A New York state law that aims to combat wage theft in the construction industry went into effect on Jan. 4. The Wage Theft Protection Act makes general contractors responsible for ensuring all workers on a project, including those employed by subcontractors, are correctly paid. It also imposes more stringent reporting requirements for subcontractors.
The law aims to encourage the industry to combat wage theft itself by making prime contractors liable for any unpaid wages, benefits, damages, attorney fees related to a civil or administrative action. The liability is limited to a period of three years: An individual or a representative can file a lawsuit against their employer-subcontractor and the prime contractor during that time.
Now that the WTPA has been in effect for half a year, other issues such as labor shortages and delayed project times are leading to talent and payroll challenges for some firms, according to Phil Ross, head of New York City-based accounting firm Anchin’s AEC group. Contractors need to take care in order to avoid surprises and liability for lack of service and/or payment from subcontractors.
Here, Ross talks with Construction Dive about how these changes may impact business as contractors adjust to the new laws.
CONSTRUCTION DIVE: What does the new law entail?
PHIL ROSS: The WTPA applies to any contracts that were executed, modified, extended or renewed on or after Jan. 4. Specifically, the new law establishes greater liability risk for general contractors, construction managers and top-tier subcontractors that engage their own contractors and vendors, and also institutes more stringent wage-reporting requirements for all subcontractors.
The WTPA establishes greater liability on wage theft including not paying minimum wage, withholding overtime pay or requiring off-the-clock work. It can also include harder-to-detect activities, like automatically deducting time for meal breaks or not paying for remote work.
What was the reasoning behind it?
The WTPA seeks to give greater protection to workers in New York State as liability for wage theft will now be the full responsibility of general contractors or top-tier construction managers — whichever reports directly to the owner/developer. If there are any discrepancies, errors or omissions of wages to employees, the liability flows all the way up the chain of payment.
Regardless of the source of the wage theft claim, whether it be a third party, a union, attorneys or an individual employee, the top-line contractor on the project is responsible and liable for damages, lost and back wages, benefits, penalties incurred and any other payment issues that may arise as a result of nonpayment claims.
Included in the liability for general contractors are any unpaid health, welfare, and retirement benefits, as well as vacation, separation, and holiday pay.
What types of builders are affected?
Any type of builder is affected. The only exclusion would be for residential projects. Each construction company is directly responsible for the wages paid to their employees, but now it is the responsibility of all the companies up to the top one in the payment chain to ensure that the proper wages and benefits are paid.
What do builders need to know to comply?
Builders need to know everything the general contractor and subcontractor need to know. In regard to overtime or misclassification, wage theft may not be known or discovered for a period of years. If the company is doing poorly or no longer exists, the liability will then become the liability of the other contractors in the chain. Sureties could be put on notice and this could affect bonding capacity.
What challenges could the new law create for contractors?
The law is significant since all lost wages could be “rolled-up” to the general contractor overseeing the entire project. Subcontractors must pay the right wage at the right time, and the right level. The general contractor bears the entire burden of the law and must perform due diligence to avoid snowballing problems.
The law is especially important now as industry issues with COVID-19, labor shortages and supply chain issues have impacted projects and the ability to make payments to employees. Anchin advises that the first proactive step is to review contracts carefully for what should be paid to subcontractors as well as making sure the subcontractors are vetted in terms of:
- Financial statement information.
- History of not paying.
Some tips to make sure a firm is in compliance include:
- As rate schedules are assigned to titles, make sure the classification is correct as to whether contractors can be considered employees or contractors. Pay should be commensurate with the title to avoid penalties, as penalties roll-up to the top.
- Low bids should be vetted carefully. A low bid may indicate that subcontractors are not paying their employees.
- It is important to consult with an attorney and carefully examine the contract language in the event of a problem.
- Internal controls should be in place to make sure contractors are paying. Perform due diligence, as well as an audit clause in the contract while going physically on site to count the numbers of workers as well as the length of time each worker remains on site.
- Know your subcontractors and make sure their workers also have insurance as mishaps can drive up costs that ultimately roll up to the general contractor who owns the project.
- Overtime is also a big area, know keenly the rules and classifications for this.
- Ask subcontractors for proof of their payment.
Overall, make sure that subs are classified correctly, compensated correctly, and in a timely manner. These proactive measures will quickly stop interest charges when there is a problem.