- State laws in California and now Maryland have handed the ultimate responsibility for the wages of all workers on a construction job to general contractors, and this could create additional exposure for surety companies that provide performance and payment bonds for private construction projects, according to Peter Strniste of law firm Robinson+Cole.
- The American Institute of Architect's A312-2010 Performance Bond and Payment Bond is one of the most commonly used bond forms, and the language is such that it obligates the surety to pay for "labor, materials and equipment furnished for use in the performance of the construction contract" if the general contractor cannot. According to the bond form, a claimant "also includes any individual or entity that has rightfully asserted a claim under an applicable mechanic’s lien or similar statute," a definition that would cover a person who has furnished labor to a project.
- Strniste said that surety companies in Maryland and California may already have additional exposure to claims of nonpayment under the new laws in those states and that underwriters should consider a contractor's potential obligations when underwriting bonds.
As of Jan. 1, 2018, California general contractors must ensure that all workers with valid wage claims on their projects are paid in full, and a similar law goes into effect in Maryland this October. Unlike in California, however, where general contractors are responsible only for wages, benefits and interest, Maryland general contractors could be responsible for up to three times the amount owed, plus attorney's fees and other costs if the reason for nonpayment is not related to a legitimate dispute.
Oregon passed its own wage protection law earlier this year that creates liability for the general contractor only if the worker's subcontractor employer has not yet been paid in full.
When surety companies are evaluating a potential payment or performance bond, a lot of the focus is on how risky it will be to back the contractor requesting the bond, so it analyzes factors like credit history and past job performance in deciding whether it will issue a bond and how much it will charge the contractor for the bond.
The possibility of having to pay future wage claims could raise the price of bonds, but the new laws could also be a boon for surety companies. One of the ways general contractors can mitigate the risk of having to pay their subcontractors' employee wages is to require that subcontractors provide their own payment bonds. Depending on the size of the job, that could translate to several new bonds per job, although it would raise the overall cost of the project and could jeopardize the position of subcontractors who are on shaky financial ground and might not be able to meet surety underwriting requirements.