Lamson, Dugan and Murray, LLP, Attorneys at Law

Flow-Down Clauses Can Drown Your Project

Posted in Construction Contracts

Craig Martin, Construction Attorney Lamson Dugan & Murray, LLPFlow-Down or pass-through clauses obligate downstream contractors to certain provisions contained in the up up-stream contractor contracts, such as the contract between the general contractor and the owner.  These clauses are contained in every major form subcontract and they can expand the scope of your potential liability.  This blog will look at typical language of a flow-down clause, what it means and how you can deal with them.



Typical Flow-Down Clause

A simple flow down clause might provide:

 The Subcontractor agrees to be bound to the Contractor by the terms of the prime contract and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the Owner, except to the extent that the provisions contained therein are by the terms or by law applicable only to the Contractor.

 What Do Flow-Down Clauses Mean?

Flow-down clauses bind a down-stream contractor to the owner or up upstream contractor.  More importantly, to the extent you may have negotiated around landmines in the upstream contractor’s contract, you may have agreed to the same or even worse provisions in the up upstream contract.

For example, if you negotiated extended notice requirements with your upstream contractor, but the prime contract, which was incorporated into your contract through a flow-down clause, contained a shorter time frame, you may be obligated to comply with a the shorter time frame.

Dealing with Flow-Down Clauses

The best way to deal with a flow-down clause is to be aware of the up upstream obligations.  If your contract contains a flow down-clause, ask for a copy of the contract to which you are obligated.  Red flags should rise pretty quickly if your upstream contractor doesn’t have or can’t get a copy.

You should also negotiate the scope of the flow-down.  Ask what the upstream contractor needs with the flow-down.  Are they seeking indemnity?  How about dispute resolution or notice provisions?  Try to limit the extent of the flow-down.

Take Away: A flow-down provision can drown your project.  If you are being asked to sign a contract with a flow-down clause, make sure you review the up upstream contract so that you know the extent of your obligations to the up upstream contractor or owner.

The New “White Collar” Exemption Regulations

Posted in FLSA

This summer the Department of Labor’s Wage and Hour Division issued proposed changes to the white-collar wage-and-hour-divisionovertime regulations under the Fair Labor Standards Act (FLSA).  The white collar exemptions include the executive, administrative, professional, outside sales and computer employee exemptions.  The focus of the proposed regulations is to increase the salary level required to qualify for the exemption from $23,660 per year to $50,440 per year.  The DOL predicts this will cause employers to change the exempt status of nearly 5 million workers who are currently exempt from overtime requirements to non-exempt status – requiring the payment of overtime.

Current Regulations

Under today’s regulations, the white collar exemption applies to employees who are paid at least $455 per week ($23,660 per year) and who customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

Proposed Changes

The most significant change is the sizeable increase in the minimum salary requirements for the exemptions.  The proposed regulations more than double the current minimum salary of $455 per week to $921.  This corresponds to the 40th percentile of weekly earnings projected for the first quarter of 2016, based on the Bureau of Labor Statistics.  The DOL also proposes annual adjustments to the minimum salary requirements.

The DOL is also seeking to increase the minimum annual compensation requirement for the highly compensated employee white collar exemption from $100,000 annually to $122,148 annually.

The DOL was also tasked with updating the duties tests contained in the regulations to make them easier to apply, but the proposed regulations do not contain any simplifications.  Instead, the DOL is asking for comments from the industry on the current duties tests.

Take Away

These proposed regulations will definitely impact those employees employers consider exempt. Employer will have to again review job duties and compensation to determine whether exempt employees are truly exempt.   These regulations, once effective, may mean that you will have to pay some employees overtime or increase their salary to meet the minimum salary requirements.  The new regulations are expected to go into effect in 2016.

OSHA Issues New Rules on Injury Record Keeping

Posted in OSHA

On July 28, 2015, OSHA issued proposed rules seeking to clarify an employer’s ongoing OSHA-logoobligation to make and maintain accurate records of work-related injuries and illness.  The new rules were drafted in response to the U.S. Court of Appeals decision in AKM LLC, d/b/a Volks Constructors v. Secretary of Labor, in which a contractor successfully argued that OSHA’s citation was issued well beyond the six month limitation period.

OSHA’s Injury Record Keeping Obligations

The Occupational Safety and Health Act requires each employer to make, keep and preserve records of workplace injuries and illnesses.  29 U.S.C. § 658(c).  OSHA has promulgated a set of regulations which require employers to record information about work-related injuries and illnesses in three ways. Employers must prepare an incident report and a separate injury log “within seven (7) calendar days of receiving information that a recordable injury or illness has occurred,” 29 C.F.R. § 1904.29(b)(3), and must also prepare a year-end summary report of all recordable injuries during the calendar year, id. § 1904.32(a)(2).  An employer “must save” all of these documents for five years from the end of the calendar year those records cover. 29 C.F.R. § 1904.33(a).

OSHA’s Citation Against Volks Constructors

In May, 2006, OSHA inspected Volks and found a number of record keeping violations.  In November, 2006, OSHA cited and fined Volks Constructors $13,300.00, for failing to properly record certain workplace injuries and for failing to properly maintain its injury log between January 2002 and April 2006.  In essence, Volks was cited for violations that occurred from 54 months to six months and 10 days before the citation.

Volks challenged the citation, arguing that it was issued too late because the Act says that “[n]o citation may be issued . . . after the expiration of six months following the occurrence of any violation,” 29 U.S.C. § 658(c), and because the injuries giving rise to recording failures took place more than six months before the issuance of the citation.  Volks lost at the administrative level and lost again before the Occupational Safety and Health Review Commission. Volks ultimately appealed to the U.S. Court of Appeals, which reversed OSHA’s citation.

The Court of Appeals Decision

In a nutshell, the court found that OSHA had waited too long to issue the citation—beyond the six month limitation period contained in the statute.  In an effort to maintain its citation, OSHA argued that the six month period to issue the citation does not begin to run until the five year record retention obligation ends.

The court was not persuaded by OSHA’s argument:

[T]he Secretary’s interpretation has absurd consequences in the context of the discrete record-making failure in this case. Under her interpretation, the statute of limitations Congress included in the Act could be expanded ad infinitum if, for example, the Secretary promulgated a regulation requiring that a record be kept of every violation for as long as the Secretary would like to be able to bring an action based on that violation. There is truly no end to such madness.

Relying on the plan language of the statute, the court concluded that employers must make records of workplace injuries in whatever form the Secretary requires within the time period established by the Secretary—here, seven days after the injury. If they fail to do so, that is a violation. OSHA may cite employers for violations within six months of the violation’s occurrence.

OSHA’s New Regulations

OSHA is proposing to amend its recordkeeping regulations, 29 CFR part 1904, to clarify that employers covered by the recordkeeping requirements have a continuing obligation to make and maintain accurate records of all recordable injuries and illnesses. OSHA asserts that this obligation continues for as long as the employer must maintain records for the year in which an injury or illness became recordable, and it does not expire if the employer fails to create a record when first required to do so.

Interestingly, these new regulations run completely afoul of the court’s decision in Volks. It will be interesting to see if the new regulations are enforceable, given the court’s comments that the record keeping statutes are clear and OSHA’s interpretation of the statute, through its rules, was unreasonable.  The new rules appear to build on OSHA’s original unreasonable interpretation.

Subcontractors Have a Duty to Clarify Ambiguities in Bid Documents

Posted in Construction Contracts

Several months ago, I wrote about an escalator subcontractor that sued a general contractor, demanding payment for work completed based on approved shop drawings.  The trial court agreed with the subcontractor, but the general contractor appealed.  Ten months later, the Court of Appeals reversed, finding that the subcontractor had a duty to bring to the general contractor’s attention major discrepancies or errors they detect in the bid documents.

The subcontractor failed to disclose ambiguities in the plans Craig Martin, Construction attorney Lamson Dugan & Murray, LLPand must suffer the peril.

Construction Difficulties

The subcontractor installed 32 inch escalators throughout the project, but the plans called for 40 inch escalators.  The general contractor and subcontractor could not reach agreement on how the dispute should be resolved.  The subcontractor sued the general to get paid for replacing the escalators and the general sued to subcontractor for concessions it had to pay to the owner.

What happened at trial?

The court decided that the contract documents were ambiguous because they did not specify the width of the escalators. The general contractor argued that certain tick marks and dots on the drawing, in addition to the scale, showed that the escalator should have been 40 inches wide. The court disagreed, finding that the scale was off 3 to 3 ½ inches.

The court concluded that the plans were ambiguous and Otis was well justified in submitting a bid for a 32 inch step. The court also found it significant that both the contractor and the architect approved Otis’ plans that clearly showed a 32 inch stair width. Based on these conclusions, the court found that Otis did not breach the contract and was entitled to be paid for the work performed in installing the 40 inch escalator.

What happened on appeal?

The Court of Appeals reversed the trial court ruling that a subcontractor that knows of an ambiguity must question it.  Here, the subcontractor’s estimator testified that he noticed that the drawings were unclear when he was preparing the bid.  And, there was nothing in the record which indicated that the subcontractor asked for a clarification.  Specifically, the estimator admitted that he did not ask about step width or what the tick marks on the drawing were supposed to indicate.  The estimator’s failure to ask for clarification meant that it bore the risk that the general contractor would adopt a different, reasonable interpretation.

Take Away: Your estimators should be discussing ambiguities in plans with upstream contractors and documenting those discussions so that it is clear, years later, exactly what was discussed.

Insurance Policy Language Really Does Matter

Posted in Insurance coverage

The debate continues on whether a subcontractor’s faulty work constitutes property iStock_000015701146XSmalldamage and an occurrence such that the insurer must cover the claim.  The most recent court to weigh in on this issue is the New Jersey appellate court (one step down from the New Jersey Supreme Court) in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC.

In this case, the condominium association sued the general contractor, who also acted as the developer, and subcontractors for faulty workmanship.  The condominium association also sued the insurer for the general contractor, demanding payment of consequential damages caused by a subcontractor’s faulty work.  The trial court granted summary judgment to the insurer, holding that the subcontractor’s faulty work was not property damage and thus not an occurrence under the Commercial General Liability (CGL) insurance policy, so no coverage.

The appellate court reversed the trial court’s decision, finding that the claims for consequential damages caused by faulty workmanship constituted property damage and an occurrence as defined in the policy.  This was a shift from earlier opinions in New Jersey.

The CGL policy analyzed in this case was the 1986 version of the CGL, while earlier opinions had analyzed the 1973 version.  The 1986 version contains an exception to the “your work” exclusion for work of subcontractors. (I know, confusing)  This means that the exclusion that applies to “your work” is excepted or not applied to subcontractors’ work. The court found that the exception of the subcontractor from the “your work” exclusion meant that the insurance policy must cover the consequential damages caused by the subcontractor’s faulty work.

One question that I have about the underlying project is whether anyone gave any thought to using a 1973 versus a 1986 CGL policy to cover the work.  Did the general contractor’s insurance agent mention that the 1986 policy language may provide broader coverage for the subcontractor’s work?

The same could be true of your projects.  Are you requiring your contractors or subcontractors to provide a certain year of ISO form?  Are you asking for an “additional insured” endorsement for completed operations under CG 20 37? If so, are you demanding a particular year, such as the 2001, 2004 or 2013?  Do you have the infrastructure in place to confirm that the proper form is being provided?

Take Away: Insurance policy language does matter.  And, it changes over the years.  Do you know what your policy provides?  Are you checking to see what policy language your subcontractors are providing?  These are all very important questions and whether you have coverage may be up for debate.

OSHA Delays Enforcement of Confined Spaces Rules

Posted in OSHA

In a recent Trade Release OSHA announced 60-day delay in enforcing the new Confined Spaces in Construction standard.  Here is my earlier blog on the new standard.  Full enforcement will not begin until October 2, 2015.

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLP

During this 60-day temporary enforcement period, OSHA will not issue citations to employers who make good faith efforts to comply with the new standard. Employers must be in compliance with either the training requirements of the new standard or the previous standard. Employers who fail to train their employees consistent with either of these two standards will be cited.

Factors that indicate employers are making good faith efforts to comply include:

  • scheduling training for employees as required by the new standard;
  • ordering the equipment necessary to comply with the new standard; and
  • taking alternative measures to educate and protect employees from confined space hazards.

Take Away: You have 60 more days, but it’s time to get your training on this new standard going to avoid OSHA penalties.

The DOL Claims Most Independent Contractors Are Employees

Posted in Independent Contractor

On July 15, 2015, the Department of Labor issued an Administrator’s Interpretation Craig Martin, Construction Attorney Lamson Dugan & Murray, LLPasserting that most independent contractors are actually employees under the Fair Labor Standards Act.  The DOL claims that the FLSA’s broad definition of employment and “suffer to work” standard under the FLSA requires that most workers be treated as employees.  The certainly appears to be the DOL’s warning shot over the bow and companies using independent contractors should take heed.

The most startling aspect of the Administrative Interpretation is the application of the economic realities test in concluding that workers who are economically dependent on the company, regardless of skill level, are employees under the FLSA’s broad definition of employee

So, what is the Economic Realities Test? Here are the factors considered:

Is the Work an Integral Part of the Employer’s Business? Integral work is just that, important for the business.  The DOL provides an example of a construction related company.  And, yes, I think the DOL intentionally targeted the construction industry.  For a construction company that frames residential homes, carpenters are integral to the company because the company is in the business to frame homes, and carpentry is an integral part of providing that service.  But, the same construction company that contracts with a software developer to create software that assists the company in tracking bids and scheduling projects and crews, is not integral to the construction company’s business.

Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job.

How Does the Worker’s Relative Investment Compare to the Employer’s Investment? Comparing the nature and extent of the investments of the employer and the worker is important in determining whether the worker is an independent contractor in business for himself. The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market.

Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative, not his technical skills, will aid in determining whether the worker is economically independent.  Again with the construction example, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

Is the Relationship between the Worker and the Employer Permanent or Indefinite?  Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.

What is the Nature and Degree of the Employer’s Control?  The employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.

Take Away: The construction industry was targeted with two examples of what makes a worker an employee.  Clearly, the DOL is looking at the construction industry for misclassification abuses.  But, look at the Special Skills example.  If you are hiring independent contractors that are active in the marketplace, doing work for other contractors, controlling their own shop, you stand a good chance of prevailing against any claims that he is an employee, not an independent contractor.   But, if you are the only source of business for that contractor, you should examine that situation closely.

Hire the Right Professional for the Job

Posted in Construction Law

The Deck–not quite done

I had the pleasure of spending the 4th of July weekend working on a friend’s deck. Fortunately for her, and for my son and me, it was not a big project.  It just involved replacing the decking, steps and railings.  An old adage was reinforced for me this weekend–it’s better to have someone that knows what he’s doing handle some projects, than someone who dabbles in it.

I have no doubt this project took my son and I a lot longer than an experienced deck builder.  I also know that our finished product, while tolerable, is nowhere near the quality of experienced craftsmen.  Can we measure a board and cut it to length? Most of the time.  But, can we miter an edge, notch a post, or rip a board?  Not very well.  These are the kinds of skills that are achieved after training and hours of experience.

The same is true for your construction business.  I hear stories all the time about construction professionals reviewing and redrafting contract terms, drafting settlement agreements, and handling their own tax audits.  But, have you had the proper training and years of experience for the project.  Or is it more like me behind the saw—hoping that the board fits?

The problem with construction contracts, settlement agreements and even audits, is that you can’t go out and buy another board.  You are stuck with the deal you struck.

Take Away: Give some thought to your construction company’s operations.  Are there areas where you would be better served by hiring the right professional for the job?

Thank Your Founding Fathers for Mechanic’s Liens

Posted in Lien Rights

Yep, our founding fathers, Thomas Jefferson and James Madison specifically, Craig Martin, Construction Attorney Lamson Dugan & Murray LLPwere responsible for proposing the first mechanic’s lien laws in the United States.  Mechanic’s liens were not a new concept when the first law was passed in the United States; France, Spain and other countries already had them.  But, in England, where landownership was limited to the upper classes, the concept of giving a tradesman an interest in the land for his labors was a truly foreign concept.

The Early Years—Pre Mechanic Lien

In the 1700s, there was no right to a mechanic’s lien.  The possession of land was never deemed to be changed by its improvement and the laborer or material supplier was held to have acquired no right of lien in the property.  The only remedy the laborer or material supplier had was to bring an action against the land owner. If the laborer or material supplier obtained a judgment, he would acquire the lien of a judgment creditor.  A Treatise on the law of Mechanics’ Liens on Real and Person Property, 1893.

The Need to Protect Tradesmen

Maryland’s state legislature understood that developing land in and around the City of Washington, Maryland, which would eventually become Washington D.C., would remain difficult if laborers and material suppliers were not allowed to protect their interest, short of filing a lawsuit and obtaining a judgment.  In 1791, during a meeting attended by both Thomas Jefferson and James Madison, the Maryland General Assembly was urged to pass an act securing to master-builders a lien on the houses erected and land occupied.  Maryland’s Mechanic’s lien was passed later that year.  Pennsylvania passed its own Mechanic’s lien act in 1803.

Evolution of Mechanic’s Liens Laws

These first statutes only protected the principal contractor on original construction.  The laws were amended to aid subcontractors after they complained about principal contractors refusing to pay them for their work.  The scope of the lien laws was eventually expanded to cover repairs to real property.

Why It’s Called  a Mechanic’s Lien

Fun fact: When these laws were originally passed, the term “mechanic” referred to anyone who performed work with their hands or was skilled in the use of tools.  Thanks to Z-Lien Construction Payment Blog.

Take Away:  As we celebrate our Nation’s independence this July 4th, don’t forget to thank our founding fathers for pushing for mechanic’s lien laws to foster the growth of our country.

Happy and Safe 4th of July.

Construction Contract Language and Insurance Coverage Must Be Consistent

Posted in Insurance coverage

Craig Martin, Construction Attorney, Lamson Dugan & Murray, LLPHow often do you review both the additional insured language in the contract and the insurance policy provided by a subcontractor?  My guess is, unless the project has gone off the rails, NEVER.  Well, perhaps you should to make absolutely sure the extent of the subcontractor’s insurance obligations and whether those obligations are being fulfilled.

This point was recently addressed in a recent DRI article analyzing the Deepwater Horizon/BP lawsuit.  My partner, Anne Marie O’Brien, also blogged on this a few months ago.

As you will recall, Transocean’s Deepwater Horizon oil-drilling rig exploded, killing 11 workers, and polluted the Gulf of Mexico.  BP demanded that Transocean’s insurer pay for the loss.  Transocean’s insurer said no, and the litigation ensued, in state court, federal court, and the Texas Supreme Court.  It was quite an odyssey of litigation.

The Contract

Under the contract between BP and Transocean, Transocean was required to name BP as an additional insured in each of Transocean’s insurance policies for liabilities assumed by Transocean under the terms of the drilling contract.  This meant that BP’s additional insured status was limited to the liabilities assumed by Transocean.  Importantly, Transocean’s liabilities were limited to above surface pollution, not subsurface pollution.

The Insurance Policy

Transocean’s insurance policies required the insurance company to pay for Transocean’s losses imposed by law or contract.  In essence, if Transocean assumed liability under the contract with BP, Transocean’s insurer had to pay for the damage.

The Claim

BP wanted Transocean to pay for the underwater pollution.  But, as noted above, Transocean only assumed liability for pollution above the water.

The Outcome

Because BP’s claim was for coverage of underwater pollution, Transocean’s insurer did not have to pay.  Transocean only agreed to cover above surface pollution.

The Takeaway

You need to understand the liabilities you are asking the subcontractor to assume and you need to make sure that the insurance coverage the subcontractor has obtained will cover the assumption of those liabilities.  In sum, read the contract, read the insurance policy, or find an experienced construction attorney that can.