As you know—in a move dramatically expanding wage liability for most construction contracts created or modified on or after January 4, 2022—the New York State legislature amended the Labor Law last year to hold a general contractor jointly and severally liable for wages that its subcontractors fail to pay to their employees and independent contractors. The legislature also added a new section to New York's General Business Law, which now allows general contractors to audit a subcontractor's payroll records, and to withhold payments owed to the subcontractor if records are not provided.
Imagine that General Construction Company contracts with Steel Sub Corporation to complete the steel work required for a commercial space in midtown Manhattan. What should General Construction do to avoid shouldering liability for wage and hour claims if Steel Sub does not make proper payments to its employees? What should Steel Sub be forced to do as part of the project to mitigate any risk to General Construction?
This article examines the audit rights of general contractors and provides some best practices to reduce their exposure to liability for a subcontractor's improper wage practices.
Tip 1: Preemptively Collect Your Subcontractors' Wage and Hour Records
Under the new law, general contractors are permitted to request certified wage and hour records from their subcontractors. Those records must contain sufficient information for the general contractor to determine whether the subcontractor is making proper wage and other benefit payments to its workers. Savvy contractors like General Construction should take advantage of this tool to ensure subcontractor compliance by regularly collecting Steel Sub's wage statements as a first step to limit exposure to liability.
One way that General Construction can streamline this process is to include a clause in its construction contract that requires Steel Sub to provide wage and hour records on a recurring basis. The clause should state that General Construction has a right to audit Steel Sub's wage and hour records under law, and its refusal to provide such records on the timetable provided by contract will result in the withholding of payments to Steel Sub. The contract should also expressly state that Steel Sub agrees to provide this information in a timely manner upon any request by General Construction.
Tip 2: Have Legal Counsel Review the Wage and Hour Records
Contracting for records disclosure is a good first step, but simply requesting and receiving the certified wage and hour records from a subcontractor will not insulate a general contractor from claims, because compliance deficiencies may not always appear on the face of the records themselves.
For example, imagine Steel Sub provides records for its employee Will Welder, indicating that he worked 60 hours during a two-week period, and was paid at his regular rate for those 60 hours. If the payroll records do not clearly delineate the hours worked in each workweek, and Will actually worked 60 hours in one week and none in the next, Steel Sub has not properly compensated Will for 20 hours of overtime. To prevent against wage and hour compliance risks hiding behind the face of payroll records, general contractors should have their legal counsel review subcontractor records on a regular basis. In our example above, if General Construction identifies the issue with Will Welder, it can raise the issue with Steel Sub for remediation before it ever becomes a legal headache.
This is just one example of an issue that a thorough review by experienced counsel could expose in a subcontractor's payroll practices. Skilled wage and hour attorneys may also vet pay records and practices for other issues, including whether a subcontractor has failed to comply with recordkeeping regulations, pay frequency rules, prevailing wage rules, or worker classification requirements.
Tip 3: Include Indemnification Clauses in Subcontractor Agreements
In addition to developing a consistent audit practice for subcontractors, indemnification is another effective approach to help mitigate wage and hour liability risk. Contractors should amend their subcontractor agreements to require subcontractors to defend, hold harmless, and indemnify the contractor against any wage and hour claims that may result from a subcontractor's failure to properly compensate its workers. The indemnification provision should also contemplate recovery for the additional fees and penalties that a general contractor may incur because of the subcontractor's payroll errors. While an indemnification agreement cannot diminish the workers' rights to bring an action against any and all contractors involved in the project, it provides an avenue for recovery of any amounts ultimately spent by or assessed against the general contractor for employee claims attacking a subcontractor's pay practices.
Although general contractors are often not involved in the day-to-day management of the subcontractor's workers on a construction project, they are now responsible for ensuring that these workers are paid in an accurate and timely manner. Given that general contractors may now be on the hook for payments to workers who were not properly paid by a subcontractor, it is crucial that contractors take all available measures to shield themselves from preventable wage and hour lawsuits. If you have any additional questions regarding how to avoid exposure to liability under the new law, please contact the authors of this article or any other member of Venable's Labor and Employment Group.
* The authors of this article thank Samantha Furman, law clerk, for her assistance in its preparation.