Construction Law Insider

On September 6, 2021, New York State Governor Kathy Hochul signed into law S2766C, which: (a) holds prime contractors jointly and severally liable with their downstream subcontractors for unpaid wages (plus benefits, damages, attorney fees related to a civil or administrative action) of such subcontractor’s employees; and (b) provides that a contractor may withhold payment to a subcontractor or lower-tier subcontractor for failure to provide certain payroll records. Liability cannot be waived except through a collective bargaining agreement expressly referring to the law. In effect, the law applies to all non-union contracts.

The law provides that a subcontractor, on request of a contractor, shall provide “certified payroll records which, at a minimum, contain all lawfully required information required for all employees providing labor on the project. Such payroll records shall contain sufficient information to apprise the contractor or subcontractor of such subcontractor’s payment status in paying wages and making any applicable fringe or other benefit payments or contributions to a third party on its employee’s behalf.”

While these audit provisions, if exercised by the contractor, may impose additional costs on the contractor, it may be the only practical protection it has against laborers’ claims. A subcontractor’s failure to comply the contractor’s audit may now be used as a legal justification for the contractor to withhold payment.

Additionally, inasmuch as the law places prime contractors in the cross hairs of claims asserted by employees of their subcontractors for the nonpayment of wages and benefits, contractors would be well served in seeking indemnification from their subcontractors. (Typically, indemnification provisions only cover indemnification for insurable claims, i.e., personal injury, bodily injury or property damage.) An expanded indemnification would cover the economic loss suffered by the contractor on account of a claim by a subcontractor’s employee. Likewise, owners should require contractors to obtain such an indemnification in order to provide added protection against employee claims, especially so if the owner takes an assignment of the subcontract.

If an owner choose this route, we suggest that the following contract provision be added to the general contract (or construction management agreement):

If the provisions of Section 198-e of the New York Labor Law and Section 756-1 of the New York General Business Law apply to the Project, Contractor shall obtain an indemnification from its subcontractors for any claims of employees of a subcontractor for the nonpayment of wages, benefits or contributions owed to the employee.

The law becomes effective January 4, 2022.

For more information on the topic discussed, contact:

• Hillel E. Sussman  |  sussman@thsh.com  |  212-508-6704