Hello everyone, welcome back! This post is going to be a little bit out of sequence from the trend of my first three posts, which we will continue with in post #5. The reason I am going off script is to cover Senate Bill 853 which was recently passed by the Maryland legislature. This bill mainly focuses on general contractors but it indirectly affects almost the entirety of the construction industry performing on contracts in the state of Maryland.
The goal of these posts are to inform you, the readers, whether you are a general contractor, service contractor, subcontractor, bond/insurance agent (or anyone else who is interested in surety for that matter) and provide the base knowledge necessary to navigate through this sometimes tricky and overwhelming industry. I hope that these posts will cover most everything you would need to know, however I am sure that along the way this information will lead to questions I did not even consider. When that inevitably happens, I encourage you to reach out to me as I would be more than happy to clear up anything I may have missed. My contact information is below:
Direct: (410) 910-0204
What is SB 853?
As I mentioned above, Senate Bill 853 was recently passed by the Maryland legislature at the end of their 2018 session. The law will go into effect on October 1, 2018 and is similar to a law that was recently passed in California. At a very basic level, this makes general contractors jointly and severally liable for the responsibility of their subcontractor’s paying their employees. Subcontractors are required to indemnify the general contractor, but this can become useless if the subcontractor is unable to pay the wages in the first place.
On the surface, this may not sound like a huge issue, and many organizations are arguing that it isn’t. They say that general contractors should only be dealing with subcontractors that are following all laws and requirements, which would avoid the issue entirely. However, on the flip side, many are arguing that the law was passed too quickly and without enough scrutiny, creating a law that has generic language and poses the following issues/uncertainties:
Who is covered?
The bill states that “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.” This part of the bill brings up the uncertainty of how far down the subcontractor/supplier chain this applies. Since the Miller and “little Miller” Acts only require bonds to cover subcontractors, sub-subcontractors and suppliers to sub-subcontractors on public projects, anything beyond that can be problematic for a GC as the law makes it sound like anyone working under the prime contract can look to the GC if they have not been properly paid.
Multiplier, attorney’s fees, and statute of limitations.
The impact of this law is also made more dramatic when considering the fact that general contractors are now liable for up to three times the wages owed, plus attorney’s fees necessary to recover them, something that had been used generally for direct employer-employee relationships. Not only is the amount collectible increased, but the time frame for making a claim to collect the wages has been expanded to as long as three years past the date of occurrence.
Difficult to defend.
Because the general contractor is potentially liable for several tiers down the subcontractor/supplier chain, they may not have the proper information readily available to defend themselves from litigation, such as payment records from the lowest tier subcontractors and suppliers.
Effect on subcontractors.
All of the issues and uncertainties mentioned above can potentially lead to general contractors becoming much more selective regarding which subcontractors they choose to work with. This has the potential to disproportionally affect smaller and newer subcontractors that may not have the experience and capacity to provide the proper records for a general contractor to feel comfortable working with them.
These potential effects are going to have general contractors looking for ways to avoid potential losses. Below are some of the ways we would expect general contractors to protect themselves based on how the law currently looks:
Surety Bonds/Insurance (would have to cover up to 3x wages)
Since bonds don’t typically cover the entirety of the subcontractor/supplier chain and there is not currently any insurance product designed to protect against this type of loss, there would have to be some changes made in each industry to adapt to the coverage required.
More extensive vetting of subcontractors
As briefly mentioned above, general contractors can be more selective in their approach of selecting subcontractors. They will look for established subs with a clean track record of no wage issues who have the capacity to ensure that they can complete a job and make sure they employees can be properly compensated.
Require more controls
There are additional controls that general contractors will look to put in place to further guarantee that money they are paying their subs is going to the employees as it should, such as funds control/escrow, certified payroll, subcontractor requirements for maintenance of accounting/payroll records for at least three years after a project has taken place. GCs will also want to require approval before subs add on another tier and make sure that some of the solutions above are put in effect for any new tiers.
The Bottom Line
For every new solution put in place, there will be an incremental cost added on to every new construction project the general contractor takes on. This will drive up the cost of construction and is really why there is so much concern across the entire industry, from GCs to subcontractors to their professional advisors mentioned in my last post. We expect changes and push back not just from contractors themselves, but trade organizations and surety companies, as well as most other participants in the construction industry. This could come in the form of attempts to modify the legislation as well as changes to or the introduction of bond forms to properly address the increased risk.
What can I do?
As with any new legislation, it is important to get a game plan together in order to prepare for the coming changes or provide feedback to get the legislation modified to be clearer. We highly recommend that all contractors get in touch with their respective trade organizations and inquire about what they are doing regarding SB 853 and how they can be involved. It is also important to be prepared for the law to be in effect as is, so we recommend discussing with professional advisors such as attorneys, CPAs, bond agents, and insurance agents to get an idea of how they can provide guidance to mitigate risk with coming changes.
For any questions/concerns, please contact:
Direct: (410) 910-0204
Mobile: (443) 668-5419