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.