The construction business in Maryland is about to get more expensive and complex.  On October 1, 2018, general contractors will become directly liable to employees of subcontractors for unpaid wages on a project for construction under the General Contractor Liability for Unpaid Wages Act (“Act”).  In addition, if a court finds that the wages being withheld were not part of a “bona fide dispute,” the court may award damages of three times the wage, plus reasonable attorneys’ fees and costs.  See Md. Code, Lab. & Empl. Art. § 3-507.2(b).

The Act effectively requires a general contractor to be a policeman for timely wage payments to a subcontractors’ employees.  This will add a significant risk and administrative costs to all construction projects.  These costs will ultimately be passed on to the end user of the project—consumers—in the form of increased rents, property costs, and retail prices.

The New Law

In the Spring of 2018, the Maryland General Assembly passed the Act and it became law without Governor Hogan’s signature by operation of the Maryland Constitution.  The Act will take effect on October 1, 2018, and adds the following text to Maryland Code, Labor and Employment Article 3-507.2:

In an action brought under subsection (a) of this section [payment of wages within two weeks], a general contractor on a project for construction services is jointly and severally liable for a violation of this subtitle that is committed by a subcontractor, regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.

2018 Md. Laws Ch. 846 (H.B. 1539); 2018 Maryland Laws Ch. 17 (S.B. 853) (emphasis added).

Per the Act, the term “construction services” “includes the following services provided in connection with real property: (1) building; (2) reconstructing; (3) improving; (4) enlarging; (5) painting; (6) altering; (7) maintaining; and (8) repairing.”  Md. Code, Lab. & Empl. Art. § 3-901(b).  Thus, the new law affects almost every aspect of construction.

The Act also includes a right for the general contractor to be indemnified by the subcontractor for such wages, unless there is an indemnification provision already in the construction contract or the nonpayment of wages arose due to lack of prompt payment by the general contractor to the subcontractor.

Potential Impacts To The Construction Industry

However, the right of indemnification should be of little comfort to general contractors.  On a project that encounters completion and payment issues, a general contractor could find itself defending mechanics’ lien claims on behalf of an owner while at the same time defending scores of these new wage claims from individual employees of the subcontractors.  If a subcontractor is insolvent or files bankruptcy, the indemnity could be worthless.

Moreover, the Act is vague.  It does not explain the extent of a general contractor’s liability if the employee has worked on multiple construction projects.  As currently written, an employee could join multiple general contractors to a lawsuit if that employee has worked on multiple projects, thereby paving the way for expensive litigation for the parties involved.

The Act also does not explain what the term “bona fide dispute” means in the construction context, nor does it expressly exempt a general contractor for liability where non-payment to a subcontractor is permitted under the construction contract.  It is possible that construction disputes involving backcharges, delays, and other issues will be litigated in an employee wage payment case to determine the extent of a general contractor’s liability.  Until such clarity is achieved, these and other issues will have to be litigated—at the cost of general contractors—to obtain certainty.

The Act also disincentivizes general contractors from working with smaller or unknown subcontractors where payment to employees is not ensured.  This means less work for startup companies, disadvantaged business entities, or smaller subcontractors.  Furthermore, general contractors are likely to require subcontractors to obtain wage payment bonds or insurance to protect themselves from wage claims.  This increases the cost of a construction project and precludes smaller subcontractors from work if they are unable to obtain requisite bonding.

Conclusion

With passage of the Act, Maryland joins the ignominious ranks of other states such as California and Oregon which have enacted similar business-chilling statutes.  General contractors and small, startup, and DBE subcontractors will bear the initial impact from the new law.  Ultimately, however, the increased costs will find their way to the Maryland consumer who buys homes or shops at the retail establishments in Maryland.

To determine how Watt Tieder can help address the impacts of the Act to your business, please contact Jonathan Wright: (703) 749-1062 or jwright@watttieder.com.