By Jevon Bindman, Anna Barton, and Carly Johnson
The 2023 legislative session spelled many changes for the construction industry, from deeming indemnification agreements in connection with public improvements unenforceable to creating upstream liability for contractors and potentially owners when subcontractors engage in wage theft.
Indemnification agreements in public contracts; subcontractor protections
As of May 25, 2023, indemnification agreements are unenforceable when contained in, or executed in connection with, a public improvement contract unless an exception applies. Indemnification agreements are agreements to “indemnify, defend, or hold harmless” another party against liability when someone is hurt or property is damaged.1
Indemnification agreements in public construction contracts are now unenforceable unless (1) the underlying injury or damage was caused by negligence or a wrongful act or omission, including breach of contract by the promisor or their independent contractors, agents, employees, or delegatees; or (2) an owner, responsible party, or government entity “agrees to indemnify a contractor directly or through another contractor with respect to strict liability under environmental laws.”2 This new statutory language for public projects parallels already-existing laws governing construction contracts in general.
The updated law also prohibits public building or construction contracts from requiring a party to provide insurance coverage to another party for their own negligence, intentional acts, or omissions.3 This does not prohibit a party from requiring workers’ compensation insurance, performance or payment bonds, builder’s risk policies, or insurance for the other party’s vicarious liability or negligent acts or omissions (including that of their independent contractors, agents, employees, and delegatees).4
Another significant change in this law is an amendment of the definition of “indemnification agreement” to include an agreement to “defend” another party.5 This amendment applies to all construction contracts, not just public improvements. In effect, this means subcontractors are only responsible for defense costs to the extent of their wrongful acts or omissions. It is likely that this will cause headaches in the construction industry because the defense obligation is triggered at the beginning of a dispute (i.e., before a determination is made as to liability). In practice, one of the parties (or their insurers) will need to pay the defense costs upfront and seek reimbursement once liability is determined. Another potential solution is for the parties to engage in expedited dispute resolution at the outset to determine proportionate liability solely to establish a party’s share of the defense cost until there is a final adjudication, at which point the defense costs could be readjusted.
To comply with the new law, construction contractors for public or private projects seeking to be indemnified by their subcontractors should ensure that any indemnification obligation is limited to the extent of the injury or damage caused by the subcontractor’s negligent or otherwise wrongful act or omission, including breach of contract. Parties should also ensure they have sufficient and proper insurance coverage per their contractual obligations.
Construction Worker Wage Protection Act
Lawmakers also made changes regarding wage theft in the construction industry with the Construction Worker Wage Protection Act (CWWPA).6
As of Aug. 1, 2023, a contractor entering into, renewing, modifying, or amending a construction contract or agreement assumes unpaid wages, benefits, and damages owed to employees of a subcontractor of any tier.7
This law builds on Minnesota’s wage theft protections, providing employees the right to sue contractors directly, making contractors jointly and severally liable for judgments against subcontractors for unpaid wages, establishing benefits and penalties under the law. Where an employee has a successful claim, a contractor may also be liable for the employee’s attorneys’ fees and costs.8
A contractor broadly includes any person, firm, partnership, corporation, association, company, organization, or other entity (including a construction manager, general or prime contractor, joint venture, or any combination thereof, along with their successors, heirs, and assigns), that enters into a construction contract with an owner.9 An owner is also considered a contractor where the owner enters into a construction contract with more than one contractor or subcontractor on any construction site.10
Where a contractor pays claims for unpaid wages by employees of a subcontractor, the contractor has a right to sue for actual and liquidated damages against the subcontractor.11
Along with the obligation to remedy wage theft complaints, the CWWPA gives contractors the right to demand payroll records and data from subcontractors to ensure they are complying with the law. Within 15 days of such a request, a subcontractor must produce records containing all lawfully required information for workers on the project and enough information to apprise the contractor or subcontractor of such subcontractor’s payment of wages and fringe benefit contributions to a third party on the workers’ behalf. The records must also include the following information:
- the names of all employees and independent contractors of the subcontractor on the project, and, when applicable, the name of the contractor’s subcontractor with whom the subcontractor is under contract;
- the anticipated contract start date;
- the scheduled duration of work;
- when applicable, local unions with which such subcontractor is a signatory contractor; and
- the name and telephone number of a contact for the subcontractor.
Redactions of the records are permissible for the sole purpose of preventing Social Security number disclosure.
The law contains an exemption for contractors or subcontractors who are signatories to a collective bargaining agreement with a building and construction trade labor union when that agreement:
- contains a grievance procedure that can be used by workers to recover unpaid wages; and
- provides for the collection of unpaid contributions to fringe benefit trust funds.12
Stakeholders in the construction industry are encouraged to review the changes to the indemnification and wage theft statutes closely and consider new practices to ensure compliance.
JEVON BINDMAN, a partner at Maslon LLP, is an experienced trial lawyer who focuses on construction, insurance coverage, and appellate litigation as well as general commercial matters. He has significant experience with contract disputes, policyholder insurance coverage claims, and construction defect and mechanic’s lien claims.
ANNA BARTON of Maslon LLP advises clients on general commercial litigation matters, focusing her practice on a wide variety of business disputes involving employment, construction, and insurance coverage cases for individual and business policyholders.
CARLY JOHNSON of Maslon LLP assists clients in commercial litigation cases ranging from construction disputes to real estate, contract, and employment matters.
Notes
1 Laws of Minnesota 2023, Reg. Sess. chapter 53, article 7, section 1, subd. 1a-3, 2023 Minn. Laws ch. 53, at 50.
2 Id., subd. 3.
3 Id., subd. 3(b)
4 Id., subd. 3(c).
5 Id., subd. 1a; see also Laws of Minnesota 2023, chapter 53, article 7, section 4, 2023 Minn. Laws ch. 53, at 51 (codified at Minn. Stat. §337.01, subd. 3).
6 Laws of Minnesota 2023, chapter 53, article 10, sections 1-8, 2023 Minn. Laws ch. 53 at 56-59.
7 Id. at section 6, subd. 2(a) (codified at Minn. Stat. §181.165, subd. 2(a)); section 8.
8 Laws of Minnesota 2023, chapter 53, article 10, section 6, subd. 3(b) (codified at Minn. Stat. §181.165, subd. 3(b)); sections 2-5 (modifying Minn. Stat. §177.27, subds. 4, 8-10).
9 Id. at section 6, subd. 1(e) (codified at Minn. Stat. §181.165, subd. 1(e)).
10 Id. at subd. 1(f) (codified at Minn. Stat. §181.165, subd. 1(f)).
11 Id. at subd. 2(b) (codified at Minn. Stat. §181.165, subd. 2(b)).
12 Id. at subd. 6 (codified at Minn. Stat. §181.165, subd. 6).