Hiring subcontractors is a common practice within the construction industry, and for many good reasons. But if a construction firm hires subcontractors without taking into consideration the legal requirements and ramifications associated with the practice, they could be in for a surprise, or worse – they could be putting their company at risk.
According to USLegal.com, a subcontractor “is a person who is awarded a portion of an existing contract by a principal or general contractor. Subcontractor performs work under a contract with a general contractor, rather than the employer who hired the general contractor.” The definition goes on to explain, “Determining whether someone is a subcontractor depends on the facts in each case, but is generally determined by whether control over the manner and methods of the work is retained by the employer.”
In construction, a firm typically hires subcontractors to perform specialty work – plumbing, cabinetry, electrical work, etc. Doing so avoids the need to pay for benefits for those workers. By hiring someone as a contractor, as opposed to as an employee, the firm is not required to offer benefits. And if the project is at all uncertain, the work expectations of a subcontractor can be changed without penalty, as opposed to those of an employee, which would incur company costs as a result of being laid off, including collecting unemployment.
When a firm hires a subcontractor, the first thing the company should do is ensure that the subcontractor is properly licensed, bonded and insured. During construction projects, it’s easy for things to fall behind, but making up for lost time without performing due diligence – even if it’s on a subcontractor the firm has worked with in the past or has a personal relationship with – is not smart. Granted, having a license doesn’t necessarily mean that nothing will go wrong, but if something does, the firm faces a great deal less legal liability if all of the subcontractors are properly licensed.
Construction bonds, or surety bonds, are another important consideration for the firm hiring subcontractors. Construction bonds are almost always a requirement for construction companies; newer companies may skip this detail. Should something unexpected happen with one of the firm’s subcontractors that prevents the project from being completed, a surety bond ensures that the client is paid if the work is not completed as promised.
Don’t Forget About Workers’ Comp
Workers’ compensation insurance is an aspect often overlooked when dealing with subcontractors. Yet while not mandated, it’s still a good idea for construction firms to buy coverage for their subcontractors. Again, different states have their own laws, but generally speaking a firm could purchase workers’ compensation insurance for a subcontractor who is not insured, as the company would be held liable should the subcontractor not have his/her own insurance and be injured on the job. (The cost of the workers’ compensation insurance can be passed on to the subcontractor by deducting it from the initial agreed-upon payment amount.) When hiring a subcontractor, you should include language in the subcontractor agreement that workers’ compensation insurance coverage must be maintained at all times during the project for the subcontractor’s employees.
Construction firms may also want to check with the state they operate in to confirm that they are, in fact, hiring “subcontractors,” as there is no one determination and different states define a subcontractor differently. This status impacts what level of workers’ compensation coverage a firm should consider.
As new residential construction numbers continue to rise at a more consistent rate, those construction firms that weathered the recession would be prudent to make sure they are in compliance with all their necessary legal requirements, especially those associated with hiring contractors.
Scott Clifford is a partner at Epstein, Lipsey& Clifford P.C., a full-service law firm that provides services in the field of real estate, social security, workers’ compensatio, and personal injury. He may be reached at sclifford@elclaw.com.
