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.

OSHA Education and Training Requirements For Contractors

Many licensed contractors have been getting “on-the-job” training for years — some, since they were working on jobsites as young laborers. But what formal education and training are required for contractors? The short answer is that it differs slightly from state to state, but no one can escape OSHA.

Perhaps the best-known training requirements for contractors are those set forth in the federal Occupational Safety and Health Act of 1970 (OSHA) and the regulations OSHA enables.

OSHA permits individual states to develop and enforce their own occupational safety and health plans, statutes, and enforcing agencies as long as the states meet federal requirements (29 U.S.C. § 667), so many contractors may be more familiar with their state’s occupational safety and health act than the federal. According to the U.S. Department of Labor, jurisdictions with their own federally-approved plans governing both public and private employers are Alaska, Arizona, California, Hawaii, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Nevada, New Mexico, North Carolina, Oregon, Puerto Rico, South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, and Wyoming. (Connecticut, Illinois, Maine, New York, New Jersey, and the Virgin Islands have plans that apply only to public employees.) State laws must be “at least as effective” and stringent as OSHA.

In most of these states, and in states that simply follow the federal OSHA requirements, construction-industry employee training is required to comply with the federal requirements set forth in 29 CFR 1926. California, Michigan, Oregon, and Washington have more stringent requirements than the federal rules.

What Training Does OSHA Require?

The Department of Labor’s regulations contained in 29 CFR 1910 and 29 CFR 1926 give employers numerous “accident prevention responsibilities.” These responsibilities specifically include the duty to train each “affected employee” in the manner the standards require. The regulations specifically require training for employees on topics including scaffolding, fall protection, steel erection, stairways and ladders, and cranes. Both federal and state courts interpret OSHA training requirements; state courts interpret them in states with their own laws but look to federal decisions for guidance.

Court decisions indicate that training requirements are interpreted broadly. For example, in 2002, the U.S. Court of Appeals for the First Circuit evaluated 29 CFR § 1926.21(b)(2)’s requirement for employers to instruct each employee in the “recognition and avoidance of unsafe conditions.” The case, Modern Continental Const. Co., Inc. v. Occupational Safety and Health Review Commission, involved vertical rigging in a tight working space during an underground project involving submerging a section of highway. The operation resulted in a fatality. The court found that the employers’ duty “is not limited to training for hazards expressly identified by OSHA regulation” and that employers are obligated to instruct their employees in the recognition and avoidance of “those hazards of which a reasonably prudent employer would have been aware.” The court recognized that while the training does not have to eliminate hazards, the training must focus on avoiding and controlling dangerous conditions.

Furthermore, merely holding or sponsoring training courses may not be enough to comply with OSHA; the regulations require employers not only to ensure training but also to ensure that each affected employee has received and understood the training. The District of Columbia Circuit emphasized this requirement in Millard Refrigerated Services, Inc. v. Secretary of Labor. The Court upheld a citation against an Alabama company operating a refrigerated storage facility after an anhydrous ammonia leak even though the employer claimed it didn’t know that its employee didn’t understand the training and therefore wasn’t wearing a respirator.

Decisions like this make it incumbent upon employers to recognize and anticipate hazards and ensure that employees have the proper education and quality training to handle them.

Penalties for Training Violations

Employers’ duty to train is worded as a duty to its individual employees: “The employer must train each affected employee in the manner required by the standard, and each failure to train an employee may be considered a separate violation” [29 CFR 1926.20(f)(2)]. The statute and regulations do not explicitly state the penalty for failure to give required training; penalties will depend on the facts of each case. OSHA violations generally fall into one of four categories: willful, serious, repeated, or other-than-serious. According to the Department of Labor, the current maximum penalty is $13,260 per serious violation and $132,598 per willful or repeated violation.

Courts have upheld steep penalties for certain training violations, particularly for repeated failure to train employees. For example, in Capeway Roofing Systems, Inc. v. Chao, a roofing contractor was fined $6,000 for failing to train an employee on fall protection. (The Secretary of Labor also assessed other fines against the contractor for failure to comply with rules on fall protection, personal protective equipment, and other regulations.) The court reasoned that the fine for failure to train was appropriate, though relatively high, because it was a third “repeat” violation. Additionally, in some states, certain OSHA violations, especially willful and repeated violations, can subject employers to criminal liability.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

Contracts Can Provide Protection From Escalating Prices

If you work in the construction industry and you aren’t familiar with the impact of price escalation, chances are you are about to learn.

It’s hard to make sense of the so-called “trade war” between the United States and China, and the economic forces in play are complex. But in essence, reports are that the events of past months are continuing to impact building costs in the United States.

President Trump and his administration have imposed tariff increases on certain Chinese goods in a claimed effort to boost the United States’ economy. As several news outlets have reported, Trump started with a 10 percent increase on certain Chinese products; then on May 10, he announced an increase from 10 percent to 25 percent on products like electronics, clothing, and seafood. A May 14 Los Angeles Times story reported that the tariffs had already added $1 billion – a number that could increase to $2.5 billion – to the annual cost of housing construction due to price increases in Chinese granite, cement, vinyl floor coverings, waferboard, tile, and stainless steel. Some roofing materials, like aluminum, are projected to cost more in the near future, too. (See, for example, BBC News’ May 10 article “Trade wars, Trump tariffs, and protectionism explained.”)

The Los Angeles Times’ prediction was that cost increases would be borne by American consumers investing in housing and construction. But the only thing that truly allocates risk of price increases will be contract terms.

And this gets us back to why we care about material price escalation and how players in the construction industry can assert some control over what are, at their core, factors beyond their control.

None of us can control what President Trump says, does, or tweets, or what China does in response. But if parties think about these issues before entering into construction contracts, they can at least know who will bear the risk of these types of increases and try to prepare accordingly. Although factors like federal economic policy and market forces can impact material prices, who bears the cost of these increases in a commercial setting is solely dependent on the parties’ contract terms. 

Assessing Risk in Pre-Existing Contracts for a Fixed Price

If standard-form construction agreements, like AIA or ConsensusDocs contracts, are a guide, then contractors and subcontractors will probably bear the risk of material price increases in contracts to which they are already a party, assuming they are contracts for a fixed sum or guaranteed maximum price. (Of course, cost-plus agreements will give contractors much more potential to recover for price increases.) Although price escalation can be addressed in provisions on contingencies — percentages of the contract value set aside for unpredictable changes in the work — unless the agreement specifically mentions price increases or escalation, contractors probably are not entitled to an increase in a fixed contract sum due to price escalation.

To understand the legal significance of a price escalation claim, it is important to understand the distinction between changes in scope of work and changes in price. Nearly all standard-form construction agreements provide for how “changes in the work” will be handled. For example, AIA A201 (General Conditions of the Contract for Construction) provides in §7.3.1 that “the Owner may … without invalidating the Contract, order changes in the Work within the general scope of the Contract consisting of additions, deletions, or other revisions, the Contract Sum and Contract Time being adjusted accordingly.” However, because per §1.1.3 the term “Work” includes “all … labor, materials, equipment, and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations,” contractors will not be entitled to an increase in the contract sum unless there is a change in the scope of the work or materials themselves.

Addressing Price Escalation in Future Contracts

Because price escalation claims don’t fit neatly into most standard provisions on change orders or equitable adjustments, parties who want to reduce their risk with respect to material price increases should explicitly address the issue when negotiating contracts. Contractors can do this by considering cost-plus contracts, inserting a price escalation clause into fixed-price agreements, or simply increasing the contract sum in an attempt to protect themselves in the event of price increases.

Cost-plus contracts could be a useful tool for contractors hoping to shift away, or more evenly distribute, the risk of higher material costs. While most cost-plus agreements will still contain a guaranteed maximum price that potentially won’t cover builders for all price increases, these arrangements still probably give contractors greater ability to pass cost increases to owners than fixed-price agreements. Because these contracts charge owners for the cost of labor and materials plus a fee, owners can also benefit from any decreases in material costs. Negotiating a guaranteed maximum price may also allay owners’ concerns about rising costs.

In fixed-price agreements, parties who want to address material cost issues should likely insert clauses that either condition the contract sum on material costs existing at the time of the contract, or clauses explicitly entitling them to make a claim for additional payment in the event of price increases. Such provisions might be more appealing to owners if they similarly entitle owners to the right to reduce the contract amount in the event of material price decreases.

If price escalation clauses are based upon time, they should specifically state the date through which the contract sum can be guaranteed. They should then specify how a contract increase, if any, should be imposed so that the parties will have a clear understanding of how a new price will be calculated. If provisions are contingent not on time but on the amount of the price increase, they should address how much of a cost increase is actionable — for example, a clause could apply to material cost increases of 3 percent and above — and should explicitly state what documentation is required in order for the contractor to make a claim for increases. In anticipation of making such a claim, contractors should consider preserving documentation of prices as they exist at the time of bid so that they can prove that price increases in fact occurred later when they are asserting a claim for price escalation. With both types of clauses, providing cost savings for the owner in the event of a price decrease, or placing some limit on the ability to claim an increase, could be crucial to making a deal with owners.

About the author: Caroline Trautman is an attorney with Oak City Law, LLP, based in Durham, North Carolina. Questions about this article can be directed to her at caroline@oakcitylaw.com.

Author’s note: This article does not constitute, and should not be construed as, legal advice on any particular scenario. For specific advice, consult with an attorney licensed in your state.

Proper Documentation Can Be the Key to Dispute Resolution

Ever been told to dance like nobody’s watching? 

That advice is great for weddings and end-zone celebrations. But after wrapping up a week-long trial, your exhausted, cynical lawyer probably thinks “write every email like it will one day be a courtroom exhibit” is far better advice than the dancing thing.

This might sound needlessly frightening, but for construction professionals working on challenging projects, documentation can make or break the ability to successfully negotiate — or, if it comes to it, prove the merits of — a dispute with another party. 

Below are some items that, if handled properly, can help companies establish their side of case and that, if handled poorly, can constitute problem areas. 

Contract Documents and Statutory Notices 

Many legal rights on a project come from the parties’ written contract agreement. Basic measures like ensuring the both parties have signed — and not just received — the contract can be crucial to preserving these rights. It is also a good practice to keep a copy of the signed contract and all attachments in a location where it is accessible to project managers and others who have authority to deal directly with the other party. As always, reading the contract in advance, and perhaps consulting with an attorney before signing the contract, is an important practice. 

Having a checklist for every project can also help ensure that good practices are routine, and not just employed for especially difficult projects. If practices are done on every project, no matter the size or complexity, it is easier to ensure that companies will comply with them. 

Potential project checklist items include: 

  • Has a written contract been signed by both parties and saved in the project file? 
  • Are certificates of insurance on file for all subcontractors? 

Checklist items for privately owned projects: 

  • Have any statutorily required project statements, notices of contract, or notices of subcontract been properly filed and served? 
  • Have any statutory prerequisites to filing lien claims been met — such as North Carolina’s requirement to serve a Notice to Lien Agent? 

Checklist items for publicly owned projects:

  • Has the payment bond been obtained?
  • If required by state or federal statute, has the payment bond surety information been sent to all parties?
  • Have statutorily required notices of contract or notices of subcontract been properly served or filed? 

Notices 

Most written prime contracts and subcontracts require parties to give written notice to the other party to communicate various things, like change orders, claims for extra payment, or the other party’s breach or default. Failure to provide notice using the proper means and by the required deadline can prevent contractors from asserting their contractual rights. To ensure compliance with contract provisions, ensure that a copy of the contract is accessible to the project manager and that notices are dated, signed (if applicable), and that copies of the notice are preserved. If notices are sent by email, a good practice is trying to obtain a delivery or read receipt. Notices to cure should state specifically what is expected of the other party in order to cure a default and what will occur if the other party does not cure the default. 

Where Notices are concerned, do the following:

  • Keep a copy of the signed, written contract in a place where project managers can easily access it.
  • Send requests for change orders and additional time or money in writing.
  • Send notices to the right person. The written contract usually dictates to whom notices should be sent, and sending notices to a person with managerial authority is generally recommended. 
  • Consult with an attorney and send a written notice before invoking contractual remedies like self-correcting defective work, supplementing a subcontractor’s workforce, or terminating a subcontractor. 
  • Maintain copies of any letters, correspondence, or notices sent to another party, including copies of proofs of service like Certified Mail cards, email read receipts, or fax confirmation sheets. 

Confirming Emails 

Emails and text messages constitute the bulk of the written communication on most construction projects today. Both emails and text messages — whether they are sent from work or personal devices — are discoverable in legal cases, meaning that companies will be required to provide them to other parties in the case during the litigation process. This may be true whether or not the company or sender believes they are relevant. The implication is twofold: contractors should send emails and text messages with care and should assume that they could one day be seen by an opponent, judge or jury. On the other hand, when used effectively, emails and text messages can be used to accurately document parties’ agreements and understandings about what will occur on the project. 

With all communications, but particularly email, attorney-client privilege is an additional concern. The attorney-client privilege protects communications between an attorney and his or her client. The client has the right to keep these communications confidential in nearly all situations. However, the attorney-client privilege can be waived if communications are shared with third parties. The ease with which people can forward and share emails makes waiving the privilege dangerously easy. In some situations, waiving the privilege once can mean waiving it in future situations. 

Below are some do’s and don’ts that can result in helpful, not harmful, emails.

DO

  • Send emails to document conditions on a project. 
  • Send emails to confirm important conversations, especially ones about dates of mobilization or that contain notices. 
  • Respond to any emails that accuse you or your company of failing to fulfill any contractual obligation. 
  • Ensure you have access to the emails of any employees who leave the company. 

DON’T

  • Don’t forward your correspondence with your attorney to others. This could waive the attorney-client privilege. 
  • Don’t copy people outside of your company on emails to your attorney. This could waive the attorney-client privilege. 
  • In a dispute over fulfilling contractual obligations, don’tlet the other party have the last word. If you are sent an email accusing you of wrongdoing, not responding to an email can make it appear that you agree with it. 
  • Don’t send emails from your personal account. If you ever need to pull and produce all of the emails related to a project, it will be much easier to do if you are only pulling from one account per employee. 
  • Don’t use profanity or offensive language or phrases. If there is anything you would be ashamed of a judge or jury seeing you say, think twice before typing it. 

Daily Reports and Photographs

Daily job reports, if done well, can serve as a diary of what occurred on a project. While emails can be helpful, too, photographs do not lie, and daily reports with objective information like number of workers, hours worked, and weather conditions can effectively corroborate a company’s narrative of a story or dispute another side’s version. 

These types of documents typically have to be authenticated in court in order for them to be admissible as evidence, so if possible, it is best for the person who wrote a report or took a photograph to be able to testify about the origin of the document itself. 

Recommended procedures include: 

  • Have competent, trusted employees, such as project managers, take photographs and complete daily reports. 
  • Have a system in place for uploading photographs and saving them in the construction file so that they are centrally located, not just stored on employees’ individual phones or tablets. 
  • Ensure all photographs are dated or otherwise stored so that dates and identities of the people who took the photographs can be accessed. 
  • Complete daily reports documenting conditions like date, weather, number of workers, and anything pertinent occurring on the project site.  

About the author: Caroline Trautman is an attorney with Raleigh, N.C.-based Anderson Jones PLLC. Questions about this article can be directed to her at ctrautman@andersonandjones.com.

Author’s note: The above article is not, and should not be construed as, legal advice. For specific advice, consult with an attorney licensed in your state.

Lien Pre-Notice Requirements Can Have a Drastic Impact on Lien Claims

For contractors or subcontractors seeking past-due payment, mechanics’ liens are often a necessary part of the collection process. The ability to encumber title to a property — and potentially foreclose on the land to satisfy debt — is a uniquely powerful tool claimants can utilize to collect final payment or favorably settle an account, allowing contractors to close out their project files and move on. Each state’s requirements differ, and precision and accuracy are typically imperative to success. For example, missing the state statutory deadline or inaccurately describing the subject property will usually invalidate the lien. Satisfying all of the requirements is very important, as the mechanics’ lien is often the only way to give real teeth to a contractor’s claim for past-due payment.

Accordingly, most subcontractors and suppliers frown upon anything that would make it more burdensome to successfully make a lien claim. For this reason, the emerging trend of “pre-notice” or “pre-lien” requirements — and their potential deterrent effect on lien claims — deserves attention. Twenty-five states require lien claimants to provide the project owner (or the owner’s agent) with a “pre-notice,” which is a written notice in which the claimant identifies itself, the party with whom it contracted, and what labor or materials it will be furnishing on the project. (States requiring a pre-notice in at least some circumstances include Arizona, Arkansas, California, Florida, Georgia, Indiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, Ohio, Oregon, Tennessee, Utah, Virginia, Washington, Wisconsin, and Wyoming.)

A key characteristic of the pre-notice is that it is a prerequisite to the later filing of a mechanics’ lien under at least some circumstances. Pre-notice requirements usually require contractors and subcontractors to take action at the beginning of a project to secure their future right to file a mechanics’ lien — even if at this stage they are owed no money or have no reason to believe they would ever need to file a lien. In nearly every state with such a requirement, failing to file the pre-notice is a complete bar to ever filing a mechanics’ lien on the project in question. The pre-notice step is typically in addition to the other steps claimants already have to take to successfully make a lien claim. These other steps usually include filing and serving the lien and filing a lawsuit to enforce the lien by the required deadlines.

Proponents of pre-notice requirements often point to the positive consequences they can have for both claimants and project owners. Often, the purpose of these requirements is to place the project owner or its title insurer on notice of all parties who are furnishing labor or materials on the property. Notice of potential lien claimants helps owners avoid liens from emerging retroactively through the doctrine of “relation back,” which makes mechanics’ lien effective as of the date of the contractor’s first date of furnishing of labor or materials, even if the lien is not filed until later. Theoretically, if an owner knows who all of the subcontractors and suppliers are beforea closing or refinance occurs, the owner will have an incentive to pay any unpaid parties who could later file liens that would relate back to the parties’ first date of work on a project and cloud the title afterthe sale or refinance. Also, in many states the pre-notice will validate the lien even when the pre-notice is served after the statutory deadline as long as it is served before the property refinances or conveys to a new owner.

Potential Pitfalls

Because they add steps to the administrative and legal procedure for lien filing and potentially deter claimants from being successful, pre-notice requirements are generally unpopular among lien claimants. A less obvious, but significant, consequence of pre-notice requirements is the negative impact they can have on customer relationships. For many general contractors, pre-notices going from their subcontractors or suppliers to an owner feel overly aggressive because they come at the beginning of a project, when no money is likely to be owed yet. General contractors do not want their customers — the owners — to think that their subcontractors are worried about being paid promptly. General contractors also don’t enjoy the idea that a subcontractor or supplier is litigious or intends to one day file a lien on a project, and some of them make this known to their subcontractors. The result? Many potential lien claimants will refrain from filing or serving a pre-notice in an effort to satisfy the general contractors. But if the general contractor or owner encounters financial trouble or fails to make contract payments down the road, these would-be claimants will have jeopardized or eliminated their ability to assert a lien claim.

North Carolina’s statute is an example. The statute has long required that lien claimants file and serve their liens within 120 days of the last date of furnishing on a project and perfect their lien claims with a lawsuit within 180 days of the last date of furnishing. In 2013, North Carolina’s legislature added a pre-notice requirement that lien claimants file and serve a “Notice to Lien Agent” within 15 days of commencement or before a sale or refinance takes place. A Lien Agent is the title insurance company assigned to the project. The Notice to Lien Agent is typically served using an approved statewide electronic filing system that transmits notice not only to the Lien Agent but also to the general contractor. In addition to North Carolina, another 10 of the other states with pre-notice requirements also require the notice to be sent to the prime contractor. (These states include California, Georgia, Michigan, Minnesota, New Mexico, Ohio, Utah, Wyoming, and Virginia.)

For many general contractors, this sends a message that subcontractors or suppliers either don’t trust them to make timely payments, or, worse, that they intend to file a lien on the project. One North Carolina concrete supplier reported that as a regular practice, his company files and serves a Notice to Lien Agent on every project where it furnishes material, but that “we’ve lost customers over it.” He said that he understands why some suppliers don’t file the Notice to Lien Agent but said that for his company, protecting prospective lien rights and the right to full payment outweighs appeasing customers who are offended.

An impending change to the North Carolina statute may complicate the pre-notice procedure further. Beginning October 1, duly filed and served Notices to Lien Agent will expire after five years and will have to be renewed at that time. Furthermore, lien claimants will be required to “cancel” their Notice to Lien Agent “a reasonable time after the potential lien claimant has confirmed its receipt of final payment.”

Because North Carolina’s only approved electronic filing system for Notices to Lien Agent, www.liensnc.com, currently has no mechanism for canceling a Notice to Lien Agent, under the current system if a lien claimant has served the Notice, there is no official way to un-serve it. When the new law is passed and the electronic system is changed accordingly, general contractors who make their displeasure known to their subcontractors could potentially influence their subcontractors to cancel the pre-notice prematurely — thereby potentially eliminating their ability to file a mechanics’ lien, even if non-payment occurs.

Whether subcontractors and suppliers want to make a regular practice of filing and serving mechanics’ lien pre-notices is a judgment call for them. But in an increasing number of states, this could mean effectively waiving any lien rights they have.

You Might Have More Employees Than You Think You Do

If you are a contractor in the construction industry, there is a chance that a person who isn’t on your payroll is legally considered to be your employee.

If you meet the above description and you operate in North Carolina, South Carolina, Virginia, West Virginia, or Maryland, there is a particularly good chance that’s the case.

You might be thinking this is because of employee misclassification — which occurs when laborers are wrongly classified as independent contractors instead of employees. But that isn’t the whole story. Increasingly, unanticipated employer liability occurs not because of employee misclassification, but instead due to joint employment — a related but totally distinct issue.

This is happening because the definition of what constitutes employment, and joint employment particularly, has become increasingly broad in recent years. Many courts expanded the definition in response to stricter guidelines the Department of Labor’s Wage and Hour Division set forth during the Obama presidency. But this is perhaps most apparent in the Southeast, where, in January 2017, the Fourth Circuit Court of Appeals expanded the definition of joint employment in Salinas v. J.I. General Contractors, Inc. The Salinas decision, along with Hall v. DirecTV, a case involving employee misclassification decided the same day, predate the Department of Labor’s June 2017 rollback of the Obama administration’s restrictive guidelines. However, despite any efforts by the Trump administration to curtail the expanding joint employment doctrine, the Salinas and Hall decisions still control in the Fourth Circuit — and case law in other jurisdiction still controls as well. It’s unclear whether a change in the law is in store anytime soon; however, in January, the United States Supreme Court declined to hear DirecTV’s appeal in the Hall case.

The Salinas court found that a general contractor was considered the joint employer of its subcontractor’s employees and therefore that the general contractor was responsible for wage violations under the Fair Labor Standards Act (FLSA). The Salinas decision and the new standard it set for joint employment represent a significant change from the more than 30-year precedent on joint employment. This means contractors — and other entities who could be considered joint employers — need to understand the risks involved in joint employment and try, to the extent possible, to manage that risk.

Defining Joint Employment

So, what is joint employment? It generally occurs in two scenarios: horizontal joint employment and vertical joint employment. Vertical joint employment is the type at issue in Salinas and the type more likely to be applicable in the construction industry. The typical scenario is one where a contractor arranges or contracts with an intermediary employer to provide the contractor with labor in certain scenarios — in essence, the contractor-subcontractor relationship. Vertical joint employment can also arise when a contractor or subcontractor contracts or engages with a staffing company to provide it with laborers for a certain project or merely to carry out certain employer functions, like administering payroll and benefits.

Due to the Salinas decision, the law in the Fourth Circuit (North Carolina, South Carolina, Virginia, West Virginia, or Maryland) is that alleged joint employers must be “completely disassociated” from the intermediary employer. Otherwise, they will be considered joint employers of the intermediary’s employees. The court set forth six factors that determine whether two entities are not completely disassociated. Here are the factors with some analysis of how they could be applied to a general contractor-subcontractor or contractor-staffing firm relationship:

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;”

If a general contractor and subcontractor agree — or if they operate in such a way — that the contractor has the authority to direct the subcontractor’s employees, set their schedules and work assignments, enforce project site rules, and/or supervise their employees, this factor would support a finding of joint employment. Similarly, if a subcontractor contracts with a staffing firm for laborers and the subcontractor has the authority to set workers’ hours and locations, and/or dictate how they perform their work, the subcontractor is probably a joint employer.

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to — directly or indirectly — hire or fire the worker or modify the terms or conditions of the worker’s employment;”

When this factor is applied, any contractor who is authorized to assign a subcontractor’s or staffing firm’s employee to a particular project — or remove the individual from a project site — will likely be considered a joint employer of that individual.

  1. “The degree of permanency and duration of the relationship between the putative joint employers;”

Many general contractors establish long-term working relationships with certain subcontractors and/or staffing agencies and work with the same companies repeatedly on many jobs. These contractors are at risk of being found to be joint employers. Likely at an even higher risk are contractors that have few to no employees on their payroll and instead retain all of their workers through an intermediary, such as a staffing firm. These contractors may believe that using staffing firms reduces or eliminates their liability under federal and state employment laws. While it might allow these companies to delegate administrative functions like administering payroll and benefits, the law in the Fourth Circuit won’t allow them to avoid much liability.

  1. “Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;”

This scenario is perhaps less common than the others but appears to apply when a contractor controls a subsidiary or affiliate. The contractor could be considered the employer of the subsidiary, affiliate, or indirectly owned entity.

  1. “Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another;”

Most general contractors or construction management firms are obligated to control and supervise the project site. This factor, as applied to such firms, would establish them as joint employers of subcontractors’ and staffing firms’ employees.

  1. “Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work.”

This factor pertains to the above scenario where entities try to delegate certain employer functions to staffing agencies. Virtually every staffer/client agreement is one where the parties “jointly determine” who has what responsibility for these functions. Even if the staffing agency is in charge of screening, payroll, workers’ compensation, and benefits, if the client performs any employer functions — like supervision, hiring, firing, and/or providing instructions, tools, or materials — then the client will likely be seen as a joint employer.

Examine Your Business Model

If a court within the Fourth Circuit is faced with any federal employment issue and a joint employment question exists, it will consider the above factors. Such a court would then likely analyze whether the laborers in question are employees or independent contractors — another, separate test. But the Salinas factors alone are enough to cause concern for most contractors who contract for labor.

Because the above factors apply regardless of the terms of any subcontract or staffing agreement, consulting with counsel about how to better draft those agreements is only one step for contractors who are concerned about expanded liability. They also need to consult with counsel about the way they conduct business and whether it still works in light of the expanded joint employment doctrine.

Otherwise, they should understand that they may have more employees than they realized.

 

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

Changes to Contractor/Subcontractor Agreement Can Have Profound Effect on Roofers

Whether they like them or not, most subcontractors and contractors have used American Institute of Architects (AIA) standard form contract documents at some point in their careers. Several options exist for those wanting to utilize standard form documents, like ConsensusDocs, Design-Build Institute of America, and the Engineers Joint Contract Documents Committee forms. However, the AIA, being founded in 1857 and having published standard form construction contracts for more than 100 years, is the most established of these organizations, and its form contracts are still the most prevalent and most commonly used forms for commercial construction projects in the United States.

The AIA updates its forms every 10 years and completed its most recent revision in late April 2017. The updates included revisions to several forms in its A-Series (Owner/Contractor Agreements), including its widely used General Conditions (AIA Form A201) and its standard Contractor/Subcontractor Agreement, AIA A401. While these are only a few of the AIA’s updates, these changes may be particularly pertinent to subcontractors and those working in the roofing construction industry. Some highlights of the 2017 updates to A401 follow here.

Designated Representatives and Notices

Both the Contractor and Subcontractor are now required to designate (in the space provided in Section 14.2) an individual who will serve as each party’s “representative” for the project. This requirement is set forth in Section 3 for the Contractor and Section 4 for the Subcontractor. Parties are permitted to change their designated representative only if they provide 10 days’ notice. This is significant for both parties because the updated form requires that notices — for example, notices of a party’s potential claim arising from the subcontract — must be made in writing and are valid only if served upon the designated representative. The new form allows notices to be made via e-email or other electronic means only if an electronic method is set forth in Section 14.4.3. Parties should remember not only to designate a point person who is prepared to serve as a project representative and an email address for notices, but they should also ensure that the other party has done the same. Failure to do so could result in notices not being made by the proper means and to the proper individual — which in turn could result in parties waiving potential claims.

New Contractor Responsibilities — With Limitations

Although it has long been a standard practice (both on AIA projects and elsewhere) for the Contractor to include the prime contract as an exhibit to the subcontract, the updated form takes this a step further and requires the prime contract to be attached to the subcontract as “Exhibit A.” If Subcontractors hold Contractors to this requirement, Subcontractors will be able to review all of the contract documents with greater ease before signing.

Furthermore, Section 3 requires Contractors to “render decisions in a timely manner and in accordance with the Contractor’s construction schedule” and to “promptly notify the Subcontractor of any fault or defect in the Work under this Subcontract or nonconformity with the Subcontract documents.” However, in Sections 3.4.4 and 3.4.5, the phrase “written notice” has been changed simply to “notice” with respect to the Contractor’s requirement to notify the Subcontractor of defective work as a prerequisite of finding the Subcontractor to be in default. Section 14 still clearly states that all “notices” must be made in writing to the designated representative. This change could result in debate over what Contractors must do in order to notify Subcontractors of defective work before they avail themselves of remedies for breach, such as withholding subcontract payments.

Contractors also now have additional duties to provide Subcontractors information they may need in order to preserve their lien rights. Section 3.3.6 previously required Contractors to provide Subcontractors “a correct statement of the record legal title to the property … and the Owner’s interest therein.” The revised A401 now requires the Contractor to request this information from the Owner if the Contractor does not have it and give the Subcontractor the information upon receipt; a corresponding section in AIA A201 requires the Owner to provide it to the Contractor.

New Subcontractor Duties and Concerns

The above requirement to submit lien information is perhaps balanced by revised Section 11.1.10, which provides Contractors additional rights to indemnification from certain lien claims. “If Contractor has paid Subcontractor in accordance with the Agreement, Subcontractor must defend and indemnify the Contractor and Owner from liens and claims from lower tier subcontractors and suppliers, including being required to bond off liens,” the new form states.

Another noteworthy change concerns alternates — alternatives to a base bid that provide for a change in the level of quality, or scope of the work specified in the base bid. Alternates provide the owner with the option to modify the project by accepting or rejecting the alternate. The newly revised A401 contains a new section, 10.2.2, which allows the parties to list alternates that the Contractor can accept after execution of the agreement. Subcontractors should consider carefully whether it is wise to include alternates under this section.

Payment and Retainage

Finally, subcontractors and contractors alike should familiarize themselves with the newly revised Section 11, which concerns progress payments. Sections 11.1.7.1 and 11.1.7.2 break down the calculation of progress payments into separate subsections for additions, deletions, and retainage. This includes additions for construction change directives and deletions to allow for defective work remaining uncorrected (assuming that Contractor has duly notified the Subcontractor of the issue). Other portions of A401 allow for additions and deletions in these scenarios, but they are often conditioned on the owner’s approval and other factors. It remains to be seen whether this section could change normal progress billing procedures.

Section 11.7.2 opens the door to retainage options other than the typical arrangement (where the Contractor simply withholds the amount the Owner is withholding). Newly added subsections allow the parties to designate items that are not subject to retainage, as well as set forth an arrangement for reduced or limited retainage. This new section (11.1.8.2) could be a helpful avenue for early finishing trades to propose release of retainage upon 50 percent completion of the project as opposed to substantial completion — or even a way for parties to negotiate the retainage percentage down.

The above are just a few highlights of changes to AIA Form A401. For additional information or questions, visit www.aiacontracts.org or email Caroline Trautman at ctrautman@andersonandjones.com.

 

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

How Can Roofing Contractors Protect Themselves if a Project Gets Delayed?

Project delays can have serious financial consequences for both contractors and subcontractors. When such issues arise, one option for affected contractors is asserting delay claims to recover losses. Delay claims, however, must meet several criteria to survive in court, and claimants can pursue them in many different ways. This article will discuss different types of delay claims and the methods for asserting them, as well as what subcontractors can do to protect themselves the next time they encounter a project that is behind schedule.

In simple terms, a delay claim arises when a project is delayed and a contractor or subcontractor needs more time (and possibly more equipment and labor) than originally budgeted to fulfill its contractual obligation.

A delay claim can help a contractor extend an original deadline for completing a job or compensate it for the additional costs associated with the delay, which may include the overtime and additional manpower necessary to keep a job on schedule, as well as consequential damages like lost profits, lost opportunities, and home office and administrative costs.

Some delays, of course, cannot be avoided and do not qualify the impacted contractors for compensation. Examples include weather-related delays and delays arising from foreseeable circumstances. Although, when an owner or general contractor causes or is responsible for a preventable delay—also known as an inexcusable delay—the lower-tier contractor may recover the additional costs to complete the project. Some examples of inexcusable delays include the customer not having the job site ready on time, supplying defective materials to its contractor, giving its contractor insufficient access to the job site, or wrongly interfering with the project schedule.

Before committing to the complicated and risky delay claim process, most subcontractors should seriously consider resolving delay disputes either through informal means or, if applicable, through the “equitable adjustment” clauses within their contracts. Pursuing equitable adjustments can be less confrontational than pursuing delay claims. What equitable adjustment clauses allow varies from contract to contract, and parties are entitled negotiate contract terms to define what constitutes such an adjustment. Generally, however, an equitable adjustment is an adjustment in the contract price to reflect an increase in cost arising from a change in the completion date or duration of time for the contracted scope of work. These price adjustments typically encompass overhead and profit as well as actual costs. (In contrast, a change in the actual scope of work is typically addressed via an additive or deductive change order.)

Some jurisdictions that lack a legal definition of “equitable adjustment” will enforce the parties’ contract terms and, in the absence of evidence to the contrary, an equitable adjustment can simply mean cost, plus reasonable overhead and profit. For example, a recent North Carolina Court of Appeals decision (Southern Seeding Service Inc. v. W.C. English Inc., et al) involved a contract provision stating that unit prices were based upon the project being completed on schedule and that should the contractor’s work be delayed without its fault, “unit prices herein quoted shall be equitably adjusted to compensate us for increased cost… .”

Although neither the contract nor North Carolina law defined the term “equitable adjustment,” the court considered the parties’ intended definitions of the term. Both parties testified that essentially, “equitable adjustment” meant the difference in cost. The court allowed the claimant, Southern Seeding Service, to recover the difference in its actual per-unit costs and the per-unit costs in its bid, plus overhead and profit.

This decision indicates that even in the absence of a contract specifically stating otherwise, contractors can sometimes use equitable adjustment clauses to recover their cost increases resulting from delays. In the case of Southern Seeding, where a “no damage for delay” clause barred Southern Seeding from making a formal delay claim, this proved valuable. One downside to the approach, however, is that it does not necessarily compel upper-tier contractors or owners to speedily compensate contractors for delays. And, unlike some delay clauses, equitable adjustment clauses do not provide for interest accruing on properly noticed claims that go unpaid. Informal methods and equitable adjustments may prove more effective for contractors who have stronger and more positive relationships.

If equitable adjustment claims will not resolve delay issues, delay claims can help—given the right circumstances. One of the biggest hurdles to establishing delay claims is first giving proper notice to the upper-tier contractor or owner. Often, contracts contain notice provisions that restrict the time window in which contractors may present delay claims. For example, some contracts require contractors to submit their claims within a certain number of days—often, as few as two days—of the date that a delaying event occurs or is known to the contractor. Courts generally enforce notice provisions strictly, though there are exceptions.

Additionally, many contracts contain “no damage for delay” clauses that can eliminate delay claims entirely. Under such terms, courts have ruled contractors may only acquire extra time “in the owner’s discretion” and cannot receive damages unless the defending party has clearly breached the contract.

Courts in most jurisdictions recognize some exceptions to “no damage for delay” clauses, particularly when owners or upper-tier contractors deal in bad faith, unreasonably refuse to provide additional time, or unreasonably interfere with the claimants’ work.

Calculating Damages

Even if a delay claim is allowed by contract, selecting the proper method of measuring and reporting damages from a delay is essential to success. The two primary methods for calculating delay claims are the critical path method and the total cost method.

The critical path method is an analysis of a project’s schedule, which shows the length of a delay and how that delay disrupted the sequence of dependent tasks required to complete a project as scheduled. Ideally, actual records of project hours, materials, and other expenses, as well as agreed-upon schedules, can enable contractors to piece together the contemporary cost of a delay. Although most courts strongly prefer these actual records to calculate damages, contractors without schedule information may also attempt the critical path method by relying on scheduling experts who can retroactively reconstruct the project’s as-built schedule and testify on critical path items to estimate how much the delay impacted them.

If there is no way to collect the information sufficient for the critical path method, the total cost method might be an option for potential claimants. This approach calculates delay damages by subtracting the total anticipated costs of a project from its total actual costs. To use this method, contractors must show (1) the customer is completely at fault for the increased costs from a delay; (2) there are no other ways to measure the damages; and (3) both the bid and actual costs are reasonably calculated.

All three of these points can be difficult to prove, and most courts, regardless of jurisdiction, treat them with a great deal of scrutiny. The New Hampshire Superior Court for Merrimack County, for instance, in the case Axenics Inc. v. Turner Construction Co., wrote “the total cost method is a ‘theory of last resort.’”

One reason why some contractors gravitate towards the total cost method is that it does not require a full account of actual costs, and many contractors can easily calculate the losses themselves. The method also allows them to potentially recover lost profits. An additional approach to the total cost method is the modified total cost method, where contractors use the same formula as the total cost method but adjust it for bidding inaccuracies and/or performance inefficiencies to make their delay claims appear more accurate. The methods using actual costs, though, generally provide stronger evidence for damages, and most courts will only accept the total cost method if a contractor is able to prove there is no other way to account for the actual costs.

Many contractors who hope to recover home office expenses in delay claims use what is known as the Eichleay formula to determine such damages. Like other aspects of delay claims, however, the effectiveness of this method depends on the circumstances of the claim, a contractor’s documentation, and the jurisdiction. Furthermore, more conservative estimates may have greater chances of success. At its core, the Eichleay formula determines the amount of home office damages by multiplying the number of delay days by the average daily rate of home office overhead attributable the delayed contract. This daily overhead rate is calculated by dividing the delayed project’s share of a contractor’s total billings and dividing it by the number of days in the delayed contract (both the on-schedule and delay days). For cases involving government contracts, federal courts have deemed Eichleay claims as “the only proper method” for calculating home office damages provided they meet certain requirements. These requirements are: (1) the government caused the delay; (2) the period of delay was uncertain and the government required the contractor to be ready to resume its work on short notice; and (3) the contractor was unable to seek other work to cover its office expenses during that period.

Outside of matters involving federal contracts, courts treat Eichleay claims with a higher level of scrutiny than critical path claims. In an effort to discredit delay claims, defending parties often claim (correctly) that the Eichleay formula is only an estimate and not necessarily an accurate indicator of damages. To ensure the numbers within the calculation are true, contractors will likely have to provide audited financial statements—information smaller contractors may not be able to provide. Also, Eichleay damages may decrease if many of the office overhead costs were from bidding for the contract or if a contractor already paid most of its office expense before a delay late in a project. Although the federal government prefers the Eichleay formula, some state courts do not accept it and instead use the terms of a contract to determine the costs of overhead. Still, many contractors try to use the Eichleay formula whenever possible because it can potentially yield hundreds of thousands more in recovered expenses than other methods. Ultimately, the jurisdiction of a delay claim is a strong factor for deciding whether or not to use the Eichleay formula.

When project delays are inevitable, contractors have options to recover at least some of their losses. For many contractors, pursuing equitable adjustments will prove to be the most cost-effective and least adversarial solution. Companies that maintain detailed schedule records and give adequate, timely written notice of their delay concerns may successfully assert delay claims to avoid serious harm when a customer refuses to accommodate them (if contract provisions allow). Ultimately, consulting with a lawyer or delay consultant early in the delay process is the best protection from losing a legitimate claim.

Author’s Note

This article is not intended to give, and should not be relied upon for, legal advice. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

Three Types of Contracts Offer Different Benefits and Risks

For the first time in years, construction material costs are rising. In March, the Bureau of Labor Statistics reported numbers showing a 4.8 percent rise in material prices between February 2016 and February 2017.

For contractors who have been working on long-term projects, the price increases could mean lower profit margins, or even losses, as they complete their work. Contractors who are in the estimating, bidding, and contract negotiation stages for new projects will want to ensure profitability and manage risk where possible. In particular, selecting the best pricing system for a project and properly drafting the contract to reflect it is essential, especially during periods of material cost increases.

Three prevalent pricing mechanisms are fixed-price contracts, cost-plus contracts, and guaranteed maximum price contracts. Here’s the lowdown on each type and the benefits and risks with respect to cost changes.

FIXED-PRICE CONTRACTS

Fixed-price or lump-sum contracts are contracts where the parties, sometimes through extensive negotiation, agree upon a fixed sum for the labor and materials to be furnished. Typically, the contractor will prepare a schedule of values where portions of the work correspond with a certain percentage of completion, and pay applications are submitted for the appropriate percentages (often, minus an agreed-upon amount of retention). If the parties want to change the scope of work, a signed change order will be required, and the parties must negotiate and agree upon the change order pricing before signed.

Fixed-price contracts offer contractors limited protection—and in some cases, no protection—in the event of material price increases. Indeed, “the normal risk of a fixed-price contract is that the market price for subject goods or services will change.” (See Seaboard Lumber Co. v. U.S., a 2002 Federal Circuit Court opinion.) Many contracts contain force majeure provisions that excuse or absolve parties from performing their contractual duties in the event of unforeseeable circumstances that are beyond their control and that make performance impossible or commercially impracticable. Examples of such events include “acts of God” like floods, tornadoes, and earthquakes, as well as events such as riots, terrorist attacks, and labor strikes. However, force majeure clauses can be difficult to enforce, and most courts, like the Federal Circuit in Seaboard, view cost changes as a normal, foreseeable risk and not an event that will excuse contractors from further performance. Therefore, when negotiating a fixed price, contractors generally should plan to be held to that price.

However, properly drafted fixed-price contracts can give contractors options to mitigate potential losses arising from cost increases. One strategy is drafting the contract to read that the fixed price is based upon material prices as of the date of signing and that significant increases in material prices will or shall (not “may”) entitle the contractor to an equitable adjustment of the contract price through a signed change order.

Contractors should also be entitled to adjust the contract price or time of completion to account for other problems—like delays, material shortages, or other difficulties acquiring materials—that can occur when costs increase. Such provisions will have better chances of being enforced if the contract specifically defines what constitutes a “significant” percentage increase in price. Additionally, contracts should include provisions protecting contractors from liability associated with delays and shortages. Some fixed-price contracts also provide that in the event the parties cannot agree on a price for change orders, the change order work shall be paid for on a time-and-materials basis including overhead and profit. If contractors are unable to negotiate an equitable adjustment provision, a time-and-material measure for change orders can provide some protection.

COST-PLUS CONTRACTS

For contractors, while the above revisions to fixed-price contracts may be helpful, cost-plus contracts will provide the maximum protection against material cost increases. Cost-plus contracts—also known as time-and-material agreements—are agreements whereby contractors bill for the cost of the labor and materials, plus a fee that is either a percentage of the project costs or an agreed-upon flat fee. When invoicing, contractors include documentation of their payment to subcontractors, vendors, and material suppliers to provide proof of the cost. They then invoice for the cost plus the agreed-upon percentage of the cost.

Unlike fixed-price agreements, cost-plus agreements place the risk of cost overages and increases on the owner. If the contractor’s fee is a percentage of the labor and material costs, these arrangements also create potential for contractors to benefit from cost increases. However, they eliminate the need to negotiate a fixed price, they make change orders much simpler to implement, and in periods of cost decreases, they can benefit owners.

GUARANTEED MAXIMUM PRICE CONTRACTS

While some owners will be wary of cost-plus agreements—especially when material prices are on the rise—guaranteed maximum price (GMP) contracts may serve as a compromise that could help both contractors and owners mitigate risk. GMP contracts are a modified cost-plus option in that they function like cost-plus agreements—contractors invoice for the labor and material costs, plus their fee—but the contracts establish a maximum price for the entire project. Contractors invoice in the same manner they would for a cost-plus agreement, but once the owner has paid the maximum agreed-upon amount, the remaining costs are the contractor’s to bear.

Often, parties to GMP contracts also agree that if the sum of the cost of work and the contractor’s fee total less than the guaranteed maximum price, the difference in the cost and the agreed-upon maximum fee reverts to the owner or is split between the two parties. This makes some owners more amenable to these agreements than they would be to traditional cost-plus agreements, which can make project costs very unpredictable.

Whether parties decide that a fixed-price or cost-plus agreement is best for their needs, they should take care to draft the price terms clearly in order to avoid ambiguity and confusion. Generally, courts enforce contracts as written if they are clear and unambiguous, but if an ambiguity exists, courts will must look to extrinsic evidence to determine what the parties intended, leaving the fate of the dispute to a jury or fact finder. For example, in Rosa v. Long (a 2004 N.C. Court of Appeals opinion), a homeowner and contractor entered into a contract stating that the contractor would build a turnkey dwelling for the “sum of $193,662.60” but later stating that contractor would receive a commission in the amount of 10 percent of all materials, subcontracts, and labor obtained and expended by the contractor. Because these terms suggested that the contract was both fixed-price and cost-plus, a jury decided what the parties intended instead of a judge enforcing the terms as drafted. Clear, proper drafting is essential to increasing the parties’ chances of a predictable outcome in the event of a dispute.

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.