#67:  Paying Your Subcontractor’s Employees

Like many states, New Hampshire law requires that if a subcontractor doesn’t pay wages to its employees, the general contractor must pay them. RSA 275:46. Similarly, New Hampshire law provides that if a subcontractor doesn’t pay amounts owed to its employees under workers’ compensation laws, the general contractor must cover those as well. RSA 281-A:18. If the general contractor must write a check under either of these statutes, the subcontractor will owe reimbursement to the general contractor — but it’s a safe bet that any subcontractor who can’t meet payroll or pay workers’ comp premiums won’t be able to meet any reimbursement obligation either. How does a GC protect itself?
Before subcontracting any significant portion of a long term job to someone who isn’t known to be financially solvent, the wise general will ask for proof that the sub can carry the strain of weekly payroll through a monthly requisition procedure, with retainage. If a sub won’t share its current financials, chances are they aren’t pretty. While some solvent subs would rather protect their financial privacy than land a particular job, it can’t hurt to ask.
An insurance certificate showing that the sub has workers comp coverage should always be a prerequisite to allowing the sub to proceed. While it doesn’t guarantee that the premiums will be paid through the duration of a project expected to last many months, the written subcontract can also provide for direct pre-cancellation notice from the insurer to the general contractor if policy premiums are late.
Second, written subcontracts can provide that all payments made to the subcontractor are to be held “in trust” for the benefit of the subcontractor’s employees working on the project, including wages and all associated employee-related expenses. The main advantage of such “trust fund” provisions is in bankruptcy; trust funds are not considered assets of the subcontractor/debtor that can be distributed to general creditors.
On federally funded projects the Davis Bacon Act requires the submission of certified payrolls in order to ensure compliance with the prevailing wage requirements. (Davis Bacon requirements are yet another instance in which “[t]he prime contractor shall be responsible for the compliance by any subcontractor,” 29 C.F.R. § 5.5(a)(6).) But even on private projects written subcontracts can reserve the right to inspect subcontractor payroll records. At the first hint of trouble the GC should demand to see them — and if they aren’t in order, it can withhold payment to the sub. The threat of that withholding may be enough to entice the sub to prioritize scarce dollars toward employee-related debts before feeding any other wolf at the door.
Some subcontracts provide that unpaid employees may be paid directly and/or issued joint checks. I generally do not recommend this except as a last resort. While it may be the only way to keep them on the job, it also entails the risk that the GC will be deemed a “joint employer” of the sub’s employees — in which case the GC may have more than just wages to worry about, ranging from fringe benefit claims under collective bargaining agreements with the sub, to Fair Labor Standard Act claims, to Title VII discrimination issues, and more.
Finally, the general should insist — even if the owner doesn’t — on sworn lien waivers with each progress payment to the sub, verifying that the sub has paid for all labor and materials on the project with the last progress payment and will do so out of the present progress payment. If the sub falsely swears (it happens!), any principal of the sub signing the lien waiver may also be liable to the general.
Bottom line: There is no foolproof protection short of a payment bond, which adds a layer of expense that could narrow the field of available subcontractors. But hey, who ever said that general contracting was risk-free?
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