New Maryland Law Greatly Expands Contractor Liability Regarding Wage Payment and Collection

On October 1, 2018, Maryland Senate Bill 853, also known as Maryland’s General Contractor Liability for Unpaid Wages Act, went into effect, expanding the liability of a general contractor on a construction project under the Maryland Wage Payment and Collection Law. In the paragraphs below, we detail what this means for contractors, subcontractors and their employees.  

Generally, the Maryland Wage Payment and Collection Law requires that an employer set regular pay periods and pay employees at least once every two weeks or twice each month. In addition to setting requirements for the notice an employer must provide to an employee regarding deductions, pay dates, leave benefits and rate of pay, among other things, the law requires an employer to pay an employee all wages due for work he or she performed before his or her termination on or before the day on which an employee would have been paid the wages had the employment not been terminated. It also provides both an administrative mechanism for enforcement of the law and a private right of action to an employee who has not been paid in a timely manner. Importantly, as long as the wages were not withheld as a result of a bona fide dispute, the law authorizes an award to the employee of up to three times the amount of the wages, attorney’s fees and costs if a violation is found.

Maryland Senate Bill 853 amends this private right of action for employers and employees in the construction services industry and provides that a general contractor on a project for construction services shall be jointly and severally liable for any violation that is committed by a subcontractor “regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.”

In other words, under this new law, if construction subcontractors do not properly pay their employees, both subcontractors and their general contractors may now be liable to the employee or employees for up to three times the owed wages and attorneys’ fees. This applies to subcontractors that are not even directly contracted with the general contractor.

Additionally, construction services under the new law are broadly defined to include “building, reconstructing, improving, enlarging, painting, altering, and repairing” in relation to property. Under this new law, general contractors are liable for any wage and hour violations committed by subcontractors, sub-subcontractors and so on that they may hire for a project. By expressly holding a general contractor on a construction services project jointly and severally liable, the law expands a general contractor’s liability for unpaid wages to far more than the subcontractors with which it is directly contracted.

Importantly, the time frame for this liability is expansive as well. A claimant may make a claim against BOTH the general contractor and the non-paying party just 2 weeks after a payment is missed. After that, a claimant has three years to make a claim.

On the bright side, the new law requires that when a subcontractor’s employee makes a claim against the general contractor, that subcontractor must indemnify the general contractor for any wages, damages, interest, penalties and attorney fees. However, a subcontractor might not always have to indemnify the general contractor. There are two exceptions: (1) when indemnification is provided for in a contract between the general contractor and the sub; or (2) when a violation arose due to the general contractor’s failure to make timely payments to the subcontractor.

That being said, while a subcontractor will now have to indemnify a general contractor in most instances, this will not make up for the time and stress a general contractor will face when claims arise. Also, to the extent that the subcontractor has not paid wages owed to its own employees because it is cash-strapped, general contractors relying on the law’s requirement that the subcontractor indemnify it for the wages, damages, etc., may find themselves unable to enforce or collect from such a subcontractor.

In order to minimize the risks associated with this new law, general contractors should take several steps. First, general contractors should revise and strengthen their subcontract forms so that audit provisions are included and extend them throughout all subcontractor tiers. To that end, general contractors should require that their subcontractors enter into similar agreements with their subcontractors/material men. Second, general contractors should revise and strengthen their subcontract forms to ensure that they are fully indemnified, defended and held harmless for any wage claims arising from this new law—this may include requiring subcontractors from lower tiers to indemnify the general contractor. Third, general contractors should update their payroll procedures to require that all subcontractors, and any subcontractors of their own, provide all payment records and logs to ensure prompt payment. Also, in the event general contractors are concerned about wages being paid to lower-tier subcontractors, they should include a joint check provision whereby they would have the right to pay these lower-tier subcontractor employees directly. Finally, general contractors may be able to protect themselves from this new law by requiring subcontractors, and any subcontractors of their own, to carry insurance or a payment bond to protect against the possibility of wage payment collection actions.

This blog was written by Paul Rose and David O’Donnell at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.