General Contractors Working in Maryland: Amend Your Subcontract Form Now

Construction and Procurement Law News, Q4 2018

Firm Alert

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A new Maryland law – Md. Code, Lab & Empl., § 3-507.2 (the “Maryland Wage Payment and Collection Law”) – makes general contractors on public and private projects in Maryland liable for unpaid subcontractor employee wages, regardless of subcontractor tier, plus treble damages and legal fees. The new statute, which mirrors an existing law in the District of Columbia, became effective October 1, 2018.

Specifically, the new Maryland law states that “a general contractor on a project for construction services is jointly and severally liable for a [wage violation] that is committed by a subcontractor, regardless of whether the subcontractor is in a direct contractual relationship with the general contractor.” The law also states that “the court may award the employee an amount not exceeding 3 times the wage, and reasonable counsel fees and other costs.”

This new law creates a great deal of financial risk for general contractors. In an attempt to provide fairness to general contractors, the new law provides general contractors a statutory right of indemnity against the offending subcontractor, including legal fees. However, there are two important caveats to this statutory indemnity right. First, general contractors are not entitled to statutory indemnity if “indemnification is provided for” in the subcontract between the general contractor and the subcontractor. Second, no right of indemnity is permitted if the subcontractor’s wage violation “arose due to a lack of prompt payment” under the contract between the general contractor and the subcontractor.

Even where statutory indemnity is applicable, this new Maryland law provides little practical security to general contractors. Many subcontractors committing wage violations may be insolvent, bankrupt, or otherwise financially unable to indemnify against a treble damages wage judgment (including legal fees).

General contractors in Maryland will likely amend their subcontract forms and requirements to mitigate the substantial risk posed by this new law. Among other actions, general contractors may amend their Maryland subcontracts to require: (1) indemnity against unpaid wage judgments rendered against the general contractor; (2) wage law compliance warranties by the subcontractor; (3) the subcontractor to flow-down wage-law compliance clauses and other GC-protecting clauses to all subcontractors of any tier; (4) the first-tier subcontractor to post a payment and performance bond, with a specific clause in the bonds covering wage violation judgements; and (5) execution of new final payment and progress payment waiver documents, amended to provide for indemnity against unpaid wage violations.

The subcontract changes listed above are examples of the steps that general contractors working in Maryland may take to protect against the financial risk posed by this new unpaid wage law. Of course, subcontractors should also be prepared for demands of this nature when negotiating new subcontracts with general contractors.