About Caroline Trautman

Caroline Trautman is an attorney with Anderson Jones PLLC, Raleigh, N.C. She assists clients with construction litigation, contractual drafting and disputes, collections, lien and bond claims, licensing issues and other matters affecting businesses.

Understand Your State’s Limitations on Non-compete, Non-solicitation and Non-disclosure Agreements

It is likely that at some point in their careers, laborers will be asked or required to sign an agreement restricting their activities once the working relationship comes to an end. National Public Radio reported in November 2016 that roughly 18 percent of U.S. workers were bound by non-competition agreements alone. This is in spite of the fact that numerous states restrict these agreements, which are prevalent in the construction industry. Many contractors require workers—particularly high-level employees—to sign such agreements as a matter of course. But whether it makes sense to do so—and which type of agreement is the best fit—depends on businesses’ needs and goals, as well as the controlling law.

NON-COMPETITION AGREEMENTS

Generally, non-competition agreements or clauses—also known as “non-competes”—prevent workers from engaging in the same business as their employers’ business after the relationship is terminated. This agreement often occurs at the beginning of the labor relationship with employees making this promise in consideration of new employment. These clauses can prohibit workers not only from starting their own businesses in competition with a former employer but also from working for competitors.

For businesses, the goal of non-competes is to prevent former employees and independent contractors from offering the same services or products as the business. Should the employee or independent contractor choose to violate a non-competition agreement and engage in the same business, typically the employer is then entitled to injunctive relief whereby a court orders the worker to stop engaging in that type of business.

By their nature, non-competes are contracts that restrain trade or commerce. For this reason, many jurisdictions disfavor these agreements. States vary greatly as to whether non-compete clauses are enforceable and, if so, how agreements must be drafted to be enforceable. For example, most who do business in the state of California are aware of that state’s general ban on non-competes (see Section 16600 of the California Business and Professions Code).

Other states, such as Florida, allow non-competes to be enforced in particular circumstances set forth by state statute. In Florida, Title XXXIII, Chapter 541.335, requires that non-competes be signed and in writing to be enforceable. The law also sets forth detailed restrictions that depend on the party against whom they are being enforced. The Florida statute places duration and geographic limitations, among other limits, on these agreements.

In many states, though no statute governs non-competes specifically, court decisions have created com- mon-law restrictions on them. These restrictions tend to be time- and location-based limits similar to the ones codified in Florida. Under Chapter 75 of the North Carolina General Statutes, contracts “in restraint of trade or commerce” are illegal and generally unenforceable. However, in interpreting this ban, North Carolina courts have enforced non-competition clauses in certain, limited circumstances. Under North Carolina case law, to be enforceable, non-competition agreements must be in writing, signed by the employee/in- dependent contractor, and based on valuable consideration. Furthermore, the duration and location in which the worker cannot compete must be “reasonable”. Finally, such agreements must be designed to protect a legitimate business interest, such as investing time and resources toward training employees. (See Young v. Mastrom Inc., a 1990 N.C. Court of Appeals opinion.)

Provided that the terms of these agreements are reasonable, they are generally enforceable regardless of whether the worker quits or is terminated (as long as the termination is not otherwise in breach of an employment contract).

Adequate consideration is an essential element of any enforceable contract and of covenants not to compete in particular. In North Carolina and other states, courts have found that mere continued employment is not sufficient consideration to render a non-compete enforceable. In North Carolina, the promise of a bonus, raise in pay, promotion or a new job assignment is generally sufficient consideration. This means that employers who want current workers to sign a non-compete should be prepared to offer them something in addition to continued employment.

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What Contractors Need to Know About E-Verify and IRCA

Because proper compliance with immigration law is complex, this article should not be construed as legal advice. Those seeking counsel about proper compliance with IRCA, E-Verify requirements, the Fair Labor Standards Act, or wage and hour laws should contact an employment attorney practicing in their state. For general questions, feel free to contact the author at ctrautman@andersonandjones.com.

Mention the word “immigration” in today’s political climate and be prepared for the conversation to take any number of turns. What starts as a friendly conversation could segue into a political debate about President Obama or Donald Trump, livening up or ruining a perfectly good Easter dinner.

But regardless of opinion or political identity, immigration law—and compliance therewith—is something about which most construction professionals should be talking. It is a necessary component of any employer’s operations and it is of particular concern to construction business owners. “Am I supposed to be E-Verifying my employees now?” and “How long do I have to store I-9 Forms?” are crucial questions for contractors.

At a minimum, it is essential for construction professionals to understand the basics of the Immigration Reform and Control Act (IRCA) of 1986 and E-Verify. By now, most business owners in the construction industry are familiar with E-Verify, as well as federal I-9 forms, which must be completed pursuant to IRCA. But with immigration reform becoming a hotly debated issue in the U.S., contractors should not only be prepared to comply with existing laws, they should also pay attention to what changes the future could hold.

IRCA

IRCA, a federal statute, makes it unlawful to hire “unauthorized aliens”, which the law defines as individuals who are not “lawfully admitted for permanent residence” or not otherwise authorized by the attorney general to be employed in the U.S. [8 U.S.C § 1324a(h) (2012)]. IRCA is the statute that requires all employees and employers to complete I-9 Forms; the employer must then retain the original forms during the employment of each active employee (and for three years after employees become inactive or are terminated). The statute’s intention is to require every employer, regardless of the number of individuals it employs, to verify all employees hired after Nov. 6, 1986, are authorized to work in the U.S.

As a practical matter, compliance with IRCA likely won’t ensure all employees are authorized to work in the U.S. However, correctly filling out the I-9 Form is crucial to avoid fines and other penalties from Immigration and Customs Enforcement (ICE), Washington, D.C. Employees and employers have obligations regarding the I-9 Form, so cooperation between both sides of an employment trans- action is key. Under IRCA, ICE has the authority to inspect I-9 Forms and conduct audits to ensure employers are complying.

Common, but often innocent, mistakes are made. For example, employers often fail to check the “status” box on the I-9 form or fail to have the employee sign the form. Also, inaccurate classification of employees as “active” or “inactive” can lead to trouble for employers who have stopped maintaining I-9 forms for employees who no longer work for the employer but who are still classified as “active”. Instituting company policies on what constitutes an “active” and “inactive” employee, as well as ensuring proper completion of I-9 forms, can help prevent ICE audits and the fines that could result.

E-VERIFY

Unlike IRCA, E-Verify is not a statute but an Internet-based system that allows businesses to determine the eligibility of their employees to work in the U.S. In many cases, E-Verify will more accurately determine an employee’s eligibility to work than the I-9 Form system under IRCA. E-Verify is available to all U.S. employers free of charge by the Washington-based U.S. Department of Homeland Security (DHS) but it gene- rally is not mandatory for employers.

Although E-Verify is technically voluntary, numerous states have enacted provisions requiring most employers to use E-Verify. These states include Alabama, Arizona, Colorado, Georgia, Idaho, Indiana, Florida, Louisiana, Minnesota, Mississippi, Missouri, Nebraska, North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Utah and Virginia. Additionally, pursuant to a presidential Executive Order and a subsequent Federal Acquisition Regulation rule, federal contractors—or those contractors doing business with the federal government—must use E-Verify.

Again, except in certain circumstances, enrollment in E-Verify is voluntary. Once enrolled, however, employers are required to post English and Spanish notices indicating the company’s participation in the program, as well as the Right to Work issued by the Office of Special Counsel for Immigration- Related Unfair Employment Practices, a division of the U.S. Department of Justice, Washington. These posters must be visible to prospective employees. To enroll, an employer simply needs to visit the E-Verify website and begin the process. Next, the employer enters into a written Memorandum of Understanding (MOU) with DHS and the U.S. Social Security Administration (SSA), Washington. This MOU provides the responsibilities of each party— employer/federal contractor, SSA and DHS.

BROADER ACTIONS

In recent years, President Obama and state governments have implemented changes to immigration law and policy that are impacting the construction industry. President Obama, in response to Congress not passing an immigration reform bill, announced a number of executive actions in November 2014. One such measure would allow certain undocumented immigrants to temporarily remain and work in the U.S. without fear of deportation. Because of pending litigation, this measure has not yet taken effect.

Although President Obama has attempted to prolong some immigrants’ ability to legally work in the U.S., several states have enacted legislation that could do the opposite. While the 19 states previously listed had made E-Verify mandatory for certain employers, some states have broadened the scope of situations requiring employers to use it. North Carolina, for example, had required all employers with 25 or more employees to use E-Verify as of 2013. But in October 2015, Gov. Pat McCrory signed into law a bill that requires all contractors and subcontractors on state construction projects to use E-Verify (N.C.G.S. § 143-133.3). The statute appears to require this without regard to a contractor’s number of employees, bringing North Carolina a step closer to South Carolina’s zero-tolerance policy for employment of undocumented immigrants.

In South Carolina, private employers who fail to E-Verify new hires could lose their licenses to do business in that state [S.C. Code Ann. § 41-8-10, et seq. (2012)]. The South Carolina law, and similar laws, easily could affect contractors from other states with more lenient policies; however, the South Carolina statute defines “private employer” to include any company transacting business in South Carolina, required to have a license issued by any state agency (including a business or construction license) and employing at least one person in South Carolina. Therefore, companies outside South Carolina that have a South Carolina office—or just one employee in South Carolina—likely will have to use E-Verify, which is becoming required in an increasing number of locations.

EMPLOYEE MISCLASSIFICATION

Importantly, E-Verify does not apply to independent contractors; companies that are required to use E-Verify need only verify the status of employees, not of independent contractors that contract with the company for work. This is noteworthy in light of another trending issue in the construction industry: employee misclassification. Employee misclassification occurs when a business wrongly classifies an employee as an independent contractor or vice versa. This is a violation of the federal Fair Labor Standards Act.

According to the U.S. Department of Labor’s (DOL’s) website, the DOL’s Wage and Hour Division is engaging in “strategic enforcement” to identify instances where companies are identifying workers as independent contractors even though they function like employees. Whether companies could be penalized for failing to E-Verify independent contractors who should have been classified as employees is unclear. However, it appears that eventually many employers will have to reclassify workers who are currently classified as “independent contractors” to “employees” to comply with federal contracts, state contracts or state laws that require use of E-Verify. It appears that this will inevitably result in employers being required to use E-Verify on an increasing number of workers.

Single Insurance Policies that Insure All Parties on a Specific Construction Project Offer Benefits and Risks

With the use of wrap-up insurance policies on the rise for commercial construction projects, many contractors and subcontractors have questions about how these policies work and what unique concerns and questions they present.

Generally, wrap-up insurance refers to single insurance policies written to insure all parties involved in a specific construction project—providing coverage for the job-site risks of the owner, construction manager, general contractor, contractors, subcontractors and design firms—instead of the individual parties each purchasing and carrying their own insurance policies. Wrap-up insurance policies are most commonly used on very large commercial or public projects. Many project owners and general contractors have found that using these policies is an effective risk-management technique for handling loss exposures related to single and multiple-site construction activities.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

Benefits

There are two primary types of wrap-up insurance policies: Owner Controlled Insurance Policies (OCIPs), in which the project owner is the primary sponsor, and Contractor Controlled Insurance Policies (CCIPs), which are controlled by the general contractor. Additionally, owners and general contractors can cover multiple projects under a single program in Rolling Controlled Insurance Policies (RCIPs). Typically, wrap-up insurance policies include general liability, workers’ compensation/employer liability, excess liability and builder’s risk as standard coverages, but many owners also add coverage for project environmental liability and project design team errors and omissions.

The benefits of using wrap-up insurance are numerous, especially for the owners or contractors who sponsor them. A successful wrap-up insurance program can significantly reduce risk for owners or contractors, giving them more control over insurance coverage for all the parties and avoiding unpleasant surprises about the extent of coverage parties have. Under the traditional model, owners or general contractors establish minimum insurance requirements for subcontractors and require them to furnish a certificate of insurance specifying coverage areas and limits. However, because all insurance policy terms differ slightly, there is no guarantee that a given subcontractor’s insurance will be adequate, or still in force, at the time of a loss. Furthermore, contractors and subcontractors normally have to build their insurance costs into their contract costs, and this increases bid amounts.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control. When sub-contractors no longer have to increase their bids to factor in insurance costs, owners claim they can utilize the cost savings to fund the costs of the wrap-up insurance. And the potentially more streamlined process for handling claims can make prospective litigation less time-consuming and costly.

Risks

OCIPs and CCIPs, of course, come with their own set of risks and drawbacks for owners, contractors and subcontractors, and the parties who are asked to enroll in these policies do not always look upon them favorably. Some subcontractors and contractors have found that enrolling in wrap-up insurance policies is administratively burdensome and that the resulting decrease in volume of insurance purchases for their companies can increase the costs of other insurance they must purchase. Additionally, subcontractors should make an effort to understand the limits of coverage; it may differ from the coverage in the policies they have been accustomed to using. This should be done at the procurement stage, before a project begins, and not later, after project contracts have been signed.

Those investigating the level and limits of coverage will want to determine how responsibility for any injuries, losses or damage will be addressed and confirm that the responsibility is outlined in the building contract or the written wrap-up policy. One potential source of misunderstanding is builder’s risk coverage. Often, builder’s risk insurance is carried by the builder. With wrap-up policies, owners and general contractors may be particularly concerned with the scope of the builder’s risk coverage. For example, if a wrap-up policy excludes property damage occurring during construction but the builder’s risk policy excludes faulty workmanship, a potential gap in coverage would exist. The wrap-up insurer might take the position that it won’t pay for what is essentially a builder’s risk claim. To prevent such an outcome, owners may find they need to add coverage to the builder’s risk policy to cover faulty work or at least repairs.

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Forum-selection Clauses and Their Impact on the Construction Industry

With the national housing market poised for slow but steady growth in 2014, U.S. contractors expect a good year for business, and the number of contracts and subcontracts for construction work is expected to increase. Many of these contracts will contain forum-selection clauses, and a recent U.S. Supreme Court ruling brings to light the importance of these clauses and coming changes in their enforceability.

WHAT IS A FORUM-SELECTION CLAUSE?

A forum-selection clause is a contractual provision in which the parties establish the place for specified litigation between them. These clauses have become increasingly common in construction contracts, particularly with general contractors who do business in two or more states. Often, general contractors have a form subcontract agreement they require or ask all subcontractors on a particular project to sign. If general contractors work in multiple states, forum-selection clauses can help them make potential litigation less costly and easier to manage by guaranteeing the litigation will take place in the company’s home state, where its executives and attorneys likely work.

An example is a general contractor based in New York but working on a North Carolina project and entering into a roofing subcontract with a North Carolina roofer. The general contractor can present the subcontractor with a forum-selection clause mandating any legal claims arising from the subcontract may only be brought in a New York court. For a North Carolina contractor, finding counsel and filing suit in New York will likely be more difficult and costly than doing so in North Carolina, especially when evidence and witnesses are located in North Carolina. In this example, the forum-selection clause makes litigation more predictable and cost-effective for the general contractor and also decreases the likelihood the subcontractor will actually be able to sue, so it most likely favors the general contractor.

To protect local contractors, many state laws have declared out-of-state forum-selection clauses unenforceable in construction contracts. These states include Arizona, California, Connecticut, Florida, Illinois, Louisiana, Minnesota, Montana, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Virginia and Wisconsin. Additionally, state laws in Nebraska, Rhode Island, South Carolina and Texas make forum-selection clauses unenforceable in certain circumstances that sometimes, but do not necessarily, encompass construction contracts. In the first category of states, local contractors have been able to file suit locally despite forum-selection clauses because courts in these states can apply the state laws and disregard the clauses. However, the U.S. Supreme Court’s recent decision on these clauses will severely limit the reach of these laws and will ensure that forum-selection clauses are enforced in many more cases.

CASE BACKGROUND

In December 2013, the U.S. Supreme Court issued a unanimous decision in the case of Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas. The court held that defendants in federal court can use forum-selection clauses to transfer their cases to the state specified in the clause, even if the suit is brought in a state with a law deeming these clauses unenforceable. Essentially, forum-selection clauses may be enforced by a venue transfer motion.

The case involved Atlantic Marine Construction (AMC) Co., a general contractor based in Virginia. AMC won a federal contract from the U.S. Army Corps of Engineers to construct a building at Fort Hood, Texas. AMC subcontracted with J-Crew Management, a local Texas company, to perform some of the work. AMC’s contract, which J-Crew Management signed, included a forum- selection clause dictating that any legal disputes between AMC and J-Crew Management arising from the contract had to be brought in state or federal court in Norfolk, Va.

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Five Ways Construction Professionals Can Protect Their Contractual Rights and Avoid Misunderstandings

If your company has recently been awarded a contract for construction work, congratulations! In finding the work and having your bid accepted, you’ve demonstrated your capability to efficiently furnish high-quality labor and materials. At this point, many contractors have no choice but to immediately proceed with reviewing the schedule, scope of work and specifications, as well as preparing to mobilize labor to meet time-related demands. With this flurry of activity, many contractors forget to reduce the agreements to writing, fail to sign written agreements, or—worse—sign contracts without reading all the terms and conditions. The following tips and information can help busy contractors prevent common pitfalls from occurring and offer guidance for those mired in contractual disputes.

1. Put everything in writing.

Most construction professionals would agree written contracts are essential for projects with new or relatively unknown clients, but many feel that long relationships with clients and mutual trust and respect eliminate the need for written contracts. In fact, some fear written agreements have the potential to offend other professionals with whom they have a positive past working relationship. However, written contracts are essential in today’s economic and legal climate and can be seen as a way to honor the mutual respect many feel toward past and repeat clients. The primary purpose of a contract is not necessarily to give one party an advantage over the other. Instead, the goal is for both parties to clearly delineate each party’s expectations from the other to avoid unwanted surprises. If both parties are aware of the duties, responsibilities, risks and rewards before the project commences, there will be less potential for disputes and misunderstandings than there will be without a written agreement.

2. Know that complying with licensing statutes is essential to preserving contract rights.

North Carolina and South Carolina, like most states, prohibit unlicensed contractors from enforcing the provisions of their contracts if a license was required for the contract in question. Additionally, North Carolina case law requires contractors to strictly comply with N.C. General Statutes Chapter 87, which contains specific provisions about the name in which contractors can lawfully hold a license. Failure to comply with the statutes will prevent contractors from enforcing the provisions of their construction contracts.

South Carolina has taken an even stricter approach. Pursuant to S.C. Code Ann. §40-11-370, it is unlawful to engage in construction under a name other than the exact name on the license issued to the contractor (if a license is required for the work), and an entity that does so may not bring an action in law or in equity to enforce the provisions of a contract. This means even a duly licensed contractor can be barred from any recovery for breach of contract, including lien and bond lawsuits, if the contractor’s name on a written contract is even slightly different from the contractor’s name on the contractor’s license. Although some states have case law adopting this principle, South Carolina appears to be the only state that has codified the rule. Therefore, it is imperative a contractor’s name on the contract is the exact same name as the name on any contracting license required for the work in question.

3. Assume no damage for delay clauses are enforceable.

Both North and South Carolina courts generally enforce “no damage for delay” clauses, which specify owners will not be liable for a general contractor’s damages arising from delay, disruption or interference—even if the owner is responsible. General contractors can enforce these provisions against subcontractors or suppliers, too. Often, the contract will provide that additional time—contingent on written approval by the owner, architect or general contractor—is the sole remedy for delay.

South Carolina courts have recognized some exceptions to these clauses’ enforceability, however. The South Carolina Supreme Court held in Williams Electric Co. v. Metric Constructors Inc. (1997) delay caused by fraud, misrepresentation or bad faith; delay caused by active interference; unreasonable delay giving rise to abandonment of the contract; or delay caused by gross negligence can give rise to recoverable damages.

Similarly, North Carolina courts have overlooked “no damage for delay” clauses and allowed parties to recover damages arising from delays that constitute abandonment of a contract; active interference with the contract; and delays resulting from fraud, bad faith or arbitrary action. Additionally, damages from delays not reasonably contemplated by the parties are recoverable.

Many delay provisions are accompanied by notice requirements, too. Most contracts that do allow parties to recover for delay related damages require the party claiming damages to give notice of the delay, or the source of the delay, as soon as they are aware of it. What constitutes notice and reasonable knowledge of the delay can be open to interpretation. Ambiguity is best avoided through specific provisions in the contract.

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