The law will take effect on January 4, 2022, and will apply to all new, renewed, modified and amended contracts.

On September 6, 2021, New York Governor Kathy Hochul signed into law S2766C, a Senate bill we reported on in a previous Alert, which assigns joint and several liability to prime contractors in any action against a subcontractor of any tier by the subcontractor’s employees for wage and benefit claims. Specifically, this includes claims for:

  • Unpaid wages;
  • Benefits or wage supplements, defined by New York Labor Law (NYLL) §198 to include at least:
    • Reimbursement for expenses;
    • Health, welfare and retirement benefits;
    • Vacation, separation or holiday pay;
  • All other remedies available pursuant to NYLL §198, which include:
    • Expenses;
    • An amount equal to 100 percent of the unpaid wages as liquidated damages (or treble damages for a willful violation);
    • Attorneys’ fees;
    • Prejudgment interest;
    • Up to a $5,000 penalty plus costs and attorneys’ fees for failure to provide Wage Theft Prevention Act (WTPA) notice under §195(1);
    • Up to $5,000 penalty plus costs and attorneys’ fees for failure to provide compliant wage statements under §195(3); and
    • Attorneys’ fees and costs in an enforcement action.

The legislation amends the NYLL to add a new Section 198-e, as well as the General Business Law (GBL) to add a new Section 756-f. The law will take effect on January 4, 2022, and will apply to all new, renewed, modified and amended contracts. It provides for a three-year statute of limitations against contractors, as opposed to the six-year statute against the subcontractor-employer.

Under the legislation, contractors’ liability cannot be waived except through a bona fide collective bargaining agreement that specifically references NYLL §198-e. Therefore, the law will apply to all nonunion contracts without exception.

Contractors may contract for indemnification by subcontractors and may maintain an action against a subcontractor to recover owed wages that are paid by the contractor. Any indemnification arrangement, however, must not diminish the employee’s right to bring an action.

In addition to indemnification, the law also encourages preemptive auditing of subcontractor payroll practices. The legislation amends the invoice process under GBL §756, permitting contractors to request copies of certified payroll records showing the status of wage payments and benefit contributions. The contractor can also request identifying and contact information for an intermediary subcontractor from a lower-tier subcontractor. A subcontractor’s failure to provide the requested information is a basis for the contractor to withhold payment under the law.

Because a subcontractor’s nonpayment of labor expenses is already a basis for contractors to withhold payment of invoices, the legislation is designed to encourage prime contractors to regularly audit each subcontractor’s payroll administration before releasing payment to that subcontractor.

Even if the contractor is diligent in reviewing subcontractor payroll records, however, there will likely be residual liability that will be difficult for the contractor to mitigate. The legislation makes contractors liable for all types of wage-and-hour claims, even those that are not apparent from a payroll review, such as failure to provide WTPA notices and wage statements, potential off-the-clock claims and potential liability for violation of frequency-of-pay requirements.

What Contractors and Subcontractors Should Do

The amendment is a significant additional administrative burden for nonunion contracts and will likely affect project costs. This is particularly true because the most effective approach for contractors to mitigate liability and risk is likely a combination of auditing and indemnification measures. Depending on the contractor’s volume, the new audit practice may even warrant hiring an additional payroll administrator.

Contractors should develop a robust indemnification provision that contemplates attorneys’ fees, duty to defend and even civil penalties. Contractors may also wish to consider other risk allocation mechanisms, such as requiring payment bonds for subcontractors, to ensure consistent, timely payroll administration in the event the subcontractor cannot make payment. Contractors should consult their attorney before resorting to direct payment to subcontractors’ employees, as this could raise other employment liability issues.

Subcontractors should take immediate steps to ensure their payroll practices are in full compliance with NYLL. The complexities of the law have often ensnared employers, but penalties will now be amplified as contractors begin to seek indemnification for any fees, costs and damages they may incur as a result of the new legislation.