There was a time when the definition of the parties involved in construction was fairly consistent.  The roles remained somewhat within traditional bounds.  A general contractor took on a project for an owner.  He/she was bound to follow the design – plans and specifications of an architect and engineer who had been retained by the owner.  The job was to “buy out” some or all of the work from other contractors – who would be loosely denominated “subcontractors”.  Price/purchase materials from “suppliers” either directly or through the subcontractors.  The focus was on holding labor and material costs to what was estimated.  A primary way of ensuring profit was keeping firm control of project scope – vs. extra work – and to closely maintain the project schedule.

With the introduction of first, construction managers, and then design-build approaches, the role of the general contractor changed. Although the notion of contractual privity remained the rule of thumb, there was some erosion where Courts saw a need.  And while scope was still somewhat sacrosanct, recovery for the time impact of acts or omissions of others, i.e., design changes, was severely limited, while liability, i.e., for liquidated damages, barely changed.

1 – Common Law Contract

As a general rule, a party was not liable in contract to anyone who is not in privity; a subcontractor it retains; a worker it employs; a supplier it has a direct order with.  This enabled the general contractor to be aware of the costs it is incurring.  Tort liability for the general contractor, as well as the design professional, was harder to predict – but generally could be insured.

With power comes responsibility.  It should not have been a surprise that many tried to look to the general contractor to cure all ills.  Yet the traditional limits were mostly observed.  Now there are a number of developments of which a contractor must be cognizant – they can be traps for the unwary.

2 – Statutory Expansion

In 2021 the New York State legislature enacted a statute that passes liability for the payment of workers on a project up to the general contractor. This is enforceable whether the workers are employed by the general contractor or subcontractor.

§ 198-e. Construction industry wage theft.

1. A contractor making or taking a construction contract shall be liable for any debt resulting from an action under section one hundred ninety-eight of this article, owed to an employee or third party on the employee’s behalf, incurred by a subcontractor at any tier acting under, by, or for the contractor or its subcontractors for the employee’s performance of labor. The provisions of this section shall not be deemed to limit the liability of a subcontractor under section one hundred ninety-eight of this article.

No one should seriously dispute the right of a worker to be paid for a day’s work.  And, no doubt we all have seen instances of the undercapitalized or dishonest subcontractor leaving workers “holding the bag”.  Yet implementation of this new legislation does present problems.  It has been suggested that the general contractor merely make sure that the workers are paid, i.e., by joint checks to the subcontractor and the worker.  Easy enough, not really?  We have a company which did not hire the worker, did not supervise him/her, and may not even know the worker, responsible for payment.  There will still be opportunities for fraud, although maybe less than before?  Also, our experience suggests that many subcontractors will find these efforts overly intrusive and balk at full cooperation.

We have yet to see any reported cases involving this new law but – given the penchant for controversy – we should see them soon.

3 – Third Party Beneficiary

The new statutory approach does not come as a complete surprise to many of us in the construction/labor law field.  The issue of payment to workers was probably always there – but it has burgeoned.  With a reduction in union work and more open shop work there seems to have been an epidemic of “wage theft”.  The use of subcontractors to perform prevailing wage work increased as did the frequency that such smaller companies were formed – and then disappeared.

Public owners have tightened up the rules on prevailing wage over the years.  Enforcement can come both on the administrative side or through a plenary lawsuit.  

Some claim union wages are much too high – imposition of high wage rates only cuts into profit.  That view might apply to some lower killed workers – but in the end you probably get what you pay for.  And to have a cadre of skilled workers available in the New York Metropolitan area is essential.  With living costs high, wages must keep pace.

With the new statute discussed above, many former cases may be subsumed into the statutory scheme.  In the meantime, we have courts straining to fulfill salutary goals by stretching basic legal principles, i.e., third party beneficiary.  The theory is that the worker is a beneficiary of the public contract subject to prevailing wage law.  See, Solouk v. European Copper Specialties, Inc., 2019 U.S. Dist. LEXIS 81267 (S.D.N.Y 2019).  However, to stretch long accepted principles of intended versus incidental beneficiary too far may not come without consequences.

4 – Joint Employer

In Labor Law there has long been instances where liability for payment to workers has extended to others beyond the direct employer.  See, for example, Navar v. Walsh Constr. Co. II, LLC, 2019 U.S. Dist. LEXIS 225447 (S.D.N.Y. 2019); Zheng v. Liberty Apparel Company, Inc., 617 F.3d 182. 2010 U.S. App. LEXIS 16478 (2d Cir. 2010).  One can almost feel a court’s anger when a company simply stiffs its workers – and the solution is to hold the individual owners liable.  In New York, a similar result can be warranted under Business Corporation Law § 630.

§ 630. Liability of shareholders for wages due to laborers, servants or employees

1. The ten largest shareholders, as determined by the fair value of their beneficial interest as of the beginning of the period during which the unpaid services referred to in this section are performed, of every domestic corporation or of any foreign corporation, when the unpaid services were performed in the state, no shares of which are listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association, shall jointly and severally be personally liable for all debts, wages or salaries due and owing to any of its laborers, servants or employees other than contractors, for services performed by them for such corporation.

See, also, Kule-Rubin v. Bahari Group Ltd., 2012 U.S. Dist. LEXIS 29000 S.D.N.Y. 2012).

5 – Erosion of Privity

A somewhat seminal event in New York jurisprudence was the Court of Appeals decision in Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 174 N.E. 441, 1931 N.Y. LEXIS 660 (1931).  With that case a traditional barrier of lack of privity broke down and led to liability for an accountant.  This principle has been extended over time to other professionals. Ossining Union Free School Dist. v. Anderson, 73 N.Y.2d 417 (1989).  What this has meant is that an architect or an engineer cannot feel comfortable with the notion that its only exposure is to its client.  This concept has been frequently used in construction litigation -although it has rarely succeeded.  Where workmanship is shoddy, the contractor may only have to fear his owner and will have various contract protections in place; yet, the design professional may not have such luxury.  Moreover, where there has been a finding of tort liability – personal injury or property damage – both may find themselves in the gunsight.

We have struggled with harmonizing these principles especially in the residential construction field, i.e., cooperatives and condominiums.  The contracts may all be with a Sponsor that has long since disappeared – before the building settles, walls crack, equipment fails, etc.  A true dilemma calling for digging and some creative lawyering.  JSignal LLC v. CCM Prop. Mgt. LLC, 2020 NY Slip Op 33340[U] [Sup.Ct. New York County 2020]; Brail v. Ogawa Depardon Architects, 2020 N.Y. Misc. LEXIS 9888, 2020 NY Slip Op 33584(U)(Sup.Ct. New York County 2020); CREF 546 W. 44th St., LLC v Hudson Meridian Constr. Group, LLC, 69 Misc. 3d 747, 128 N.Y.S.3d 829, 2020 N.Y. Misc. LEXIS 3326, 2020 NY Slip Op 20172 (Sup.Ct. New York County 2020).

6 – Registration

In an effort to further control the construction process there is very recent legislation requiring registration in order to participate in public work. Labor Law § 220-i now provides:

2.

a. Prior to submitting a bid on a contract for public work or commencing work on a covered project under private contract, a contractor shall register in writing with the bureau on a form provided by the commissioner. The form shall require the following information:

i. The name, principal business address and telephone number of the contractor.

ii. Whether the contractor is a person, partnership, association, joint stock company, trust, corporation, or other form of business entity.

iii. The name and address of each person with a financial interest in the contractor and the percentage interest, except that if the contractor is a publicly-traded corporation, the contractor shall supply the names and addresses of the corporation’s officers.

iv. The contractor’s tax identification number, unemployment insurance registration number, and workers’ compensation board employee number.

v. Whether the contractor has any outstanding wage assessments against it, pursuant to this article.

vi. Whether the contractor has been debarred under New York or federal law within the last ten years.

vii. Whether the contractor has been debarred pursuant to the laws of any other state within the last ten years.

viii. Whether the contractor has been finally determined by the appropriate authority to have violated any labor laws or employment tax laws including, but not limited to, the requirement to have workers’ compensation coverage, payment of workers’ compensation premiums, deduction and payment of income taxes, payment of unemployment insurance contributions or payment of prevailing wage.

ix. Whether the contractor has been finally determined by the appropriate authority to have violated any laws establishing workplace safety standards including the federal Occupational Safety and Health Act.

x. Whether or not the contractor is associated, or a signatory to, an apprenticeship program under article twenty-three of this chapter. If so, the apprenticeship program shall be provided by the contractor.

xi. Whether or not the contractor is a minority or women-owned business enterprise pursuant to the provisions of article fifteen-A of the executive law.

b. At the time of registration, and upon request, the contractor shall submit to the commissioner documentation demonstrating that the contractor has workers’ compensation insurance coverage for all workers as required by law, including any and all declarations and information pages related to such policy which shall be electronically accessible and searchable to the public, provided however, that in no event shall a worker’s name or other personal identifying information be included in such database. This information shall be made readily available to the public by the bureau within forty-eight hours of the initial public request.

Much of the statute refers to information which is already publically available and used by owners.  It may be argued that a contractor’s provision of such details is likely to be more accurate and descriptive where needed.  At the same time, some information may be more private, i.e., “person with a financial interest”, or problematical, apprenticeship programs.  

7 – Criminal Exposure

Finally for this Blog, we have the Manhattan District Attorney, Alvin Bragg, announcing a new initiative to protect the rights of workers, especially on construction projects.  This initiative calls for enhanced charges and penalties against corporations and individuals committing wage theft. This may simply be additional pandering to an election base, considering that the New York City Comptroller, New York State Department of Labor and U.S. Department of Labor, already fully occupy the space.  There have been few criminal prosecutions in this area which might more appropriately be evaluated as “white collar” crime or civil violations.

Disclaimer: This Blog is offered to raise and discuss issues of general interest in the field.  It should not be construed as legal advice or the formation of an attorney-client relationship. Do not rely solely on this information on making decisions for your firm. Prior results do not guarantee a similar outcome.

References:

1. This role has sometimes been labelled “Prime Contractor”.
2.  This term has in our experience been too loosely used to not only cover a true agent of an owner but also to include at least some aspects of being a traditional general contractor.
3. Lawyers struggled to find the logic behind such cases as Ossining Union Free School Dist. v. Anderson, 73 N.Y.2d 417 (1989) in comparison with Morse/Diesel, Inc. v. Trinity Industries, Inc., 859 F.2d 242 (2d Cir. 1988).
4.  Labor Law § 198-e.
5.  Kickback schemes were once in vogue.  We have no evidence to suggest they no longer exist.
6.  This term has emotional impact – though the conduct is more “cheating” than outright pickpocketing.