New Risks for Illinois Contractors – Wages Due Subcontractors’ Employees

September 13, 2022 Construction Law Corner

This summer, Illinois joined what seems to be a growing movement towards expanding construction-worker rights and protections against wage theft. Through an amendment to the Illinois Wage Protection and Collection Act (the “Act”)—the law governing, among other things, wage payments, deductions, and reimbursements—prime contractors (those in a direct contractual relationship with a property owner, including top-tier construction managers) are now potentially liable for claims brought by their subcontractors’ laborers for unpaid wages, benefits, and contributions. In addition, prime contractors may be liable for damages, interest, penalties, and attorney’s fees associated with such claims.

Without doubt, the amendment—codified as 820 ILCS 13.5—represents a big win for Illinois labor groups, which lobbied for the amendment’s passage. The amendment is particularly advantageous for construction unions, signatories of which are, as discussed below, expressly exempt from the amendment.

The amendment applies to private construction projects—both new construction and improvements on existing structures—exceeding $20,000. Government projects are exempt, as are improvements on existing single-family homes and individual units within multi-family properties.

In many ways, the amendment largely mirrors recently passed comparable legislation in New York, which went into effect in January 2022. As articulated in a publicly circulated memo from New York State Senator Jessica Ramos, these new laws aim to create a system of industry self-policing with respect to enforcement of labor laws. In Illinois, the law serves to buttress existing routes of wage recovery for construction laborers, whose wages are already protected through mechanics lien rights.

Signatory Contractors Exempt

A key difference between the Illinois amendment and the New York legislation, is that the Illinois amendment provides that primary contractors who are “parties to a collective bargaining agreement on the project where the work is being performed” are exempt from the new provisions. While the amendment’s language is a bit ambiguous, the general consensus is that all labor-union signatories are exempt from the new liability risks. In turn, some view the amendment, for better or worse, as an implicit, if not explicit, government-sanctioned organizing tool for the trade unions. Because signatory contractors are exempt from the new liability risks, unionization could represent a risk-mitigation tool to avoid exposure under the amendment. While unlikely that the amendment will result in currently nonunion contractors becoming signatories in droves, it is feasible that those on the fence could be further incentivized to do so.

Subcontractor Indemnification Obligations

Unlike the New York law, which allows contracting for subcontractor indemnification, the Illinois amendment provides that, by default, subcontractors must indemnify the prime contractor for liability under the amendment, unless the subcontractor’s failure to pay was due to the primary contractor’s own failure to pay monies due to the subcontractor in accordance with the terms of their contract. For those familiar with construction contract disputes, whether monies are, indeed, “due in accordance with the terms” of a contract can itself be a complicated question. Pay-if-paid provisions, entitlement to change orders, and contractually permissible withholdings can create a complex web of factual and legal questions. Thus, in some cases, adjudication of a prime contractor’s payment liability to a subcontractor’s employee under the Act may first require adjudication of a prime contractor’s payment obligation to the subcontractor employer.

Ultimately, a subcontractor’s indemnity obligation to the prime contractor for unpaid wages may come with little consolation or practical value if and when a non-paying subcontractor is in dire financial condition and unable to make payroll, which is the likely reason for not paying wages due.

Risk Management

Prime contractors have a number of risk-mitigating tools at their disposal that may be implemented both before and after hiring subcontractors. To start, prime contractors should undertake due diligence in vetting potential subcontractors. Prequalification requirements and information gathering regarding subcontractors’ financial wherewithal can serve as preemptive protections. Requiring subcontractors—especially those deemed to pose particular risks of default—to procure performance bonds or specialty insurance may be prudent in certain cases. Even more stringent measures such as requiring corporate or personal guarantees may serve to bolster the amendment’s indemnification obligations. Through focused contract provisions, prime contractors can put in place payroll certification, auditing rights, and conditional payment terms to help ensure subcontractors are paying their employees throughout the project.

Naturally, such efforts cost time, effort, and hard costs. For an industry already stretched thin from manpower shortages, volatile material costs, and thin margins, in the long run, project owners and developers are likely to bear the ultimate cost burden.

Final Thoughts

While the basic structure of the amendment is fairly simple, it’s application and functionality are more complicated. A prime contractor’s liability for subcontractor wage payments is by nature project specific. Where a laborer works on multiple projects for different prime contractors, it may not always be clear (or ultimately discernable) whether a short-paid laborer was or was not paid for the work they did on any given project. While admittedly rare, joint ventures between union-signatory contractors and non-union contractors pose a unique question of exemption, as does work on public-private-partnership projects.

While we have yet to see the claims process play out (either in Illinois or under the New York law), the amendment clearly adds risk of significant unanticipated liability. The amendment requires potential claimant employees to provide 10-day written notice to both its employer and to the prime contractor before filing a claim, giving parties a narrow window to assess the veracity of the claim and determine the prudent course of action. If you receive such notice, as either a subcontractor or a prime contractor, you should immediately contact an attorney before proceeding. There may be legitimate reasons for non-payment, but failing to make payments may also carry risk of accruing additional penalties, interest and fees.