March 4, 2020
by Bob Incollingo
New laws signed by Governor Phil Murphy on January 20, 2020 make New Jersey construction contractors responsible for their subcontractors’ debts for unpaid wages and violations of employer tax law.
One of the new laws (S4064/A5801 approved as P.L.2019, c.510) provides that for any contract entered into on or after January 1, 2020 for the erection, construction, reconstruction, alteration, maintenance or repair of any building in the State other than an owner-occupied residence, the contractor making or taking the contract shall assume, and be responsible for, any debt owed to a wage claimant, or third party on the wage claimant’s behalf, incurred by a subcontractor at any tier acting under, by, or for the contractor for the wage claimant’s performance of labor under the contract. The new responsibility does not apply if the labor was furnished pursuant to a collective bargaining agreement to which the employing contractor or subcontractor is signatory, if the bargaining agreement provides lawful remedies by which unpaid wages may be collected.
The second of the new laws (S4225/A5840 approved as P.L.2019, c.374) imposes liability on every construction contractor for subcontractors’ unpaid employer taxes under the workers’ compensation law (N.J.S.A. 34:15-1 et seq.), the unemployment compensation law (N.J.S.A. 43:21-1 et seq.), the temporary disability benefits and family leave insurance law (N.J.S.A. 43:21-25 et al. and N.J.S.A. 43:21-39.1 et al.), and the New Jersey Gross Income Tax Act (N.J.S.A. 54A:1-1 et seq.). In addition, a contractor now shares civil legal responsibility for provisions of those laws regarding retaliatory actions against employees for exercising their rights under any of those laws and provisions of those laws regarding the misclassification of workers, and both the client employer and the labor contractor providing workers to the client employer may be subject to any remedy provided for violations of those laws.
The new law also pins individual liability on any owner, director, officer, or manager acting on behalf of an employer who violates any provision of State wage and hour laws or State employer tax laws, or any provision of section N.J.S.A. 2C:40A-2 (which covers criminal violation of contract or bargaining agreement to pay employees) regarding compliance with such laws.
These are powerful risk shifting statutes, and cry out for remedies to fix ultimate responsibility on the culpable party and reimburse the payor. The problem is that the culpable party will be in all likelihood unable to pay the debt or the fine involved; if otherwise, there would be no liability to shift. In this way, the State has now made guarantors out of contractors for all those below them in the chain of contract.
So what do you do? A contract disclaimer of vicarious liability is not going to be enforced by a reviewing court. It would be a waste of time, like putting a tombstone ad in a newspaper, “No longer responsible for my wife’s hospital bills.” The law says different, and that’s that.
What can you, the upstream contractor, do to mitigate the risk of having to pay for your subcontractor’s (or sub-subcontractor’s) unpaid wages and taxes? Here are a few thoughts:
Insert a properly and broadly drawn indemnification clause in your form of subcontract. Such a clause should impose liability on your subcontractor for all loss and liability, including attorney’s fees, expert’s fees and defense costs of every kind imposed on or incurred by you or your responsible managing officers on account of the subcontractor’s or its sub-sub’s failures to obey the labor and tax laws referred to in the new statutes. Have at least one principal of the subcontractor individually guarantee the defense and indemnification clause in a signed writing.
Investigate the purchase of an acceptable contractors’ standalone wage & hour insurance policy, or a wage and hour extension coverage endorsement to your employment practices liability (EPL) insurance policy. EPL policies do not generally provide coverage for wage and hour claims, and unless modified, they exclude coverage for claims arising out of the failure to pay wages or overtime to nonexempt employees. By contrast, wage and hour liability insurance can cover indemnity and defense costs related to violations of these types of state and federal statutes that govern employee compensation. Be on guard that some wage and hour endorsements do not indemnify you for settlements or judgments, and cover only a portion of your defense costs. Moreover, for all such policies their treatment of vicarious liability should be subjected to expert review and where warranted, underwriter revision before purchase. All this may be for nothing if a claim is made after the EPL policy expires, so continuing coverage is essential through the relevant period of limitations, and coordination with retroactive renewal dates or the inception of the replacement policy is essential.
If you are satisfied that you have obtained insurance coverage for this risk, consider whether you can condition award of the subcontract on proof of similar coverage purchased by your subcontractor. If the policy allows it and your lawyer blesses the move, have your company added as an named insured.
Although I can’t recommend it, you could contractually require a certified payroll report on a regular basis, making your subcontractor swear to updated compliance with employee compensation laws. The New Jersey Department of Labor & Workforce Development has a form for public works projects for weekly and final certification online,1 and there’s no reason it couldn’t be adapted to a private job. Even so, unless you’re working on a prevailing wage project, you probably don’t need the frustration. The hours you spend in reviewing and checking error-prone reports and the extent to which you may safely place trust in a signed statement of compliance will vary, and although it may help keep them honest, having your subcontractors certify payroll will ultimately do nothing to insulate you from vicarious liability under the new statutes.
If you do get tagged with vicarious liability under the new laws, or any time your subcontractor takes the money and runs, I would argue that you have standing to sue its control group under the New Jersey Uniform Fraudulent Transfer Act, N.J.S.A. §§ 25:2-20 – 25:2-34, to recover money and property transferred out of the company which left it with debts beyond its ability to pay as they became due.
Just let me know if I can help.
Bob Incollingo is a dedicated New Jersey construction attorney who litigates coverage disputes and other cases overlaid by contractual risk transfer and insurance issues. He has been certified as a Construction Risk and Insurance Specialist (CRIS) through the International Risk Management Institute, Inc. (IRMI). This insurance designation recognizes specialized expertise in construction insurance, and demonstrates one’s commitment to the construction industry through an on-going continuing education component focusing on construction risk and insurance. More articles like this appear on RJILAW.com.