Personal Liability Affirmed in Maryland Construction Trust Law Case

The Maryland Court of Special Appeals affirmed for the first time the personal liability of an individual for not paying subcontractors under the Maryland Construction Trust Law, only four weeks after issuing an opinion reversing a finding of personal liability on behalf of a managing agent who received money from a general contractor but failed to pay his supplier. See Wednesday, May 21, 2008 Blog Entry entitled “Maryland’s Construction Trust Laws Limited by Court of Special Appeals.” In the most recent case, the Court found that the subcontractor met all of the specific requirements of the Maryland Construction Trust Law. This included the issuance of specific invoices to the subcontractor and the fact that the general could not account for more than $124,000.00 in funds. In the case where the Court reversed the finding of personal liability, the contractor issued a general invoice for expenses to the subcontractor. As a result, the Court deemed that the payments received could not be ear-marked or held in trust for a specific subcontractor.

For further questions, please contact Matthew G. Hjortsberg or Michael W. Siri at 410-583-2400 or at Hjortsberg@bowie-jensen.com or Siri@bowie-jensen.com, respectively.

Maryland's Construction Trust Laws Limited by Court of Special Appeals

Maryland's Court of Special Appeals limited the breadth of Maryland's Construction Trust laws. This Statute states in relevant part:

"Any officer, director, or managing agent of any contractor or subcontractor, who knowingly retains or uses the moneys held in trust under §§ 9-201 of this subtitle, or any part thereof, for
any purpose other than to pay those subcontractors for whom the moneys are held in trust, shall be personally liable to any person damaged by the action."

Thus, this statute imposes personal liability on someone who uses money held for the benefit of subcontractors for some other purpose.

The Court of Special Appeals reversed a finding of personal liability on behalf of a managing agent who received money from a general contractor but failed to pay his supplier. The Court reasoned that the Construction Trust laws were not drafted to impose a higher standard or degree of liability upon officers of a construction company than those of any other type of business. Furthermore, the court concluded that because the contractor's payment requisitions did not identify for which sub-contractor or supplier payment was sought, then money was never ear-marked or held in trust for the benefit of any other party. Further, the mere insufficiency of funds is not a sufficient basis to impose liability under the Trust. Instead, "Where funds paid by contractors to subcontractors are earmarked for payment to a specific payee, but payment is not made, and those funds can be tracked, personal liability may be imposed."

For further questions, contact Matt Hjortsberg at 410-583-2400 or at hjortsberg@bowie-jensen.com

Legislative Update for Residential Construction

The Maryland Legislature passed several bills affecting residential construction.

House Bill 409 increased the limit from $15,000 to $20,000 on an award to a single claimant making a claim on the Home Improvement Guaranty Fund.

House Bill 1309 requires the Maryland Home Improvement Commission to establish a licensing program for companies providing mold remediation on residential properties.

Senate Bill 1008/House Bill 1557 double the initial registration fee for home builders to $600. It also doubles the renewal fee to $300 for a builder who has issued building permits for fewer than 11 homes in the preceding year. The fee for a builder who has issued building permits for 11 or more homes is doubled to $600.

The Consumer Protection Division is required to establish a Home Builder Guaranty Fund to compensate claimants for an actual loss that results from an act or omission by a registrant. A home builder must pay the Guaranty Fund a fee of up to $50 with each application for a new home construction permit. The Consumer Protection Division may award up to $50,000 to one claimant for acts or omissions of one builder, the division may not award more than $300,000 to all claimants for acts or omissions of a single builder unless the builder reimburses the fund for all of or a portion of these claims. A claim against the Guaranty Fund must be filed within two years of discovering any damage or defect. A builder whose act or omission gave rise to a claim against the Guaranty Fund must reimburse the fund. The failure to do so may result in referral to the Central Collection Unit, a lien on the builder's real property and suspension of the builder's registration until the claims are paid in full.

For further information contact Matt Hjortsberg at (410) 583-2400 or at Hjortsberg@bowie-jensen.com

Maryland Legislature Caps Retainage

At the end of the 2008 General Session in Annapolis, the General Assembly passed Senate Bill 313, which places a 5% retainage cap on construction contracts in excess of $250,000.00, when a performance and payment bond is furnished. The bill requires the contractor to furnish 100% security to guarantee performance of the contract and 100% security to guarantee payment for labor and materials. Further, the retention proceeds of any payment due from a contractor to a subcontractor may not exceed the percentage of retainage from the owner to the contractor. This also applies to subcontractors and lower-tiered subcontractors.

This new law will not prohibit withholding of any amount due from the owner to the contractor, contractor to subcontractor, or subcontractor to lower-tiered subcontractor if the non-paying party reasonably determines that the contractor or subcontractor’s performance under the contract provides reasonable grounds for withholding the additional amount. Upon approval by the Governor, this new law will take effect on October 1, 2008.

Employees Returning from Military Service

New Labor Ruling applicable to employees returning from military service:

Employers must credit National Guard and reservists active duty time towards their eligibility for leave under the Family and Medical Leave Act. Contractors should know that the Department of Labor (“DOL”) recently issued a memorandum that clarifies its position on the rights of returning uniformed service members to family and medical leave, which is governed by the Uniformed Services Employment and Reemployment Rights Act (“USERRA”). USERRA entitles returning service members to all the benefits of employment that they “would have” obtained if they had been continuously employed.

Under ordinary circumstances, a worker becomes eligible for leave under the FMLA after working for a covered employer for at least 12 months, during which he or she completed at least 1,250 hours of work. The DOL has interpreted the protections afforded by USERRA and FMLA together to require employers to count the months and hours that reservists or National Guard members would have worked had they not been called up for military service, when determining the employee’s FMLA eligibility. Thus, the months and hours that the employee would have worked, but for his or her military service, should be combined with the months employed and the hours actually worked to meet the 12-months and the 1250 hours of employment required by the FMLA.

The bottom line is that contractors may hire individuals who are called to active duty within weeks of their hire date and return from active duty eligible for FMLA protected leave from their civilian jobs.

For more information on this subject or other employment law matters, please contact Nicole Windsor at 410-583-2400 or windsor@bowie-jensen.com.

Sales and use tax relief for contractors.

The Maryland sales and use tax will be increased from 5% to 6% on January 3, 2008; however, there is a limited exception for contractors and subcontractors who buy materials after January 3rd for incorporation into real property under a contract that was made before January 3rd. In other words, contractors who entered into contracts in 2007 can buy materials for those projects at the 5% sales tax rate even after the 6% rate generally goes into effect. The Comptroller's office has created a certificate that contractors can submit to vendors in order to receive the 5% rate. Vendors are not required to accept the certificate and can charge the 6% rate, but in that case contractors may submit the certificate directly to the Comptroller's office for a rebate in the amount of the extra 1% sales tax paid. The certificate is available here.

UPDATED - Maryland's New Prevailing Wage Law

Maryland’s new living wage law becomes effective October 1, 2007. The law applies to all contractors or subcontractors that have state contracts for services valued at $100,000 or more. Nonprofits are exempt. Employers with fewer than 10 employees are also exempt on contracts that do not exceed $500,000.

All contractors covered by the new legislation must post a notice advising their employees of their rights under the new law and the name, address, and telephone number for the Commissioner of Labor and Industry. Failure to post the notice can result in a civil penalty not exceeding $50 per violation.

The law requires government contractors and subcontractors to pay their employees either $11.30 or $8.50 per hour, depending on where the work is performed. In Montgomery, Prince George's, Howard, Anne Arundel and Baltimore Counties as well as Baltimore City (“Tier 1 areas”), employees must be paid an hourly rate of at least $11.30. Employees performing work in all other parts of the state (on government contracts) must be paid an hourly rate of at least $8.50.

If a government contractor provides health insurance to its employees, it may be entitled to a credit against the legally required wage for the hourly cost of its share of the employee’s health insurance premium. Specifically, if a Tier I employer pays $1 per hour for an employee's health insurance, it is entitled to a $1-per-hour credit toward the payment of the mandated $11.30 hourly wage.

Violation of the new law is a misdemeanor punishable by a fine not exceeding $500 or imprisonment not exceeding one year or both. In addition, employers may be required to pay restitution to affected employees along with liquidated damages to the State in the amount of $20 per day for each employee paid in violation of the law. The law also gives employees a private right of action to recover the difference between the amount they were paid and the amount they should have been paid under the law.

Maryland’s new living wage does not apply to state-funded construction projects where workers are paid the prevailing wage for each locality. In addition, it only applies to employees who work at least 13 consecutive weeks on a particular government contract and is at least 18 years old.

For more information contact J. Nicole Windsor at Windsor@bowie-jensen.com or 410-583-2400. Ms. Windsor concentrates her practice on employment law.

Prevailing Wages on Government Contracts

Certain federal laws require contractors and subcontractors to pay some employees wages in excess of minimum wage. Most notably, the Davis-Bacon Act (“DBA”) and the McNamara-O'Hara Service Contract Act (“SCA”) impose wage requirements related to nearly all construction and service contracts with the U.S. or District of Columbia governments.

The DBA requires contractors to pay laborers and mechanics prevailing wages as determined and published by the Department of Labor (“DOL”). The Act applies to contracts with the U.S. government and District of Columbia for the construction, alteration, or repair of public buildings or public works (provided that the contract sum is at least $2,000). The term “prevailing wages” means the locally prevailing wages and fringe benefits paid on similar projects as determined by the DOL. In addition to the Act, there are approximately 60 other statutes whose intent is to assist construction projects through grants, loans, loan guarantees, and insurance include prevailing wage requirements. These "related Acts" involve construction in transportation, housing, air and water pollution reduction, and health.

The SCA applies to every contract entered into by the United States or the District of Columbia, the principal purpose of which is to furnish services to the United States through the use of service employees. The definition of "service employee" includes any employee engaged in performing services on a covered contract (other than a bona fide executive, administrative, or professional employee who meets the exemption criteria).

The SCA requires contractors and subcontractors performing services on covered federal or District of Columbia contracts in excess of $2,500 to pay service employees in various classes no less than the monetary wage rates and to furnish fringe benefits found prevailing in the locality, or the rates (including prospective increases) contained in a predecessor contractor's collective bargaining agreement. Safety and health standards also apply to such contracts.

The DOL maintains a website, http://www.wdol.gov/, that provides a single location to use in obtaining appropriate SCA and DBA wage determinations for each official contract action.

For more information contact J. Nicole Windsor at Windsor@bowie-jensen.com or 410-583-2400. Ms. Windsor concentrates her practice on employment law.