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Illinois Joins Trend Making General Contractors Liable for Paying Subcontractors' Workers

Posted: June 13, 2022

On June 10, 2022, Governor J.B. Pritzker signed into law two related bills, HB 5412 and HB 4600, sent to him the previous month by the Illinois legislature that will hold a primary contractor (one who has a contract with an owner) liable for the unpaid wages and other amounts owed to employees of subcontractors, of any tier, on Illinois private construction projects.  The bills, enacted as, Public Acts 102-1076, and 102-1065 (the “Acts”), will supplement the existing remedies in the Illinois Wage Payment and Collection Act (“WPCA”) for contracts made on or after July 1, 2022.  Primary contractors already have liability for employee wages owed by their subcontractors on public projects covered by the Federal Davis Bacon Act, and the same responsibility is owed under the prevailing wage acts of many states, including Illinois.  Primary contractors may also have liability for subcontractors’ wages on private projects pursuant to some states’ mechanics lien acts (including Illinois), as well as obligations contained in union collective bargaining agreements to which a primary contractor may be signatory.  However, these amendments to the WPCA represent a significant departure from the well-established legal concept known as privity of contract, which provides that a contractor, with few noted exceptions, is not liable for obligations (including debts to workers) of its independent contractors, such as subcontractors on construction projects.  This law will impose far-reaching and unpredictable liability for primary contractors in Illinois and, as a result, some construction industry experts foresee fundamental changes in the role of subcontractors on Illinois private construction projects.  This article will discuss the new law as well as important exceptions within it.

Similar bills were pending in the Illinois legislature and hotly debated for the last few years, so observers of the legislative process were unsurprised by the measures’ enactment this year.  The effort to expand the obligation of primary contractors to guarantee payment of subcontractors’ employees on private projects has recently received strong support in several states around the country from the United Brotherhood of Carpenters and Joiners of America as well as its local chapters.  California, Maryland, Oregon, Virginia, Washington D.C., and New York have all enacted similar laws in the last several years, and other states are currently considering similar measures.  Illinois’ enactment of what its proponents call a “wage theft bill” is neither the most nor least expansive of the recent spate of laws making primary contractors liable for subcontractors’ employee compensation.  Unfortunately, the new law’s ultimate impact is uncertain, in part due to ambiguities in its language.    

Both bills were sent to and signed by the Governor at the same time, though HB 4600 is a trailer bill to HB 5412, intended to clarify and make concessions to opponents of HB 5412.  The amendments describe a primary contractor as someone who has a contract directly with a property owner.  Likely this includes a tenant of real property, but that is uncertain from the language of the bills.  A primary contractor’s liability for wage-earner debts reaches to any tier subcontractor, but does not include subcontractors “ … who solely provide goods and transport of such goods related to the contract.”  The term “goods” might be intended to include materials, tools, and equipment consumed in the project but because “goods” is not defined in the new law, that is uncertain. 

The enactments would expand a primary contractor's liability to include debts due a subcontractor’s employee for “unpaid wages or fringe or other benefit payments or contributions, including interest owed, penalties assessed by the Department, and reasonable attorneys’ fees, but shall not extend to liquidated damages.”  HB 5412, § 13.5 (c).  Actions against a primary contractor may be brought by the unpaid wage earner or others on behalf of the wage earner, including the Illinois Department of Labor, which has the authority to impose civil penalties and seek criminal sanctions against liable parties for failure to pay compensation to employees.  Under the WPCA, a liable party must pay, in addition to other amounts, attorneys’ fees incurred by the employee, interest, and an additional sixty percent (60%) per year for as long as the debt is unpaid.  If a court interprets the 60% per year imposed by Section 14 of the WPCA to be liquidated damages, then a primary contractor would not be liable for that amount because liquidated damages are exempted.  Further, though the liability imposed on a primary contractor under the new law includes “penalties assessed by the Department” of Labor, it does not expressly authorize criminal sanctions, which may be imposed under the WPCA against recalcitrant direct employers found guilty of not paying a wage earner.     

The intent of some other provisions likewise is uncertain.  For example, Section 13.5 (b) of HB 5412 includes this language: “A property owner who acts as a primary contractor related to the erection, construction, alteration, or repair of his or her primary residence shall be exempt from liability under this Section.”  Since a primary contractor is defined as a party who has a contract with a property owner, it is difficult to imagine what was intended by the foregoing exemption, especially because the amendments impose no liability on owners.  Also, it is unclear whether the following is intended to impose liability on the first-tier subcontractor, or on the subcontractor who fails to pay its employee, which could be a lower-tier subcontractor.  Section 13.5 (d) of HB 5412 provides, in part:

Except as otherwise provided in a contract between the primary contractor and the subcontractor, the subcontractor shall indemnify the primary contractor for any wages, fringe or other benefit payments or contributions, damages, interest, penalties, or attorney's fees owed as a result of the subcontractor's failure to pay wages or fringe or other benefit payments or contributions as provided in this Section, unless the subcontractor's failure to pay was due to the primary contractor's failure to pay moneys due to the subcontractor in accordance with the terms of their contractual relationship.

Though the likely intention of the foregoing is to make the subcontractor who fails to pay its employee responsible to reimburse the primary contractor for any damages caused by non-payment, it does not clearly read that way.  Instead, it refers to “a contract between the primary contractor and the subcontractor,” a contract which only a first-tier subcontractor has, suggesting it is that first-tier subcontractor who must indemnify the primary contractor.  Moreover, the exemption of a subcontractor from liability when the primary contractor fails to pay “in accordance with the terms of their contractual relationship,” similarly assumes the subcontractor providing indemnification has a contract with the primary contractor.  Perhaps a court will decide that the purpose of the legislation would be best served if the “guilty party” – the employer who failed to pay its employee, even if not a first-tier subcontractor – ought to reimburse the primary contractor who is liable for the debt under the new law.

HB 4600 (P.A. 102-1065), which was intended to clarify and supplement the provisions of HB 5412 (P.A. 102-1076), makes three notable changes to the impact of the Acts.  First, it reduces the statute of limitations for bringing actions from ten to three years.  Second, it exempts projects priced at less than $20,000.  Finally, it excludes projects for the “alteration or repair of an existing single-family dwelling or to a single residential unit in an existing multi-unit structure.”  HB 4600 also creates a study group to review the Illinois Construction Bond Act, but those provisions are unrelated to the WPCA.

An important exemption for union contractors is found in Section 13.5 (g) of HB 5412, which provides: “Primary contractors who are parties to a collective bargaining agreement on the project where the work is being performed shall be exempt from this Section.”  As was made clear by the sponsor, Representative Marcus Evans, when the bill was debated on the House floor on March 3, 2022, the intent of this section is to exempt union contractors.  Representative Evans explained that employees subject to a collective bargaining agreement already have protection from their unions in the form of wage bonds and advocacy for individuals in enforcing their legal rights and, therefore, union contractors should not be required to take on the additional liability imposed by the new law.  Therefore, based both on the wording of the Acts and the legislative history, the apparent intent is that on any project, for which the primary contractor employs any union laborers, the primary contractor will not have any additional liability under the new law for unpaid debts due to subcontractors’ employees on that project. 

One unfortunate but likely consequence of the Acts is to incentivize primary contractors to shy away from hiring smaller and less well-financed subcontractors, and to self-perform more of the work, so as to minimize the risk of having to pay twice for their subcontractors’ workers.  Meanwhile, the risks to contractors and subcontractors from unexpected claims by subcontractors’ workers will be substantial and difficult to quantify, so prudent primary contractors and higher tier subcontractors may want to obtain proof, before making final payment, that all of their subcontractors’ employees are fully paid.  The Illinois Department of Labor, which is authorized to interpret the WPCA, may weigh in on the meaning and intent of the Acts by propounding clarifying regulations.  Ultimately, the courts will determine what the legislature intended when enacting the new amendments to the WPCA.