How contractors can guard against wage theft on their jobsites

Construction has a wage theft problem.

In fiscal year 2023, the Labor Department’s Wage and Hour Division secured over $35.5 million in back wages for nearly 18,000 construction employees — more funds than from any other U.S. industry.

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

The issue creates a unique challenge for general contractors and primes who want to conduct business lawfully 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 prime or GC having direct knowledge of those interactions. 

Given that 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’s exposure for wage theft,” said Dan Rosenberg, principal at Chicago-based law firm Much Shelist. “States now have passed laws making it even easier for employees and unions to go after unpaid wages from solvent, bigger contractors.”

For example, in Minnesota, the Construction Worker Wage Protection Act went into effect in August 2023. The law gives construction workers the right on some projects — there are exceptions for smaller residential builds — to pursue unpaid wages from the lead contractor instead of a subcontractor that didn’t pay them. They can pursue what they’re owed by filing a claim with the state’s labor department or in court.

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

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

Why it happens

The reason wage theft is so pervasive in construction, experts say, is because it tilts the business playing field — albeit illegally — in favor of those companies that engage in it.  

“The thing to understand is just what a cost advantage is afforded to the contractor that chooses to cheat through employment classification,” said John Nesse, partner at St. Paul, Minnesota-based labor relations law firm Management Guidance LLP.

Nesse serves as the general counsel to the Signatory Wall and Ceiling Contractors Alliance, an advocacy group for union contractors. The organization’s leaders have testified to Congress that misclassifying workers or engaging in wage theft offers close to a 50% cost advantage over employers who follow the rules. The downside, of course, is the shadow that hangs over firms when they’re found out, particularly if they sully the good names of their partners along the way. 

“If you have an employer who is subcontracting the work, so that you’re creating multiple tiers below the GC, every tier creates an additional layer of risk,” Nesse said.

Vet, 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 in contracts. But legal experts say the best first line of defense is often to know your trade partners well, ensure they have the means to pay employees and build trust in that working relationship.

“The first thing is you have to carefully vet your primary, the client and any subcontractors,” said Charles Krugel, a management-side labor attorney in Chicago. “And what I say is you could do a basic internet search or maybe search some court websites in your jurisdiction and find out if there’s been any lawsuits or any complaints or bad reviews from 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 how exactly the subcontractor will deliver the work, according to Nesse, and ensure subcontractors will actually classify employees as employees, rather than independent contractors.

“Obviously you’re going to need to subcontract that first tier to the specialty contractors,” Nesse said. “You’ve got the concrete guy, you’ve got the electrician, you’ve got the drywall guy, so on and so forth. But if you’re subcontracting to a drywall contractor and then that drywall contractor is in turn subcontracting the work, to me, that’s an enormous red flag.”

Contracts and response

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

For example, Rosenberg shared standard, common contract language, such as the requirement of a sub to provide the GC with any additional sub-subcontracts for work or permitting the GC to stop paying the subcontractor if they suspect wage theft is happening, in which case they should start paying workers directly. Doing so could also function as a potential defense, should a wage theft case arise down the road.

But Krugel said contracts can also use more creative approaches. For example, the prime could set up an escrow account with an initial down payment to protect funds, though that could pose a challenge based on its cash flow. Additionally, contractors could attempt to decide joint liability within the contract itself.

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

An ounce of prevention

When it comes to prevention, both Rosenberg and Nesse noted that involving labor representatives — unions — can make a big difference. According to Nesse, merely having a third party working to ensure employees get their due can prevent the issue.

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

For non-union builders? Extra leg work to know who’s hired by the sub remains the best course of action.

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

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