Proposed Law Poses Risk of Significant Legal Exposure for General Contractors in New York

May 19, 2021Alerts

New York lawmakers are close to passing a law that creates automatic liability for general contractors when their subcontractors fail to properly pay their employees.

Existing New York law provides at least a modicum of protection for a general contractor that has no role in supervising, directing or controlling its subcontractors’ employees’ work. In a significant departure from the current state of the law, legislation pending in both houses of the New York State Legislature would require that a general contractor ensure its subcontractors’ employees are properly paid in accordance with applicable law. If enacted, this will significantly alter the relationship between general contractors and subcontractors in the construction industry by making general contractors jointly and severally liable for any wage and hour violations committed by their subcontractors, even when the general contractor has no control over the subcontractor’s employees.

Joint and Several Liability

New York Senate Bill S2766 and its Assembly counterpart, A3350, would create a new statute, New York Labor Law § 198-e. Under this proposal, a construction contractor and subcontractor would be jointly and severally liable “for any unpaid wages, overtime, benefits, wage supplements, penalties, liquidated damages, attorneys’ fees and any other costs” associated with employment arising from an agreement for “construction, reconstruction, alteration, maintenance, moving or demolition of any building, structure or improvement, or relation to the excavation of or other development or improvement to land.” In other words, a general contractor would be automatically liable for any wage and hour violations committed by a subcontractor engaged to perform work on its behalf. This places an unreasonable burden on general contractors and eliminates one of the main benefits of hiring subcontractors – outsourcing responsibility for a portion of the construction project.

The proposal also prohibits employees, contractors and subcontractors from releasing or waiving any liability created by Section 198-e. For example, in order to avoid mechanics’ liens, general contractors usually request a release of liability from subcontractors they are paying. Such releases would now be invalid and unenforceable. Further, because employees cannot release claims under Section 198-e, it may make it very difficult for subcontractors and general contractors to privately resolve wage and hour disputes with employees. Instead, such disputes would need to be resolved in court or with the New York Department of Labor.

Illusory 'Concession' Nullified by Case Law

In an apparent concession to general contractors, the legislation permits a general contractor to seek indemnity and contribution from a subcontractor for wages paid by the general contractor. Unfortunately, however, this provision is illusory. Federal and state appellate courts have uniformly held that contractual agreements requiring indemnity and contribution are unenforceable if the underlying claim is a wage claim. Similarly, common law claims for indemnity and contribution are also unavailable to a party when the underlying claim is a wage claim. Therefore, irrespective of the language of Section 198-e, longstanding court decisions prohibit employers from seeking indemnity and contribution for wage and hour violations even where a co-employment relationship truly exists. In short, legal precedent effectively nullifies the provision of Section 198-e that permits a general contractor to seek reimbursement for the wages it pays to a subcontractor’s employees.

The proposal would be enforced by the New York Department of Labor and New York Attorney General. Further, aggrieved individuals or their representatives could file suit against their employer-subcontractor and the general contractor in court.

Employers in the New York construction industry are strongly encouraged to contact their State Senators and Assemblypersons as well as industry trade groups to put pressure on lawmakers not to pass this legislation, which could devastate the industry just as it begins to recover from the blows it was dealt by the pandemic. Without such pressure, employee advocacy groups will ensure this law is passed, likely requiring the industry to completely revamp the interplay between property owners, leaseholders, contractors and subcontractors.

For more information about this Alert, please contact Glenn S. Grindlinger at [email protected] or 212.905.2305, Bryn Goodman at [email protected] or 212.878.7975, or any member of Fox Rothschild’s New York Labor & Employment Department.