How contractors can protect themselves from wage theft on their jobsites

Construction has a wage theft problem.

In fiscal year 2023, the Wage and Hour Division of the Department of Labor secured $35.5 million in back wages for nearly 18,000 construction employees, more funds than any other American industry.

Wage theft can take many forms, including not paying overtime, not paying union or pension dues, or misclassifying full-time employees as independent subcontractors, who are therefore denied benefits.

The issue creates a unique challenge for general and prime contractors who want to do business legally and effectively, and who want to protect themselves from reputational risk, liability and regulatory consequences. This can be tricky, as subcontractors often deal directly with workers, without the principal or the GC having direct knowledge of these interactions.

Given this structure, GCs and project managers should be on the lookout, lawyers say, for wage theft on their projects. Beyond the DOL’s enforcement efforts, some states have also begun to adopt or pursue joint liability for wage theft.

“Ultimately, in every state, there is exposure to wage theft,” said Dan Rosenberg, principal at the Chicago-based law firm Much Shelist. “States have now passed laws that make it even easier for employees and unions to pursue unpaid wages from solvent and larger contractors.”

For example, in Minnesota, the Construction workers’ wage protection law went into effect in August 2023. The law gives construction workers the right on some projects (there are exceptions for smaller residential construction) to pursue unpaid wages from the prime contractor instead of a subcontractor who he didn’t pay them. They can pursue what they are owed by filing a claim with the state labor department or in court.

But even in states that don’t have such laws, contractors can still face consequences, Rosenberg said.

“The mechanic’s lien laws in every state would allow an employee to file, that ultimately the contractor, even, God forbid, the owner could have to pay for that project,” he said.

why does it happen

The reason wage theft is so widespread in construction, experts say, is because it tilts the business playing field, albeit illegally, in favor of the companies involved.

“What you need to understand is what cost advantage the contractor has that chooses to cheat through labor classification,” said John Nesse, a partner at the St. Louis labor relations law firm Management Guidance LLP. Paul, Minnesota.

Nesse serves as general counsel for Signat’s Alliance of Wall and Roof Contractors, an advocacy group for union contractors. Organization leaders have testified to Congress that misclassifying workers or engaging in wage theft offers a cost advantage of close to 50 percent over employers who follow the rules. The downside, of course, is the shadow it casts over companies when they find out, especially if they tarnish the good names of their partners along the way.

“If you have an employer that outsources the work, so you’re creating multiple levels below the GC, each level creates an additional layer of risk,” Nesse said.

Veterinary, prequalify, verify

To better protect themselves from the reputational risk, liability, and regulatory consequences that go hand in hand with wage theft, contractors can put specific provisions into contracts. But legal experts say the best first line of defense is often to know your business partners well, make sure they have the means to pay employees and build trust in that working relationship.

“The first thing is that you have to carefully analyze your principal, the client and any subcontractors,” said Charles Krugel, a Chicago-based labor attorney. “And what I’m saying is you can do a basic internet search or maybe look up something. courts websites in your jurisdiction and find out if there have been lawsuits, complaints or bad reviews of contractors or subcontractors on websites like Yelp, Yahoo, Glassdoor, whatever and find out what their reputation is.”

In the vetting process, it’s also vital to find out exactly how the subcontractor will deliver the work, according to Nesse, and to make sure subcontractors actually classify employees as employees, rather than independent contractors.

“Obviously, you’re going to have to outsource that first level to the specialty contractors,” Nesse said. “You’ve got the concrete guy, you’ve got the electrician, you’ve got the drywall guy, and so on and so forth. But if you subcontract to a drywall contractor, and that drywall contractor in turn subcontracts work, to me, that’s a huge red flag.”

Contracts and response

Some provisions exist to help protect a GC in the event of wage theft by a subcontractor.

For example, Rosenberg shared standard and common contract language such as requiring a subcontractor to provide the GC with any additional subcontracts for work or allowing the GC to stop paying the subcontractor if they suspect theft of salary, in which case they should start paying workers directly. Doing so could also work as a potential defense, should a case of wage theft arise.

But Krugel said contracts can also use more creative approaches. For example, the principal could set up an escrow account with an initial down payment to protect the funds, although this could be challenging depending on their cash flow. Also, contractors could try to decide joint liability within the same contract.

“If we’re in a state that doesn’t have strict liability, then ‘you pay 80 percent, we pay 20 percent,’ or something like that,” Krugel said. “And maybe that could hold. That might be enforceable then.”

A bit of prevention

In terms of prevention, both Rosenberg and Nesse noted that the involvement of labor representatives—unions—can make a big difference. According to Nesse, simply having a third party working to make sure employees receive their entitlement can avoid the problem.

“I represent union signatory contractors, and when you have a labor agreement in place, that union acts as a third party to enforce those employment requirements,” Nesse said. “And to me, that’s the ultimate protection against that.”

For non-union builders? Additional leg work to find out who is hired by the sub is still the best course of action.

“The absolute core of this problem is employee misclassification and making sure that project workers are actually employees of someone, not independent contractors,” Nesse said. “Now, there’s going to be some rare exceptions to that, right? Like the guy who’s coming to paint the mural on the ceiling, he’s probably going to be an independent contractor. But the 10 to 20 guys who are installing the drywall should always be employees

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