nd District Court of Appeal, while noting that the term “willful” is not defined in Business in Professions Code Section 7110, explained that it must be construed in harmony with similar statutes and the intent of those statutes, which with respect to the enforcement statutes applicable to the CSLB is to “protect the public against dishonesty and incompetency in the administration of the contracting business.”

Under a similar statute, Business and Professions Code Section 7109, which provides that a “willful” departure in any material respect from accepted trade standards for good and workmanlike construction constitutes a cause for disciplinary action, earlier cases have “require[d] only a general intent to perform an act, not a specific intent to violate a law,” explained the Court of Appeal.

Further, rejecting ACCO’s argument that such an application turns the statute into a strict liability statute, the Court of Appeal stated that it does not:

We can imagine the absence of willful or deliberate disregard of building laws occurring in the following scenario: A contractor attempts to obtain a building permit but is unable to obtain one because the local permitting authority incorrectly believes no permit is required. Even if it is later established that the permit should have been issued, the contractor’s failure to obtain the required permit cannot be considered a “willful’ violation of the applicable laws, and therefore discipline under section 7110 would not be warranted. We can also imagine the absence of willful or deliberate disregard of building laws where a city’s permitting requirements are ambiguous or subject to interpretation.

Finally, the Court of Appeal rejected ACCO’s argument that by interpreting the term “willful” under Business and Professions Code Section 7110 to encompass even actions involving general intent it precludes a contractor from being able to show that it acted in good faith. The Court held that unlike under criminal statutes “moral blameworthiness is not a necessary element of willful misconduct” under Section 7110, since the purpose of the law is not to punish but rather “toprotect the public against dishonesty and incompetency in the administration of the contracting business.”

Conclusion

So there you have it. Except in very limited circumstances, a contractor’s actions will be considered “willful” under the enforcement statutes of the CSLB irrespective of whether the contractor intended the result or not. I think someone owes me a beer.