Author: Brian Flackey

Prepared exclusively for the Builders Association of Minnesota (BAM) by Nicholas Strafaccia of the Arthur Chapman Kettering Smetak & Pikala P.A.

 

Coming into effect on August 1, 2023, Minnesota’s legislature passed a substantial amendment to the state’s wage protections for construction workers. While in 2019, it was thought Minnesota already had some of the country’s most stringent laws, the 2023 amendment takes it a step further. Within the amended Article 10 of the Construction Worker Wage Protections statute the (“CWWP”), a contractor may be liable to a subcontractor’s employee for unpaid wages and benefits. The new law leaves much for a court to interpret; however, for your benefit we have looked into the plain language of the CWWP statute and compiled helpful information for the Builders Association of Minnesota’s members. We hope this article can help our members navigate these new waters.

In what will be labeled as Minn. Stat. § 177.27 and Minn. Stat. § 181.165, the legislature has pushed liability for unpaid subcontractor employees upstream: “[a] contractor entering into a construction contract shall assume and is liable for any unpaid wages, fringe benefits, penalties, and resulting liquidated damages owed to a claimant or third- party acting on the claimant’s behalf by a subcontractor at any tier acting under, by, or for the contractor or its subcontractors for the claimant’s performance of labor.”

At legislative hearings, it was argued the bill would provide protection to exploited construction workers who have been victimized by wage theft contractors. The CWWP supporters specifically stated the new law would protect immigrant workers. A quote from Adam Duininck, director of governmental affairs for the North Central States Regional Council of Carpenters, states the new law will, “tilt the playing field so it’s even between the generals and the workers, because right now the playing field between the workers and their own employers is not equal at all.”

Despite wide opposition to the CWWP across the construction industry, the union backed bill passed and will soon become a reality for all contracts and agreements entered into, renewed, modified, or amended on or after August 1, 2023.   

The purpose of this article is to walk through a few of the basic concepts found in the CWWP. This article does not discuss every aspect of the new law and, be advised, as these laws will inevitably be challenged in court, the information in this article may fluctuate. With that said, when reading the CWWP, there are a few questions that come to mind: who is considered a contractor? What is considered a construction contract? Are there any exceptions to this new law? What does enforcement of this new law look like? And likely the burning question, what can I do now? These questions will be answered in turn below.

 

1. Who is considered a contractor?

 

Contractor is defined in the new law under section 6, subdivision 1, section (e). “A contractor is defined very broadly and more or less, includes all entities above the subcontractor whose employee is making the allegation of wage theft––regardless of how many sub-subcontractor levels may be at play. The CWWP defines ‘contractor’ to include individuals, firms, companies, “or other entit[ies].” The definition specifically includes construction managers and general contractors.

Expanding the definition further, project owners may be considered a contractor as well: “[a]n owner shall be deemed a contractor and liable as such under this section if said owner has entered into a construction contract with more than one contractor or subcontractor on any construction site.” The perceived goal with this sentence is to button up any attempt by a general contractor to alleviate its liability by also owning the construction project. However, the broad nature of the writing could include many sophisticated project owners who, at times, directly contract certain aspects of the work themselves rather than to the general contractor.

 

2. What is considered a construction contract?

 

The CWWP defines a Construction Contract under section 6, subdivision 1, section (d), a construction contract includes any and all agreements, written or oral, for the construction, alteration, remodeling, repair, maintenance, demolition, excavation, etc. that relates to the development or improvement of land. Reading the plain language of the definition, it’s hard to imagine any agreement in the construction industry that is not included in the definition.

Beyond defining the term, the definition builds in an exception by also defining what “shall not” be considered a construction contract:

a construction contract shall not include a home improvement contract for the performance of a home improvement between a home improvement contractor and the owner of an owner-occupied dwelling, and a home construction contract for one- or two-family dwelling units except where such contract or contracts results in the construction of more than ten one- or two-family owner-occupied dwellings at one project site annually.

This section of the definition is murky. How the exception, and exception to the exception, reads is open to multiple interpretations and as a result, is ambiguous. Furthermore, rather than putting this language in an exception subdivision, it forces a contractor to parse out what may be a valid construction contract in legal terms, from what the CWWP defines as a construction contract.

Starting with the first portion of the above, under the CWWP it is not considered a construction contract if a homeowner hires a ‘home improvement contractor’ to complete work on the home which the homeowner resides in––i.e. the owner’s dwelling. Seemingly, the legislature is attempting to do two things: (1) protect smaller residential projects and (2) limit an owner’s liability by narrowing the CWWP’s ‘Contractor’ definition. Recall, if an owner enters into more than one contract related to the same project, it is considered a contractor––and possibly liable under the CWWP. However, if the owner’s contracts are between a homeowner living in the home and a home improvement contractor, the CWWP does not apply.

A few points to be aware of with this section, there are many undefined terms (at least not defined in the CWWP). For example, what is considered a “home improvement contract?” What is a considered a “home improvement contractor?” While other Minnesota statutes define these terms, the CWWP does not. These are questions that cannot be resolved by a plain reading law.

The second sub-definition of what is not a construction contract is a bit more confusing. Starting off, the definition of a construction contract does not include, “a home construction contract for one- or two-family dwelling units.” This seems clear enough. Residential builders, building for example, single-family homes and certain townhouses, are not subjected to CWWP because those contracts are not considered construction contracts.

However, the definition builds in an exception to this exception which may cause confusion: “except where such contract or contracts results in the construction of more than ten one- or two-family owner-occupied dwellings at one project site annually.” In an attempt to break down the exception requirements, residential builders must comply with the CWWP if, (1) within one year; (2) you enter into one or more contracts, (3) resulting in more than ten––i.e. eleven total buildings, (4) each building is either a one or two family, owner-occupied dwelling, and (5) the eleven buildings are all part of the same construction project/development.

This break down may leave you scratching your head. The first question that comes to mind is, who are the parties to this “home construction contract?” We don’t have the “owner” and “home improvement contractor” the law’s author used previously. Another question, how can you construct a new home that at the same time is an owner occupied dwelling? An ‘owner occupied dwelling’ requires the building to be an owner’s primary residence. Recall another requirement demands the project be a home construction contract––i.e. more often than not, the building doesn’t exist at the time the contract is entered. Therefore, it can be presumed that any potential owner would have a different dwelling at the time the contract is entered into making this exception inapplicable.

While the list of questions could continue, the belief is that this exception is meant to apply to general contractors’ subcontracts to build new homes within the same development. If, within one year, you build at minimum eleven single or double owner-occupied dwellings, you must comply with the CWWP. Yet, how the law has been written and can be interpreted, will most likely be the source of future litigation.

 

3. Are there any (other) exceptions to this new law?

 

Section 6, subdivision 6 of the CWWP is titled, “Exemptions.” As previously pointed out, these are not the only exemptions removing a contractor requirement to abide by the CWWP. The definition section of who a contractor is, and what a construction contract is, more or less, creates exemptions. Beyond the definitions, section 6, subdivision 6 defines additional exemptions. For the purposes of this article, the union exemption will be touched on. The CWWP shall not apply to any, “contractor or subcontractor that is a signatory to a bona fide collective bargaining agreement” with a trade or labor organization. The organization’s collective bargaining agreement must include a grievance procedure to recover unpaid wages and a procedure to collect unpaid contributions to the fringe benefit trust fund.

To overly simplify, if the subcontractor or contractor is part of a union, they do not face the liability assumptions put in place within the CWWP. However, should a union subcontractor fail to pay its employees, the employees could assert claims against a non-union contractor to recover funds. Further, depending on the union’s bargaining agreement, an unpaid union member can designate the union, who did not receive fringe benefit contributions from a union member, to make a claim against a non-union contractor to recover those funds. It cannot be ignored the power a union has to assert and litigate a claim verses an individual union member.

 

4. What does enforcement of this law look like?  

 

Should a subcontractor’s employee believe its wages, or other benefits were unjustly withheld, he/she has the option of initiating a civil lawsuit directly in district court––noting there is no notice requirement or timeframe for an upstream entity to investigate the claim pre-suit. The employee has the option of designating a “person, organization, or collective bargaining agent,” to file the complaint in district court on the employee’s behalf. The complaint can be filed against the person’s employee and any upstream contractor––barring the exemptions previously discussed.

Should the court rule in the employee’s favor, the court is required to award the employee its attorneys’ fees and costs. Should the court rule in the employer or contractor’s favor, there is no collection of attorneys’ fees or costs. The statute also puts a three-year time limit on the employee’s claims. The CWWP itself directs us to Minn. Stat. 541.07, clause 5 as the controlling statute of limitations. Clause 5 reads, “the limitation is three years.” Meaning, upstream contractors should be aware of possible liability under the CWWP for up to three years after final payment has been made on a project.

Last note, per the statute, a contractor and subcontractor are jointly and severally liable for the employee’s unpaid wages and benefits. This means, regardless of a contractor’s actions, if the subcontractor is found to be liable in court, the contractor shares that liability. There has been talk around the industry that enforcement is going to start with the general contractor and work its way down. Meaning, for example, a fourth-tier subcontractor commits wage theft against its employees. The employees of the that subcontractor will file a claim against the project’s general contractor requesting payment. The general contractor will then be tasked with paying the wages, and filings its own claim against the bad-acting subcontractor.

 

5. What can I do now?

 

This is the golden question. Like all important questions, the answer is never simple. We have identified three possible options you can explore within your company or with your attorney. Because the law is not in effect nor has it been challenged, these are preventative measures to weigh internally at your organization. Should you want to discuss any of these in more depth feel free to reach out to BAM or Nicholas Strafaccia J.D. at the Arthur Chapman Kettering Smetak & Pikala Law Firm.

 

• Discuss your concern with your Subcontractor Default Insurance (SDI) carrier or agent. SDI policies are meant to provide coverage to contractors for economic loss incurred due to the actions of their subcontractors. Depending on your policy and the language within, you may have insurance coverage for a claim made under the CWWP.

 

• While not the easiest avenue, a contractor could force its subcontractors to obtain payment bonds for each project. These bonds are legal contracts between the subcontractor and a surety bonding agency. The bond will only be disbursed if there is a claim of non-payment. This significantly decreases a contractor’s liability for CWWP claims.

 

• Require certified payroll reports during a project. Certified Payroll reports confirm that all subcontractor employees have been paid during the previous pay period. Depending on the subcontractor’s ability, a contractor’s contract can be amended to include a requirement that certified payroll reports be submitted prior to contractor releasing payment.

 

• Finally, trust your subcontractors. This avenue is not suggested for subcontractors you hire for the first time. However, if your company has built a strong relationship with a group of consistently used subcontractors, simply doing business as usual is a viable option.