Some construction firms, relieved to have made it through the lean years of the recent recession and eager to secure new business, are moving too fast when it comes to new construction. In this environment, legal requirements and compliance can sometimes be assumed rather than verified, especially in reference to hiring subcontractors.
West's Encyclopedia of American Law succinctly defines a subcontractor as "one who takes a portion of a contract from the principal contractor or from another subcontractor." USLegal.com further explains that a subcontractor "performs work under a contract with a general contractor, rather than the employer who hired the general contractor. 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."
Hiring subcontractors makes sense fiscally. These individuals can be counted on to provide specialty work such as cabinetry, electrical, plumbing, painting or flooring. Contracting out this type of work to someone with extensive field experience can save money by avoiding the need to train someone or potentially purchasing expensive specialty equipment that won't be used often. Additionally, a firm saves on benefits expenses with subcontractors as well—there is no requirement to offer benefits to an independent contractor. Should the project be uncertain, the work expectations of a subcontractor can be changed without penalty and without added company costs associated with layoffs or paying unemployment, unlike with a full-time employee.
The first thing a company should do when hiring a subcontractor is ensure that the individual is properly licensed, bonded and insured. It can be easy to overlook this, especially if a firm has worked with the subcontractor in the past or if a project is already behind schedule. Looking to get things done faster without the appropriate due diligence, however, is a recipe for disaster. That doesn't mean that as long as all subcontractors have valid licenses nothing will go wrong on a project. However, if something does, the firm faces a great deal less legal liability if all the subcontractors are properly licensed.
Another often overlooked aspect when dealing with subcontractors is workers' compensation insurance. While not mandated, it's still a good idea for construction companies to purchase coverage for their subcontractors. Individual states have their own laws. Generally speaking, though, a firm would be held liable should the subcontractor be injured on the job and not carry insurance. Purchasing workers' compensation insurance would soften the financial blow to a firm should this event occur, and the cost of this insurance can be passed on to the subcontractor by deducting it from the initially agreed-upon payment amount.
In this vein, it is smart to check the certificates of insurance of any hired subcontractors. Depending on the type of insurance coverage they select, it's possible that if a claim is made by one subcontractor at a work site, the insurance coverage will be eliminated from all other subcontractors making subsequent claims. When hiring a subcontractor, a firm should include language in the agreement that workers' compensation insurance coverage must be maintained at all times during the project for the subcontractor's employees. Given the potential legal and financial ramifications, it makes sense to review subcontractor insurance coverage with counsel as well.
Construction or surety bonds are another important consideration for firms that hire subcontractors. Most experienced companies understand that construction bonds are almost always an industry requirement. For those firms just starting out, however, this reassuring necessity could be overlooked. When a firm starts to build multiple layers of contractor oversight on a project, an unexpected incident with one of the subcontractors can prevent project completion. Surety bonds offer coverage to pay a client if the work is not completed as promised.
Going back to the initial definition of a subcontractor provided above, there is one other organization's definition that is important for a construction firm to consider: the firm's state Department of Revenue. In fact, there is no one determination to confirm the employment status of a subcontractor, and states define the position differently. This status also impacts what level of workers' compensation coverage a firm should consider.
For many good reasons, hiring subcontractors is a common practice within the construction industry. Make sure to maintain the positive outcomes associated with subcontractors while minimizing the negatives by considering the legal requirements and ramifications associated with the practice. Without this direction, the firm could be in for a surprise, or worse—the entire company could be at risk.
