Contractors Should Be Aware of Regulations Before Using Drones on Construction Sites

This article is intended for educational purposes only and should not be construed as legal advice. For legal advice about the use of drones, contact an attorney.

The 21st century has brought with it explosive growth in technology that is changing the world we live in on a daily basis. New innovations are allowing for more efficient ways to do business in various industries; the construction industry is no exception.

Among the more controversial innovations with vast potential to revolutionize construction work is the Unmanned Aircraft System, or UAS, which is more commonly known as a drone. These remote-controlled flying robots have already found their way onto construction sites around the country, and use is proliferating as entrepreneurs discover more ways to apply drones to commercial uses. Although drones may yield numerous benefits to contractors, they have also created a need for new regulations to allow them to fit into the national legal landscape. As a result, contractors wishing to employ drones on their construction sites must be aware of such regulations.

BENEFITS OF DRONES

The application of drones to construction work has begun to yield advantages in several areas, including marketing, inspections and surveys.

Traditionally contractors have presented their ideas and progress to their customers through a combination of diagrams and photographs of the site. Drones allow contractors to show off their work in a new way. By attaching a video camera to a drone and sending it through and around a construction site, contractors can provide customers a fully immersive virtual tour of the site, including aerial views and observations of areas that otherwise would be difficult to reach. This new marketing tool will surely be a boon by visually enhancing the viewer’s experience.

Drones also have the potential to more efficiently monitor the activities of workers on a job site for progress and ensure all workplace policies are being followed. Because construction sites involve the work of many people, usually in different areas that can be difficult to reach, a small flying camera can quickly and efficiently aid site superintendents in monitoring projects.

Another area in which drones have begun to make an impact is surveys. In the past, surveyors have completed their work by carefully drawing lines and manually measuring distances. Today, drone technology allows for much larger areas to be covered in much less time. A drone can be synced with GPS technology to create a quick, reliable, mobile mapping system or with thermal imaging systems for thermodiagnostics, assessment of damage and estimating of projects.

LEGAL CONCERNS FOR CONTRACTORS

Before applying drones to a worksite, however, construction professionals must be aware of several laws that will affect their use. Many laws that have been considered common practice with regard to drone use thus far have recently been nullified by a comprehensive new set of rules finalized by the Washington, D.C.-based Federal Aviation Administration on June 21. These new rules follow:

HIRE A CERTIFIED PILOT IN ADVANCE
Not just anyone can operate a drone commercially; a pilot must be certi- fied in advance. The new rules issued by the FAA include a new system for certifying drone pilots. The new system creates a certified position, “Remote Pilot in Command”, a title which can only be obtained via receiving a remote pilot certificate. Any person operating a drone must possess this certification or be under the direct supervision of someone who is certified. To qualify for the remote pilot certificate, a person must meet the following requirements:

  • Demonstrate aeronautical knowledge by either:
  • — Passing an initial aeronautical knowledge test at an FAA-approved knowledge testing center.
    — Holding a Part 61 pilot certificate other than student pilot, completing a flight review within the previous 24 months and completing a small UAS online training course provided by the FAA.

  • Be vetted by the Transportation Security Administration, Washington.
  • Be at least 16-years old.

This certification system also allows for temporary early access in certain circumstances. For example, any person certified as a Part 61 pilot will, upon submission of an application for a permanent certificate, immediately receive a temporary remote pilot certificate so he or she does not have to wait before continuing drone work. All applicants not certified under Part 61 can still receive temporary early permission; they will receive a temporary certificate after being satisfactorily vetted by the TSA. In addition, foreign pilots must meet these requirements at least until international standards are developed.

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The Building Industry Is Working to Reduce Long-term Costs and Limit Disruptions of Extreme Events

“Resilience is the ability to prepare for and adapt to changing conditions and to withstand and recover rapidly from deliberate attacks, accidents, or naturally occurring threats or incidents.” —White House Presidential Policy Directive on Critical Infrastructure Security and Resilience

In August 2005, Hurricane Katrina made landfall in the Gulf Coast as a category 3 storm. Insured losses topped $41 billion, the costliest U.S. catastrophe in the history of the industry. Studies following the storm indicated that lax enforcement of building codes had significantly increased the number and severity of claims and structural losses. Researchers at Louisiana State University, Baton Rouge, found that if stronger building codes had been in place, wind damages from Hurricane Katrina would have been reduced by a staggering 80 percent. With one storm, resiliency went from a post-event adjective to a global movement calling for better preparation, response and recovery—not if but when the next major disaster strikes.

CHALLENGES OF AN AGING INFRASTRUCTURE

We can all agree that the U.S. building stock and infrastructure are old and woefully unprepared for climatic events, which will occur in the years ahead. Moving forward, engineering has to be more focused on risk management; historical weather patterns don’t matter because the past is no longer a reliable map for future building-code requirements. On community-wide and building-specific levels, conscientious groups are creating plans to deal with robust weather, climatic events and national security threats through changing codes and standards to improve their capacity to withstand, absorb and recover from stress.

Improvements to infrastructure resiliency, whether they are called risk-management strategies, extreme-weather preparedness or climate-change adaptation, can help a region bounce back quickly from the next storm at considerably less cost. Two years ago, leading groups in America’s design and construction industry issued an Industry Statement on Resiliency, which stated: “We recognize that natural and manmade hazards pose an increasing threat to the safety of the public and the vitality of our nation. Aging infrastructure and disasters result in unacceptable losses of life and property, straining our nation’s ability to respond in a timely and efficient manner. We further recognize that contemporary planning, building materials, and design, construction and operational techniques can make our communities more resilient to these threats.”

With these principles in mind, there has been a coordinated effort to revolutionize building standards to respond to higher demands.

STRENGTHENING BUILDING STANDARDS

Resiliency begins with ensuring that buildings are constructed and renovated in accordance with modern building codes and designed to evolve with change in the built and natural environment. In addition to protecting the lives of occupants, buildings that are designed for resilience can rapidly re-cover from a disruptive event, allowing continuity of operations that can liter- ally save lives.

Disasters are expensive to respond to, but much of the destruction can be prevented with cost-effective mitigation features and advanced planning. A 2005 study funded by the Washington, D.C.-based Federal Emergency Management Agency and conducted by the Washington-based National Institute of Building Sciences’ Multi-hazard Mitigation Council found that every dollar spent on mitigation would save $4 in losses. Improved building-code requirements during the past decade have been the single, unifying force in driving high-performing and more resilient building envelopes, especially in states that have taken the initiative to extend these requirements to existing buildings.

MITIGATION IS COST-EFFECTIVE IN THE LONG TERM

In California, there is an oft-repeated saying that “earthquakes don’t kill people, buildings do.” Second only to Alaska in frequency of earthquakes and with a much higher population density, California has made seismic-code upgrades a priority, even in the face of financial constraints. Last year, Los Angeles passed an ambitious bill requiring 15,000 buildings and homes to be retrofitted to meet modern codes. Without the changes, a major earth- quake could seriously damage the city’s economic viability: Large swaths of housing could be destroyed, commercial areas could become uninhabitable and the city would face an uphill battle to regain its economic footing. As L.A. City Councilman Gil Cedillo said, “Why are we waiting for an earthquake and then committed to spending billions of dollars, when we can spend millions of dollars before the earthquake, avoid the trauma, avoid the loss of afford- able housing and do so in a preemptive manner that costs us less?”

This preemptive strategy has been adopted in response to other threats, as well. In the aftermath of Hurricane Sandy, Princeton University, Princeton, N.J., emerged as a national example of electrical resilience with its microgrid, an efficient on-campus power-generation and -delivery network that draws electricity from a gas-turbine generator and solar-panel field. When the New Jersey utility grid went down in the storm, police, firefighters, paramedics and other emergency-services workers used Princeton University as a staging ground and charging station for phones and equipment. It also served as a haven for local residents whose homes lost power. Even absent a major storm, the system provides cost efficiency, reduced environmental impact and the opportunity to use renewable energy, making the initial investment a smart one.

ROOFING STANDARDS ADAPT TO MEET DEMANDS

Many of today’s sustainable roofing standards were developed in response to severe weather events. Wind-design standards across the U.S. were bolstered after Hurricane Andrew in 1992 with minimum design wind speeds rising by 30-plus mph. Coastal jurisdictions, such as Miami-Dade County, went even further with the development of wind- borne debris standards and enhanced uplift design testing. Severe heat waves and brown-outs, such as the Chicago Heat Wave of 1995, prompted that city to require cool roofs on the city’s buildings.

Hurricane Sandy fostered innovation by demonstrating that when buildings are isolated from the supply of fresh water and electricity, roofs could serve an important role in keeping building occupants safe and secure. Locating power and water sources on rooftops would have maintained emergency lighting and water supplies when storm surges threatened systems located in basement utility areas. Thermally efficient roofs could have helped keep buildings more habitable until heating and cooling plants were put back into service.

In response to these changes, there are many opportunities for industry growth and adaptation. Roof designs must continue to evolve to accommodate the increasing presence of solar panels, small wind turbines and electrical equipment moved from basements, in addition to increasing snow and water loads on top of buildings. Potential energy disruptions demand greater insulation and window performance to create a habitable interior environment in the critical early hours and days after a climate event. Roofing product manufacturers will work more closely with the contractor community to ensure that roofing installation practices maximize product performance and that products are tested appropriately for in-situ behavior.

AVERTING FUTURE DISASTERS THROUGH PROACTIVE DESIGN

Rather than trying to do the minimum possible to meet requirements, building practitioners are “thinking beyond the code” to design structures built not just to withstand but to thrive in extreme circumstances. The Tampa, Fla.-based Insurance Institute for Business & Home Safety has developed an enhanced set of engineering and building standards called FORTIFIED Home, which are designed to help strengthen new and existing homes through system-specific building upgrades to reduce damage from specific natural hazards. Research on roofing materials is ongoing to find systems rigorous enough to withstand hail, UV radiation, temperature fluctuations and wind uplift. New techniques to improve roof installation quality and performance will require more training for roofing contractors and more engagement by manufacturers on the installation of their products to optimize value.

Confronted with growing exposure to disruptive events, the building industry is working cooperatively to meet the challenge of designing solutions that provide superior performance in changing circumstances to reduce long-term costs and limit disruptions. Achieving such integration requires active collaboration among building team members to improve the design process and incorporate new materials and technologies, resulting in high-performing structures that are durable, cost- and resource-efficient, and resilient so when the next disruptive event hits, our buildings and occupants will be ready.

A Roofing Contractor Drives Sales and Leads with Fast and Easy Energy-efficiency Financing

After 15 years in the roofing business, I’ve seen countless construction, design trends and sales methods change over time. The one thing that has always stayed the same? That first discussion with the customer around the kitchen table, looking at the scope of the job and then getting right down to finances. It’s the conversation that can make or break a project: Can the customer get the financing he or she needs to complete the job? Do we need to offer other options? Scale back? Or, even better, can we expand the job and sell into higher-quality products and designs built to last?

Supported by local governments, the YgreneWorks PACE program allows property owners to perform energy-efficiency and resiliency upgrades on their homes or businesses with zero down, a low interest rate and simple annual payments made through their property taxes.

Supported by local governments, the YgreneWorks PACE program allows property owners to perform energy-efficiency and resiliency upgrades on their homes or businesses with zero down, a low interest rate and simple annual payments made through their property taxes.

Regardless of project size or complexity, customers have two top-of-mind factors when considering a reroof: cost and time. As roofing contractors, we strive to deliver the highest-value renovation in the shortest time possible. To keep our team at Cal-Vintage Roofing of Northern California, Sacramento, at the industry forefront with competitive product and service offerings, we’ve developed a partnership with Santa Rosa, Calif.-based Ygrene Energy Fund to offer customers the latest in financing. The result has been a much happier kitchen-table conversation, alleviating customer concerns about reroofing costs and ultimately increasing our business by 20 percent.

KEEPING PACE WITH A GROWING TREND

Ygrene Energy Fund is a leading multi-state provider of Property Assessed Clean Energy (PACE) financing. Supported by local governments, the YgreneWorks PACE program allows property owners to perform energy-efficiency and resiliency upgrades on their homes or businesses with zero down, a low interest rate and simple annual payments made through their property taxes. These “green” roofing projects can include everything from cool roof shingles that slow heat build and save on electricity costs to reflective insulation providing a better thermal barrier for a building.

Increasingly, Cal-Vintage customers are more concerned with how projects impact the environment and are always interested in ways to lower utility bills. In fact, many PACE-qualifying upgrades are now being mandated by law; for instance, Title 24, Part 6, of the California Code of Regulations requires that residential and nonresidential buildings adhere to strict energy-reduction standards mandated by local governments. This has resulted in an uptick in owners who need major roof renovations and also need a way to afford the upgrade. As similar laws gain popularity amongst U.S. cities and states, PACE is a valuable tool for customers looking for better reroof financing options. As a large roofing company, we at Cal-Vintage must take it upon ourselves to offer every way to comply with these rules.

To qualify, Ygrene considers the equity in the property, not the personal credit of the property owner, unlocking finance doors for entire groups of customers. So far, more than 40 Cal-Vintage clients have taken advantage of the PACE option to avoid dipping into savings, escape lengthy paperwork and skip extensive background checks. Securing traditional reroofing loans can be a long and difficult process. With PACE financing, our customers have been able to complete larger, longer-lasting projects faster because the financing comes through in two to three days rather than two to three weeks.

BECOMING A CERTIFIED PACE CONTRACTOR

many PACE-qualifying upgrades are now being mandated by law; for instance, Title 24, Part 6, of the California Code of Regulations requires that residential and nonresidential buildings adhere to strict energy-reduction standards mandated by local governments.

Many PACE-qualifying upgrades are now being mandated by law; for instance, Title 24, Part 6, of the California Code of Regulations requires that residential and nonresidential buildings adhere to strict energy-reduction standards mandated by local governments.


Our job as roofing contractors is to provide the best value to our customers and community, and in a world of changing regulations and housing needs, this value extends to financing. The entire Cal-Vintage team is trained through Ygrene’s Certified Contractor Education program to know when and how to offer PACE financing as an option at the kitchen-table discussion.
The Ygrene education and certification program includes in-person training for our sales teams matched with webinars and online tutorials that can be accessed from the web anywhere, anytime. Topics cover all the information we need, including details about the PACE program, important consumer protections, step-by-step instructions for helping customers fill out the online application and how to ensure we receive our payment in a timely manner.

The Cal-Vintage sales team also received an in-person, individual training by a Ygrene regional area manager dedicated to our team. The training included information about program features and benefits, access to the web portal, the proposal tool and in- depth answers to our questions. As PACE requires a number of legal disclosures and approvals, our contractor team was briefed on the application and approval and funding processes so we could properly answer any custom- er questions. Additionally, Ygrene offers a support call-center to field any additional questions on the financing.

GETTING STARTED

We heard about Ygrene through a customer and reached out to the company’s local representative to become certified. The process was simple, and all of our questions were answered in the training session. Since the company’s inception, Ygrene has trained nearly 3,000 contractor companies in communities across its service territory. With $1 billion in approved applications and $350 million in closed contracts, Ygrene has been generating successful outcomes for customers and contractor partners across the U.S. Those interested in becoming a certified contractor can visit Ygrene Works’ website.

PHOTOS: CAL-VINTAGE ROOFING OF NORTHERN CALIFORNIA

PACE Financing is the Key to Unleashing Energy-efficiency and Renewable-energy Retrofits in Commercial Buildings

Architects, contractors and managers who make a living improving the energy efficiency of buildings know the drill: They fight hard for cost-effective energy-efficient designs, and they fight even harder to ensure these designs and systems survive cost-cutting efforts that can arise.

Through the GreenFinanceSF program, San Francisco-based Prologis used PACE financing to fund lighting upgrades, HVAC improvements and rooftop solar. These upgrades reduced purchased electricity costs by 32 percent. PHOTO: PACENation

Through the GreenFinanceSF program, San Francisco-based Prologis used PACE financing to fund lighting upgrades, HVAC improvements and rooftop solar. These upgrades reduced purchased electricity costs by 32 percent. PHOTO: PACENation

Technically sound projects don’t always get off the ground for several economic reasons. Sometimes the split incentive embedded in leases means the owner makes the capital investment but the tenant reaps the economic benefit. Other times, architects, contractors and managers must face the fact that they simply cannot get internal capital allocated to energy-efficiency projects despite their undeniable cost effectiveness. For small business owners, it can come down to lack of funds. For larger companies, the capital allocation process often translates into investment hurdle rates that are hard to attain because energy-efficiency projects must meet two- or three-year simple paybacks.

If an energy retrofit project makes economic sense and internal capital won’t be allocated to it, textbooks suggest the use of external capital. In practice, it’s not that easy. For small business owners, getting third-party financing often requires personal guarantees, some equity investment or other conditions. For larger companies, the use of external capital involves lengthy discussions that may include the downside of borrowing when a building’s holding period is up in the air, the cost of project capital versus corporate debt, and the balance sheet impact of the borrowed funds.

Enter Property Assessed Clean Energy (PACE) Financing. PACE is a tax-lien financing program that allows interested property owners to finance qualifying energy-efficiency and clean-energy improvements on their properties through a voluntary benefit assessment placed on their property tax bill.

This exciting form of third-party financing provides unique benefits to building owners:

The 542 Westport Avenue Shopping Plaza, Norwalk, Conn., financed a $285,000 lighting upgrade, which reduced electricity costs by more than $17,000 per year. PHOTO: Hartt Realty Advisors LLC

The 542 Westport Avenue Shopping Plaza, Norwalk, Conn., financed a $285,000 lighting upgrade, which reduced electricity costs by more than $17,000 per year. PHOTO: Hartt Realty Advisors LLC

  • The cost of PACE financing and the benefits generated can be shared with tenants, thus eliminating the split-incentive issue that derails so many energy-efficiency projects.
  • One-hundred percent of project costs, including soft costs such as development fees, can be financed through PACE, which removes the requirement for out-of-pocket expenses for owners.
  • PACE financing is available with flexible terms up to 20 years, making it possible to generate positive cash flow—and operating income—from projects with simple paybacks as long as 12 years. This increased operating income translates to higher property values for building owners.
  • PACE is entirely property-based financing. As a result, it requires no personal or corporate guarantees.
  • PACE is attached to a property tax bill, so the obligation to repay the financing automatically transfers to the new owner upon the sale of the property, along with the energy-saving benefits generated by the project. This eliminates any holding-period concern owners may have.
  • It’s generally accepted that PACE does not affect a building owner’s typical loan covenants, such as debt to equity ratios.

PACE funding is provided or arranged by a local government for 100 percent of a project’s costs and is repaid with a voluntary assessment during a term of up to 20 years. The property owner pays its typical tax bill, which now includes the PACE finance charge, and the local government redirects that payment to the investor.

Capital provided under a PACE program is secured by a lien on the owner’s property. Like other tax assessments, PACE assessments assume a first lien priority and the repayment obligation automatically transfers to the next property owner if the property is sold.

Similarly, in the event of default, only the payments in arrears would come due and the PACE financing does not accelerate. Because assessments are repaid through the property tax bill—a secure payment stream—PACE projects are seen as less risky than other financing mechanisms and, therefore, benefit from lower interest rates from the private sector with no government financing required.

The 542 West Avenue Shopping Plaza features a solar canopy that powers the exterior LED lights. PHOTO: Hartt Realty Advisors LLC

The 542 West Avenue Shopping Plaza features a solar canopy that powers the exterior LED lights. PHOTO: Hartt Realty Advisors LLC

PACE builds on a long history of benefit assessments that a government can levy on real-estate parcels to pay for the installation of projects that serve a public purpose, such as sewers and sidewalks. PACE serves a public purpose by reducing energy costs, stimulating the economy, improving property valuation, reducing greenhouse-gas emissions and creating jobs.

Pioneered by the city of Berkeley, Calif., in 2008, PACE is now a proven and effective tool to attract private capital to clean-energy projects. Commercial PACE programs are currently operating in 16 states and Washington, D.C., including more than 2,000 municipalities.

More than 700 energy-efficiency retrofits have been financed to date by commercial and industrial building owners using PACE. Indianapolis-based Simon Property Group, a global leader in retail real estate and an S&P 100 company, first used PACE in 2009 and has accelerated its use since then. Prologis, a leading developer of industrial real estate, used PACE to perform an energy-efficiency and renewable-energy retrofit at its headquarters in San Francisco in October 2012.

In Connecticut, hundreds of owners have elected to use PACE to retrofit their buildings, including the Norwalk Center, a family-owned shopping center, whose owner found PACE was ideal to finance energy-efficiency and renewable-energy improvements. In Bridgeport, Forstone Capital used PACE to retrofit the mechanicals and envelope of its 100,000-square-foot office building, which will save the owner nearly $250,000 in energy costs annually. Without PACE, it would have implemented only a fraction of its desired work scope.

Property owners across the U.S. are using PACE because it saves them money and makes their buildings more valuable. PACE pays for 100 percent of a project’s costs and is repaid for up to 20 years with an assessment added to the property’s tax bill. PACE financing stays with the building upon sale and is easy to share with tenants.

PACE is a simple and effective way to finance energy-efficiency, renewable-energy and water-conservation retrofits to buildings. Building owners who want to take advantage of PACE financing can find out where PACE is available via PACENation, a recognized source of impartial, independent and consensus-based information about PACE.

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.

A Roofer’s Guide to Safely Navigating the OSHA Employee Interview Process

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

OSHA is asking questions. Are your employees ready to answer? When OSHA visits your next job site they will undoubtedly engage in what is known as the “Employee Interview” stage of the inspection. This is the part of the OSHA inspection where the compliance officer has the right to take your employees aside and interview them regarding company safety and health policies. The inspector will attempt to question your employees on everything from fall-protection equipment, company-training practices and site-specific hazards. If your employees are prepared for these interviews and remember they have certain fundamental rights the OSHA inspector may not violate, your company has a much better chance of avoiding costly OSHA citations.

What Will OSHA Ask My Employees?

The OSHA inspector will without hesitation ask your employee if they have been trained on fall protection. The inspector will ask very specific questions regarding how the employee was trained, who performed the training and how often this training occurred. Employees need to be prepared to answer these questions, and company training policies should allow the employees to tell the inspector they are frequently trained by the company’s safety director or a third-party safety consultant. The employee should also be able to tell the inspector that he or she was trained once upon hire and retraining occurs at least once a year. Additionally, the employee will need to advise the inspector about any videos or lectures they are required to attend to complete the company’s training program. It will further support your defense if the employee notifies the inspector about any weekly toolbox talks or routine safety meetings they are made to attend at specific jobs.

All roofers should also be able to recite OSHA’s fall-protection standard. This has become a major source of citations in recent months and is easily preventable if employees are prepared for the OSHA interview. The employees must report to the OSHA inspector they are fully aware of OSHA’s regulation requiring the use of fall protection at heights of 6 feet or more above a lower level. It is not necessary for employees to identify the exact provision within the Code of Federal Regulations, but they must be able to tell the inspector they are trained to recall that regulations exist that require all employees working on a surface with unprotected sides and edges at 6 feet or more above a lower level be protected from falling by the use of a fall-protection system. The magic words required to support your company’s defense against this type of citation are 6 feet. The employee must tell the inspector they always wear fall protection when working at a height of 6 feet or more.

Another favorite interview tactic of the OSHA inspector is to question an employee on the dangers of a fall. Often times this question is so alarmingly simple roofers have trouble giving OSHA the correct answer. If OSHA asks employees if they are aware of what happens if someone falls from a roof, the best possible answer will always be to inform the inspector they have been trained to recognize death or serious injury can occur from a fall. If an employee makes the mistake of reporting to the inspector that falls are not always dangerous or that roofers can some-times survive a fall, there is a strong chance the company will be cited for an inability to properly train employee on the hazards associated with a fall.

OSHA inspectors also prefer to ask employees if all falls are preventable. Most roofers would immediately reply that falls are preventable but construction is a dangerous and high-risk profession. This is not the answer your employees should provide to OSHA. The administration wants to know your employees are trained to recognize the fact that all falls are preventable. An employee should never tell OSHA that injuries are an unpreventable reality on a construction site. If OSHA inspectors ask your employees if falls are preventable, the answer should always be to inform the inspector that all falls are 100 percent preventable.

Must My Employees Speak to the Inspector?

OSHA has what is referred to as administrative probable cause. This gives OSHA the legal right to enter your job site and begin an inspection. OSHA’s powers essentially allow the administration to conduct inspections at almost any active place of employment. However, these powers do not give OSHA inspectors the right to detain or hold anyone for questioning against their will. The employees’ participation in the OSHA inspection process is completely voluntary. An employee may, under their own free will, choose to speak to the inspector, or the employee may choose not to speak to the inspector. It is very important to remember that an employer must never instruct, order or command an employee not to speak with OSHA inspectors when they arrive onsite. However, the employer has the right to educate his or her employees that no one is required to speak with OSHA if they elect not to.

How Long Can the Inspector Speak to My Employees?

If your employees voluntarily choose to speak to the inspector, the interviews must be completed within a reasonable amount of time. The Occupational Safety and Health Act states the interviews are to be completed in a reasonable manner. Additionally, OSHA’s Field Operations Manual conditions that interviews are to be as brief as possible. With such open time limitations, there have been varying arguments by OSHA and employers as to exactly how long an OSHA inspector may speak with an employee. It is traditionally accepted OSHA may take no longer than five to 10 minutes for field interviews with company employees. This amount of time can be less or more, depending on the type of investigation, knowledge of the employee, or if the inspection involves any injuries or fatalities. It is highly recommended the employees know their rights before speaking with the inspector. These rights include the employee’s ability to stop the interview at any time if he or she feels uncomfortable or believes the interview has gone on too long.

Can Our Company Attorney Be Present?

In almost all investigations, non-supervisory employees must speak to the inspector without the assistance of counsel. Supervisors, crew leaders and foremen are all entitled to an attorney during their interview because of the supervisory nature of their position. Administrative case law has held that any employee who has been granted authority over other employees is considered a supervisor. This authority has been defined as any time an employee is granted the ability to control the method and manner in which he or she performs assigned tasks. Employees who are not given supervisory responsibility and who do not have the ability to control the method and manner of the assigned work may speak to the inspector in private. However, always recall the interview process is entirely voluntary and the employee may request a company representative attend the interview with them. This is very important and is often overlooked by companies during OSHA inspections. If the employee specifically and voluntarily requests the interview take place with a supervisor or attorney present, the OSHA inspector must submit to the employee’s wishes.

How Should an Employee Handle Questions Regarding Training?

Company safety policies and training programs should be comprehensive and effective at all times. These training sessions, retraining classes and field safety exercises should result in a roofing crew that can recognize all hazards relating to our industry. The employees should be trained on each and every safety protocol to prevent against these hazards. If company training programs address all these issues, the employee will have no problem informing OSHA he or she has been trained on all relevant safety regulations. An employer is almost guaranteed an automatic citation if an employee simply concedes to an inspector that he or she has never received training in an area of roofing safety.

Inspectors will ask employees very complicated and confusing questions on a job site. This has been a major factor in recent citations and has resulted in significant penalties against roofers across the nation. For example, inspectors will often use technical or scientific language in an attempt to confuse a roofing employee to the point where the roofer acknowledges he or she has never heard of such terms. This sort of behavior from OSHA inspectors should not be tolerated if your employees are properly educated and prepared for OSHA interviews. An employee should not be coerced into telling an inspector they have not been trained or do not recognize a specific safety hazard. Instead, the employee should inform the inspector the company’s training program includes all hazards a roofer could face on a job, and if the employee is ever unsure of how to handle a specific safety issue, he or she need only refer to the company safety manual, which is always on the job site in every company vehicle.

When OSHA arrives at your next project, remember the roofing contractor who has properly prepared his or her employees for OSHA interviews will prevail. Today’s contractors must consistently defend their companies against OSHA and the federal government’s increasing involvement in the construction industry. However, a well-educated crew who has been informed of their rights with regard to the OSHA interview process can make all the difference when defending your company against an OSHA citation.

Fewer Contracts and More Coordination Point to Design-Build Becoming Even More Popular

When contractors and owners elect a certain project delivery method for their project, it can affect all aspects of the construction, including costs, time to complete the project and amount of exposure to liabilities for each involved party. Owners and designers have long viewed the “Project Delivery Method” as the comprehensive process including planning, design and construction required to execute and complete a building facility or other type of project. Choosing the right project delivery method is integral to a successful project. Currently, there are at least four types of common project delivery methods: construction management at risk (CMR), design-bid-build (DBB), design-build and multi-prime (MP). There is a growing trend showing the more traditional design-bid-build product delivery method is losing its appeal and other options, like the design-build delivery method, are taking its place.

To understand why the design-build process is growing in popularity, it is helpful to discuss three areas where the four processes are different: number of phases and essential parties, number of essential contracts and the liability exposure under the contracts within each method.

NUMBER OF PHASES AND ESSENTIAL ‘PRIME’ PARTIES

Traditional design-bid-build is the familiar, drawn-out process where the owner of the property contacts a designer to create plans and specifications. Once complete, the owner takes the plans and specifications and begins the bidding process. After a bid is accepted, only then can construction begin. The CMR and MP methods use similar processes, though the owners may contract to different parties instead of contracting with the general contractor (we’ll discuss this more later). Under design-bid-build, CMR and MP methods, a minimum of three players is necessary in every project: the owner, designer and the contractors in their various forms.

The design-build method uses an “integrated” process, whereby the designers and contractors are one-and-the-same entity. The process of designing and constructing occurs simultaneously and thus eliminates the lag time between an owner’s receipt of a design and the acceptance of a bid. Also, because there is only one entity performing the design and construction, the only two necessary “prime” parties are the owner of the project and the design-build entity.

NUMBER OF ESSENTIAL CONTRACTS

Another closely related factor to the number of phases and essential parties is the number of contracts created during the project. The traditional design-bid-build project first requires the owner to form a contract with a designer that will design the building or project in isolation and without any input from the construction team. CMR operates similarly again; however, it allows for input from the construction team as to what materials would be the most cost-effective and merchantable for the desired purpose. In these two processes, two contracts exist: one between the owner and designer and one between the owner and construction-management constructor.

MP requires the owner to contract directly with each contractor and subcontractor instead of with one general contractor. Under this process, a minimum of two contracts exists between the owner and the designers and contractors, likely increasing as the size of the project increases.

Conversely, the design-build process merges the designer and builder into one entity. Because the one entity handles both jobs, the contracting process is streamlined and results in only one contract between the owner and design-build entity.

LIABILITY EXPOSURE UNDER THE CONTRACTS

As the volume of contracts involved in the project increases, the more fragmented the liability exposure becomes. In the design bid-build, MP and CMR methods, the owner first secures the designs from the designing entity. When the owner hires the constructing entity, he or she warrants to the constructing entity that the designs and specifications are sufficient for its hired purpose. The designer and the contractors are independently responsible for their work product, but the owner is still held responsible for any representations made to either entity. Although the CMR method attempts to foster the communication between the designer and contractors, no contract exists between the two and, therefore, liability remains on the owner for all
representations made. Further, any change orders, which frequently arise, and any other “gaps” are solely the responsibility of the owner.

Design-build removes the wall that is frequently erected when construction projects go wrong. Frequently during litigation involving the design-bid-build process, designers will attempt to avoid liability by pointing the finger at the contractors and vice-versa. Design-build, by creating a merged entity including the designer and the contractor, places the responsibility of designing and constructing with that one entity, which facilitates problem resolution instead of gearing up for an adversarial proceeding. Therefore, the design-builder is responsible not only for designing the project so that it will satisfy the desired standards, but it must also complete the project required by the owner in the contract.

As for “gaps” with the design-build process, they are essentially eliminated. The entity is performing both roles. Should the owner provide the design-builder with prescriptive designs and specifications, however, the design-build contractor is the party
responsible for discovering any inconsistencies with the performance standards by which they are bound. Any consistencies found will be the financial responsibility of the owner.

FEWER BUMPS

It is easy to see why the design-build process is growing in popularity. Costs are decreased by streamlining the process in many ways: an overlapping process of concurrent designing and constructing, fewer required contracts, and the ability of the contracting entity to adapt to the changes in design and construction. Although liability exposure is more concentrated in the design-build entity than in the other methods, the benefits of coordination between the designer and contractor will surely outweigh its detriments.

In addition to making the project delivery process easier, fewer bumps along the way will surely decrease the time and costs associated with the completion of a project. As we follow the trend toward a more design-build-focused construction industry, we will likely experience a positive effect on the litigation process, where claims will arise only between two parties as opposed to the requisite three parties in a traditional design-bid-build-based action.

A Case Involving Uber Has States Revisiting Employee versus Independent Contractor Status

When it comes to employment misclassification, no industry is safe. Employee misclassification occurs when an employer improperly classifies a worker as an independent contractor rather than as an employee. Misclassification can be intentional and unintentional and it generally results in avoidance of employment taxes and other potential liabilities.

While misclassification is prevalent in the construction industry, the issue recently resurfaced in a case involving San Francisco-based Uber Technologies Inc., the increasingly popular transportation network company wherein drivers use their own personal vehicles to transport customers to and from their destinations. Uber drivers and customers use a mobile-phone application that allows drivers to indicate whether they are accepting rides and allows customers to locate drivers and pay their respective fares. Uber has always classified its drivers as independent contractors.

In a recent hearing, the California Labor Commission challenged Uber’s classification of its drivers and reviewed whether Uber drivers were actually employees. Uber looked to the drivers’ exclusive control over their schedules and which ride requests to accept to support their contention the drivers were independent contractors. To Uber’s dismay, the commission ruled Uber drivers were, in fact, employees, entitling them to various benefits, including health insurance, unemployment benefits and workers’ compensation. As a result, Uber also was forced to cover certain business expenses, including toll reimbursements and mileage. Of the labor commissions addressing the Uber issue, the California Labor Commission’s decision directly conflicts with rulings in five other states: Colorado, Georgia, Illinois, Pennsylvania and Texas. All of these states’ commissions held that Uber drivers were independent contractors.

As employee misclassification gains more visibility, more states are reevaluating how to properly classify workers. The North Carolina General Assembly, for example, is attempting to pass a law that would expressly define the factors that would determine whether a worker is an employee or independent contractor. A few of the factors being considered by the North Carolina Legislature in House Bill 482 include:

  • Whether the individual is engaged in an independent business, calling or occupation.
  • Whether the individual is paid a fixed price, a lump sum or upon a quantitative basis for the work performed.
  • Whether the individual is not subject to discharge because he or she adopts one method of doing the work rather than another.
  • Whether the individual is free to hire assistants as he or she may think necessary and whether the individual has full control over such assistants.
  • Whether the individual selects his or her own time.

In addition to the much-needed clarification, the bill also proposes a penalty provision, where repeated intentional misclassifications by employers of their employees as independent contractors will trigger a $1,000 per employee liability. The bill would also create a five-member investigatory team and an amnesty period that would provide an opportunity for employers to self-report their current misclassifications. The “temporary amnesty program” will provide misclassifying employers with
immunity from civil penalty and enable to re-classify their workers to their correct designation.

Other states, like Texas, who have already enacted a similar law, are successfully discovering and reclassifying misclassified employees. In 2013, the Texas Labor Commission conducted 6,158 audits—752 of which were in the construction industry. Of the 752 businesses, 37.6 percent were found to have at least one misclassified employee. A total of 3,638 employees—an average of about 16 per business—were misclassified as independent contractors. The construction industry had one of the highest percentages of misclassified employees among all industries.

An investigative series, “Contract to Cheat”, published in a number of Sacramento, Calif.-based The McClatchy Co.’s newspapers in 2014, revealed just how prevalent the misclassification issue is in the construction industry in high-development areas, such as North Carolina and Texas. The series resulted from a year-long investigation into U.S. Housing and Urban Development, Washington, D.C., and other government projects that were completed during the government stimulus era of 2009-13. Payroll records of 64 HUD projects with budgets of more than $1 million were released to the McClatchy investigators and revealed employee misclassification was rampant throughout the construction industry.

The series revealed, among other findings, that employers in North Carolina and Texas with government contracts, which general contractors accepted on the condition they would adhere to all government laws and ensure all their subcontractors would do the same, were misclassifying employees 35.2 and 37.7 percent of the time, respectively. Additionally, Florida, where, like North Carolina and Texas, the construction workforce includes a higher-than-average concentration of immigrant workers, also experienced misclassification of 15.5 percent of workers.

The McClatchy investigation estimated misclassification resulted in $467 million per year to North Carolina and $1.2 billion per year in Texas of lost tax revenue from employers and workers failing to pay employment-related taxes. Not only did employers fail to withhold mandated taxes, such as social security and unemployment taxes, but North Carolina independent contractors who attempted to comply with tax law underreported their income by 56 percent to the state and federal governments. In addition to abusing the tax system, the practice has made it more difficult for smaller, law-abiding employers to compete with employers who are strategically undercutting the competition, placing lower bids made possible by the illegal tax benefit of misclassifying employees.

Though not currently being considered by state legislatures, the opportunity to create a third classification may present itself in the future. Canada has employed the use of a third, intermediate category: the dependent contractor, which is technically a subset of the independent contractor classification. The dependent contractor is a hybrid classification that includes benefits of the independent contractor and employee classifications. Dependent contractors enjoy some of the protections provided to an employee, such as health insurance, severance protections, unemployment benefits, and workers’ compensation, but they still enjoy the flexibility of schedule and control otherwise held by independent contractors.

In Canada, the classification hinges upon the number of clients the contractor has. A dependent contractor—like many contract construction workers—has only one client and depends on that client for income and sustenance of their business. A contractor with more than one client is an independent contractor because they are not exclusively dependent upon any one client. Were a state to create a dependent contractor classification, legislators would then be tasked with determining which select employee benefits employers would be required to provide dependent contractors versus full-time employees.

Although Uber is appealing the California Labor Commission’s decision, the commission’s ruling is important because it has sparked a renewed discussion of employee misclassification across not only the transportation services field, but also in the construction industry, where, as discussed above, it has long been an important issue.

As more states review employee misclassification, it is imperative employers, employees, and contractors alike be aware of any changes to state and federal employment laws. While employers are frequent targets of employee misclassification enforcement efforts, “independent contractors” may also be held liable, especially when they willfully comply with intentional misclassification. An employer should never assume that paying a worker by the hour, or any one of the other factors set forth above, guarantees the worker should be classified as one classification or another. If you are concerned about your business’s employment practices, consult an employment law attorney in your area who can best advise you on your state’s employment laws.

Preferential Payments and Their Impact on Your Business

For a roofing contractor, there is perhaps no better feeling than receiving that last payment draw or retainage check at the end of a long project. Issues with the general contractor, concerns over change orders and pesky building inspections seem to disappear along with the check as it slides into the ATM. You breathe another sigh of relief when the check clears and the funds hit your account. You quickly pay your crew and suppliers and cross your fingers that you turned a profit. Just as quickly, you close your file and move onto the next job.

Months or years later, you receive an ominous letter in the mail bearing a green certified sticker. Peeling open the envelope, you find a letter, advising you that the contractor or developer you worked for 10 jobs back has filed bankruptcy. Not your problem, right? You read on and see the bankruptcy trustee is demanding you return the last payments that contractor made to you or risk being sued in federal court. Assuming you even made money on the job, those dollars are long since spent. What now?

This situation is all too real for thousands of roofing contractors around the country. How can a bankruptcy trustee take your hard-earned money or, worse, require you to pay back money on a job where you didn’t even make a profit? It all comes down to Section 547 of the Bankruptcy Code. When a company files for bankruptcy, a trustee is often assigned to administer that company’s assets and liabilities. In certain circumstances, the code allows a bankruptcy trustee to seek return of “Preferential” payments made to creditors within the 90-day period before the date the bankruptcy petition was filed (the “Preferential period”). This is also known as “clawing back”; the bankruptcy trustee is essentially attempting to take back payments made during the Preferential period while the company was insolvent. As unfair as this may seem, bankruptcy trustees in many instances are entitled to pursue these payments and commonly institute federal lawsuits against their claw-back targets

Your Defense

What can the target of a claw back demand do? Fortunately, the code provides several defenses to these actions. For the purpose of this article, I’ll focus on the most common, the “ordinary course of business” defense. In effect, the bankruptcy trustee may not claw back payments made in the ordinary course of business or financial affairs of the debtor (the company in bankruptcy) or made according to business terms (often a written contract). While it seems simple enough, the manner in which the court determines the normal course of business is something all contractors should be aware of.

To determine if a payment was Preferential and can be clawed back, the court may look at whether the parties’ business dealings changed during the Preferential period as compared to before the Preferential period. Here, seemingly innocuous changes in the parties’ behavior can often be all it takes for the court to mark a payment as Preferential and require the creditor to return it to the bankruptcy trustee.

One of the most common scenarios occurs when the debtor (typically the owner or general contractor or whoever owes you the money) makes late payments. For example, consider a situation where the contract between the parties called for payments to be made within 30 days and in fact all pre-Preferential period payments were received within the allowable timeframe. The debtor then begins making late payments, 35 days, 45 days, etc., and shortly thereafter files for bankruptcy. Under this scenario, the court may determine these late payments were made outside the normal course of business and thus you as the creditor would be forced to pay the bankruptcy trustee back for each such payment. However, if you could perhaps show you previously worked on other jobs with this debtor and late payments were not uncommon, you may succeed in defeating the attempted claw back.

Another typical scenario deals with unusual debt-collection efforts by a creditor. In this situation, if the court determines that you as the creditor undertook atypical debt-collection practices (for example, refusing to deliver supplies until payment of outstanding invoices is made), it may consider it evidence that the Preferential period payments made in response to the collection efforts were made outside the ordinary course of business. Once again, if you could show the court that this scenario typically occurred on other jobs with this debtor you may still defeat the claw back.

Protect Yourself

So what can we learn? Claw back situations should be a very real concern for roofing contractors as they often do not manifest themselves until months or years after a particular job or contract was completed. Although there is no fail-safe mechanism to prevent claw back scenarios, roofing contractors can protect themselves in several ways, including continually monitoring the financial condition of those they contract with, requiring payment on delivery of service or materials, keeping detailed records, strictly adhering to the ordinary course of business, and requiring a letter of credit when the entity with whom they contract is utilizing a bank or financier.

Contractual Risk Shifting, Workers’ Compensation and You

During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining power. How do they do this? Most commonly through the use of indemnity and waiver of subrogation clauses. While these clauses apply in a variety of situations, they are particularly concerning with regard to workers’ compensation insurance.

All states have mandatory workers’ compensation statutes. These statutes make employers strictly liable for employee injuries on the job. Strict liability means liability without fault. Therefore, an injured employee of a subcontractor can recover damages from the subcontractor’s workers’ compensation carrier even if a third party is 100 percent at fault for the injury.

What Is Subrogation?

Subrogation arises when an innocent party incurs damages attributable to the fault of another. This most commonly applies when an insurance carrier pays an insured loss and subrogates to the rights—or “stands in the shoes”—of the injured party in recovering against the responsible party. This doctrine is based on equitable principles, primarily to prevent the at-fault party from escaping liability. Makes sense, right? Then how does a subcontractor waive subrogation?

Here’s a sample waiver of subrogation provision:
Subcontractor hereby waives all right of recovery against the Contractor, the Owner and their respective officers, directors, employees, agents and representatives with respect to claims covered by insurance obtained pursuant to insurance requirements under this Subcontract. The Subcontractor agrees to cause its Workers’ Compensation, General Liability and Automobile Insurance carrier to waive their rights of subrogation against the Contractor, Owner and their respective officers, directors, employees, agents and representatives.

Here’s an example:
A subcontractor’s employee is injured by the sole negligence of the contractor. The subcontractor’s workers’ compensation carrier pays out statutory damages to the injured employee. Pursuant to the waiver of subrogation clause, the subcontractor and its carrier have no right to recover the losses from the contractor.

What is the practical effect? The subcontractor suffers the consequences of the contractor’s sole negligence. How? The subcontractor’s experience modification rate (EMR) goes up. What else goes up with the EMR? Premiums!

What Is Indemnification?

Indemnification requires one party to pay damages to another, sometimes without regard to who was actually at fault. These types of clauses often include language requiring the subcontractor to “defend and hold harmless” the contractor, which puts the additional burden on the subcontractor of incurring fees and expenses for the contractor’s legal defense. There are generally three types of indemnity clauses: broad, intermediate and limited.

A broad indemnity clause requires the subcontractor to pay loss or damage regardless of who is at fault, even if the damage is caused by the sole negligence of the contractor. This is the most onerous type of indemnity clause because it shifts the entire risk to the subcontractor.

Here’s a sample broad indemnity provision:
Subcontractor shall indemnify, defend and hold harmless the Contractor, Architect and Owner against all liability claims, judgment or demands for damages and expenses, including, but not limited to, reasonable attorneys’ fees, arising from accidents to persons or property arising out of or resulting from the performance of the work.

An intermediate indemnity clause requires the subcontractor to pay loss or damage for its own sole or partial negligence. Some intermediate indemnity provisions require the subcontractor to pay the entire loss or damage while others only require the subcontractor to pay its pro rata share of the loss or damage.

Finally, a limited indemnity clause only requires the subcontractor to pay loss or damage that is the sole responsibility of the subcontractor.

How do indemnity and subrogation interplay? When the subcontract has abroad indemnity clause and a waiver of subrogation clause.

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