General Contractor Liability For Subcontractors’ Failure To Pay Employees

Late last year a new and important Maryland law went into effect that established general contractor liability for their subcontractors’ failure to pay their workers. 

 Generally, an employee who has not been paid in accordance with the employer’s regular pay practices can sue his or her employer for the wages that are due, plus attorneys’ fees and, importantly, treble (triple) damages.  As such, the employer faces significant penalties if it fails to pay its employees. Under this general wage claim mechanism, a subcontractor’s employees can sue their employer – the subcontractor – if they were not paid.  If they prevailed, they could recover three times the wages due and attorneys’ fees from their employer, but not from the general contractor.

 The new law changes this and permits the subcontractors’ employees to sue the subcontractor and the general contractor, who would be jointly and severally liable for the full amount of any recovery including penalties and attorneys’ fees.  In addition to greatly expanded liability, this presents several issues for general contractors:

             •           The general contractor likely has very little or no control over subcontractors’ pay practices.  As such, it is usually not in a position to monitor or know of any subcontractor that fails to pay its employees.  Furthermore, in the event a claim is filed, a contractor probably does not have access to the subcontractor’s daily reports and other records necessary to defend against employees’ claims.  While one would hope that subcontractors maintain accurate records, this is by no means guaranteed.

             •           The law applies to all subcontractors, including those not in privity with the contractor (i.e. sub-subcontractors). 

             •           The general contractor is jointly and severally liable, meaning that employees can collect the full amount of any judgment from the general contractor without collecting from the subcontractor. 

             •           While the statute provides for indemnity from the subcontractor (as do many subcontracts), indemnity (either statutory or contractual) from a subcontractor is likely meaningless if the subcontractor has already failed to pay its employees. 

             •           The statute also provides that a subcontractor does not have to indemnify the general contractor if the failure to pay wages arose because the general contractor failed to pay the subcontractor in accordance with the subcontract.  This raises problems if the general withholds payment to the subcontractor for a questionable reason, and the withholding ultimately causes the subcontractor to fail to pay its employees.  If the reason for the withholding is ultimately found to be invalid, then the general can be liable for not only the breach of its subcontract but also the associated wage claims against the subcontractor that arose because of the failure to pay the subcontractor. 

 Going forward, general contractors should be proactive.  First, they may want to audit all downstream subcontractors’ wage payments and obtain from the subcontractors documents supporting proper calculation and payment of wages. Second, they should check insurance coverages and determine whether subcontractors’ employees’ wage claims are covered.  If not, adding coverage for these claims is probably wise.  Third, contractors should ensure that their subcontracts contain adequate indemnification provisions that are more robust than the statute and that subcontractors are financially able to actually indemnify them (for example, bonding these claims).