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General Contractors Beware of New Maryland Law

by Guy R. Jeffress, Esq.

The Maryland General Assembly passed Senate Bill 853, which took effect on October 1, 2018, that added the following text to Section 3-507.2 of the Maryland Code, Labor & Employment:

In an action brought under subsection (a) of this section, 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.

The Act now permits an employee of a sub-contractor, who was not paid in accordance with applicable Maryland wage/hour laws, the right of action against the general contractor even though there is no direct contractual relationship between the general contractor and the subcontractor’s employee. If a court finds that a sub-contractor failed, under certain circumstances, to properly pay an employee, the general contractor may be liable for treble damages, counsel fees, and other costs.

In light of the new risk created by this law we are recommending the following risk mitigation strategies for Owners, General Contractors and Senior Sub-Contractors involved in Maryland based construction projects:

  1. Inspection of Payroll Records – Include in your contracts a provision that requires subcontractors to provide certified and detailed payroll information with every pay application. If the information is not provided, the pay application is not rejected.
  2. Audit Clauses – Include provisions in your contracts that permits you to conduct “spot audits” or “interviews” with sub-contractor employees.
  3. Certifications – Require sub-contractors to certify or declare in their payment applications that they have checked/audited the payrolls of every sub-contractor at every tier to confirm the payment of employees.
  4. Insurance/Bonding – Require subcontractors to furnish payment and/or performance bonds or wage-hour insurance. To cover the entire statutory period for wage claims, these bonds or insurance will have to be maintained for three years after final payment of wages on the project.
  5. Broad Indemnity and Personal Guaranty Provisions – In addition to any existing general indemnification clause, include a specific clause or language addressing claims arising out of any violations of the Act. Require that the principals of all sub-contractors personally guaranty compliance with the Act and payment of employees.
  6. Flow Down of Terms and Conditions – Require that all clauses in the sub-contract relating to the Act and subcontractor’s obligations thereunder flow down to each subcontract tier.
  7. Obligation to Defend – In addition to indemnification obligations there should also be provisions all sub-contracts requiring the sub-contractor to defend the general/direct contractor for violations of the Act.
  8. Hiring Decisions – Include provisions giving the general contractor the power to approve or reject the hiring of sub-subcontractors of all tiers.
  9. Site Security – Implement site security to confirm identification of all employees on the job site so no previously unidentified individuals can later appear seemingly out of nowhere and claim that an employer/subcontractor did not pay them.
  10. Creation of Fiduciary Duty – “In-Trust” Requirements – Include a provision in all private works sub-contracts requiring sub-contractors to hold all payments received “in trust” for the benefit of the direct contractor and the benefit of the subcontractor’s employees, lower-tiered subcontractor employees, for the purpose of meeting the wage and benefit obligations owed not only to the subcontractor’s employees but the employees of any lower-tiered subcontractors.
  11. Increased Retention – Increase retention percentages, withholding, and back-charges depending on the sub-contractor and size of job.
  12. Identification of General Contractor – expressly note the identity of the general contractor in each contract. Project owners may want to include disclaimers that they are “not” acting as the general contractor.
  13. Three Years Statute of Limitations – A general contractor should retain pertinent records from all subcontractors for at least that long following project completion and should make sure that all indemnification obligations survive the completion of the project for that length of time as well.

Please contact us at 703-369-4738 with any questions.

*The information contained in this website is provided for informational purposes only and should not be construed as legal advice. The material on this website may not reflect the most current legal developments. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this site. Do not act or refrain from acting upon this information without seeking professional legal counsel.