April 20, 2018

Maryland Imposes Sweeping New Liability for Construction General Contractors

4 min

In the waning days of the legislative term, the Maryland General Assembly passed legislation making construction general contractors jointly and severally liable for the failure of subcontractors to pay their employees in accordance with Maryland's wage and hour law. The governor did not veto the bill and, instead, allowed it to become law. As a result, the new law will become effective October 1, 2018.

The ramifications of the new law are sweeping. Under Maryland law, an employer that fails to pay its employees in accordance with Maryland's wage and hour laws may be liable to the employee or employees for up to three times the wages owed, plus reasonable attorneys' fees and other costs. Until now, this liability has largely been confined to the direct employer of the employees. Although the definition of "employer" can include corporate individuals responsible for controlling the wages and terms and conditions of employees, separate legal entities generally have not been legally responsible for another employer's failure to properly pay its employees.

The new law changes this by providing that a general contractor on a construction services project will be jointly and severally liable for a subcontractor's failure to properly pay its employees. The term "construction services" is broadly defined and includes "building, reconstructing, improving, enlarging, painting, altering, and repairing" provided in connection with real property. The potential liability imposed by the new law is not limited to first-tier subcontractors, but extends "regardless of whether the subcontractor is in a direct contractual relationship with the general contractor." In other words, a general contractor may be liable for wage and hour law violations committed by its subcontractors, sub-subcontractors, and so on.

The law does provide that a subcontractor must indemnify a general contractor for "any wages, damages, interest, penalties, or attorney's fees owed as a result of the subcontractor's violation." This protection, however, may be meaningless if the subcontractor is unable to pay such damages and costs. The law also leaves open the possibility that employees who contend they were improperly paid by their direct employer may sue both the general contractor and their direct employer. To the extent general contractors are allowed to be sued, the potential costs subject to indemnification will be increased by the general contractor's costs of defense.

The implications of the new law for general contractors cannot be overstated. The new law effectively imposes strict liability on general contractors for wage and hour violations committed by subcontractors on their projects. Because the general contractor is not the direct employer, it may not have any time and attendance records relating to the employees and, thus, will have no real ability to defend against claims, including potentially fraudulent claims by workers employed by subcontractors.

The potential consequences for subcontractors are no less traumatic. In order to protect themselves against illusory indemnification, in lieu of or in addition to obtaining insurance themselves, general contractors will likely require subcontractors to obtain a bond or insurance to protect against the possibility of wage claims by subcontractor employees. Apart from increasing the cost of construction projects in Maryland, such requirements will prove problematic for many subcontractors. In order to obtain adequate protection, general contractors will likely require subcontractors to obtain a bond not simply for the amount of wages, but for three times the wages, anticipated attorneys' fees, and costs, as well as additional protection from sub-subcontractors to the subcontractor. In addition, because the limitation period for wage claims in Maryland is three years, prudent general contractors will require that such bonds or insurance be maintained for at least that period of time. To the extent smaller or start-up subcontractors may experience difficulty obtaining adequate bonds or insurance, the new law will effectively preclude such subcontractors from obtaining work. Beyond this, subcontractors can expect new information requests concerning their pay practices, financial data, and wage claim history.

It is too soon to predict the actual effect of the new law, although, as noted, its effect is potentially enormous. Prudent general contractors should begin now to consider steps they can take to prevent potential liability should a subcontractor—or a sub-subcontractor—be alleged or be found not to have paid its employees properly. We will continue to monitor developments regarding this new law.