Tymon Berger, Berger Construction Law
According to AGC of Washington’s chief lobbyist Jerry VanderWood, the number of anti-business bills introduced in Olympia this year has been unprecedented. But thanks to a worthy effort from AGC and its members, general contractors and subcontractors alike will not be as easy targets in years to come for double-payment liability on private projects.
AGC worked to successfully defeat the so-called “direct contractor” bill introduced in both the State’s House (HB 1395) and Senate (SB 5565) after recognizing that the proposed law created a moral hazard by holding general contractors and first-tier subcontractors strictly liable for the bad acts of lower-tier contractors.
The direct-contractor bill would have handed plaintiffs’ lawyers a slam-dunk case. Under the proposed legislation, “a third party owed fringe or other benefit payments or contributions”—for example, a union trust fund—could bring suit against any and all upstream contractors to collect payments that a downstream subcontractor failed to pay. The legislation even provided these third parties an award of their attorney fees.
The true peril of the pair of bills was that they provided no defense for upstream contractors. The successful plaintiff would only have to prove two things: first, that the general contractor was on a private project where a lower-tier contractor failed to pay fringe benefits; and second, the amount of fringe benefits owed to the plaintiff. With these two elements established, the general contractor would be liable regardless of whether the general contractor already paid for the work and regardless of any efforts the general contractor made to ensure fringe benefits were properly being paid. Had the legislation passed, a general contractor’s only option would have been to settle the lawsuit.
As VanderWood made clear throughout the AGC’s opposition to the pair of bills, the AGC in no way opposed the proper payment of fringe benefits. But importantly, holding contractors strictly liable for these payments appealed to a wholly inaccurate perception that general contractors somehow benefitted from lower-tier contractors shirking their responsibility to pay fringe benefits. Further, while the AGC would always support what one sponsor of the bill described as “a fair day’s pay for a fair day’s work,” the proposed legislation allocated responsibility for this pay in an arbitrary and ineffective way by simply holding the general contractor and first-tier subcontractors responsible.
The Senate version of the bill first stopped in the Senate’s Labor & Commerce committee. Convincing testimony offered in opposition to the bill questioned its prudence given that existing lien laws already provide a “third party” lien rights for owed fringe benefits. As the testimony further pointed out, the bill failed to put any responsibility on the “third party” for tracking owed fringe benefits and left upstream contractors with absolutely no defense to—and no means of avoiding—double-payment liability.
Testimony offered against the bill ensured it did not make it out of the Senate committee. But the bill continued to make its way through the House and would require more work to keep the bill off Washington’s list of newly-minted laws at the end of the legislative session.
AGC and its partners NUCA and BIAW began the work of defeating the bill in the State’s House by crafting a safe-harbor provision that would allow contractors to defend against liability by taking affirmative steps toward ensuring the payment of fringe benefits. This safe-harbor provision included putting the onus on a plaintiff “third party” to accurately track owed fringe benefits and timely notify the general contractor when payment had not been made. This sharing of responsibility would have allowed upstream contractors to take steps to withhold the amount due, including leveraging contractual rights to withhold further payment and retainage when evidence indicated fringe benefits were not being properly paid.
AGC worked to secure support for the safe-harbor provision while simultaneously working with allies in the Legislature to create a flurry of amendments that effectively steered the legislation toward a balanced approach in sharing responsibility for ensuring the proper payment of fringe benefits. The strategy worked as the bill was viewed as too controversial to be brought to the House Floor for a vote.
General contractors and subcontractors know all too well that tracking lower-tier subcontractors’ payments of fringe benefits is an enormous undertaking. This is made worse by a “third party” failing to accurately track unpaid benefits in real time. So even if a general contractor adds the administrative staff necessary to track all hours performed by every trade—and even if this additional staff accurately applies the varied fringe-benefit payment requirements for each trade—the general contractor’s efforts are wasted if the third party cannot verify whether payments are received.
The law would have proven to be a disaster for both Washington’s builders and owners by artificially inflating construction costs. It would’ve meant some builders going out of business, driving up costs by further crimping the supply of qualified builders in Washington. And for those that stayed in business, they could have only done so by bonding every subcontractor on a project. Given the current inelasticity in the construction market, those additional bonding costs would have surely been passed onto owners.
In the end, thanks to the efforts of the AGC, NUCA, and the BIAW in defeating this proposed legislation, contractors have been saved from a potentially crippling law that would’ve drastically changed contracting on private projects in Washington.
Tymon Berger, Berger Construction Law, joined AGC in testifying against the contractor liability bill.