Liability Issues for Subcontractors

Gary Auman

October 1, 2011

In today’s business world, being a contractor or subcontractor is fraught with legal issues. Every time you sign a contract as either the principal or a subcontractor, you are exposing yourself to significant risk.

Of course, the major risk is probably whether you will get paid. But you also have to be concerned about whether any of the other parties involved in the project will be filing a lien against the principal or against you claiming unpaid charges. And as an employer, you always have the concern of potential employment law claims against you by your employees or those of another subcontractor or the principal. Finally, there are liability issues resulting from regulatory infractions or injuries suffered by the employees of the principal or another subcontractor that may be levied against your company.

These issues may take various forms, but all must be anticipated. Most of these situations can be addressed in the language of the contract. No matter how many times you have dealt with a particular principal or another subcontractor, always review any contract you are about to sign in great detail. If you have questions, seek the advice of your corporate attorney. Most times it is too late to raise these issues or concerns after a claim has been filed against your company.

Other than straightforward liability issues that arise because a clearly negligent act by one of your employees resulted in physical injury to a non-employee, there are three basic avenues where liability can arise. First is the relationship with your subcontractors. Is it truly an arm’s-length business relationship? Is there room in the language of the contract or in how your management carries out the contract for an employee of a subcontractor to argue that they were essentially your employee? A second area that may be addressed in the contract is an indemnification and hold harmless agreement that will benefit the principal or the subcontractor. The third area falls outside the contract: the Occupational Safety and Health Administration’s (OSHA’s) multi-employer work site policy. Under this policy, there are numerous ways you can become responsible for the safety of other employers’ employees on the work site.

Contractual Relationship with a Subcontractor

To define your relationship with a subcontractor, you may use a short form contract, a one-line handwritten agreement (not recommended), or a contract designed by your attorney that goes into great detail covering multiple points. It is important to be sure that the contract you enter demonstrates an arm’s-length relationship with the subcontractor while you are working with them.

Some contractors try to avoid the responsibility that comes with having employees by essentially considering everyone who works for them to be subcontractors. This type of extreme situation is frequently unraveled by regulatory authorities as soon as any problem arises.

However, many contractors find themselves in similar situations despite trying to operate with an arm’s-length relationship with the subcontractor. Some contractors take great pains with their attorneys to develop contractual agreements that clearly set out the business relationship between them and their subcontractors. However, all that effort can be undone by an onsite management team who begins to direct everyone on the job site as though they were their employees.

One example: a subcontractor’s employee files a workers’ compensation claim against you. Suddenly you have to defend what would otherwise be a valid on-the-job injury claim but which was made against your company rather than the true employer. Usually the claimant (the subcontractor’s employee) will try to demonstrate how your onsite management treated him as an employee of your company and why therefore he should be entitled to workers’ compensation benefits against your company. This situation can be difficult to defend, especially if the subcontractor is arguing that it has no employees.

The moral of this story is that using very clear language in drafting your contract and setting out the relationship with your subcontractor is only half the battle. You must also be sure that your onsite employees conduct themselves with the subcontractor’s employees as befits an arm’s-length relationship. They must not place themselves and your company in the position of being considered the employer of the subcontractor’s employees.

Make sure that your onsite management, at all levels, works through the subcontractor’s onsite management and does not direct the subcontractor’s employees. Of course, even with this situation, if a subcontractor’s employee is injured due to the full or partial negligence of your employee, you could find yourself defending a general liability personal injury claim against your company.

Indemnification and Hold Harmless Agreements

The waters can get very muddy in the next potential avenue for liability: the indemnification and hold harmless agreement. While the indemnification and hold harmless agreement might seem to be the panacea for all situations that could expose your company to liability, always remember that it can be a two-edged sword. As a subcontractor yourself, you must very carefully review any indemnification and hold harmless language in any contract you are about to sign.

Further, when signing contracts with other subcontractors who will work for you, be sure the agreement includes effective indemnification and hold harmless language under the law of the state in which the work is being performed. Different states address indemnification and hold harmless language in different ways. Always be sure the language in your subcontract with your principal is compatible with the laws of the state in which you are performing the work. For this reason, using boilerplate language for the indemnification and hold harmless agreement may not be a good idea.

In some states, the party against whom the indemnification and hold harmless language applies must be 100 percent negligent for the language to become operational. In those states, if the indemnification and hold harmless language is written so that you can exercise it against your subcontractor even if you have some negligence for the actions that caused the injury, the indemnification and hold harmless language may not be enforceable.

Also, check with regulatory agencies to determine whether indemnification and hold harmless language extends to fines and penalties that may be issued against you as the result of some regulatory violation by your subcontractor. Regulatory enforcement is considered a means of penalizing the violator for its wrongful actions to ensure it will “toe the mark” in the future. In most cases, indemnification and hold harmless agreements that apply to regulatory fines and penalties are not enforceable since they are against public policy. In other words, the courts view regulatory fines and penalties as a means of ensuring regulatory compliance. If someone can depend on someone else to pay their fines or penalties, even under a contract to do so, they are less likely to comply with the laws and regulations.

This is especially true with regard to Environmental Protection Agency (EPA) and OSHA fines. The theory is that if through contract language you can expect your subcontractor to pay your fines and penalties, you have no incentive or reason to comply with the environmental laws or the health and safety laws that govern your business. It would follow that you also have no reason to provide your employees with a safe work site. So, before drafting indemnification and hold harmless language that extends to such regulatory issues, be sure that the language you wish to use is not prohibited in the state in which you are working. If you go forward with such language, even though it might be unenforceable in the state in which you are going to work, be sure that its lack of enforceability will not make the entire contract or the entire indemnification and hold harmless clause unenforceable.

Frequently a contract includes a time frame in which you must accomplish your work for the principal, perhaps providing a penalty if your work is not completed before a certain deadline. Many things could delay your completion on time. Consider potential causes for delay and work language into the contract that excuses delay for those specified reasons.

For example, when regulatory officials appear on a job site, the prudent contractor stops work at least until he can determine the purpose for the visit. Another cause might be a delay in delivery of materials. This situation can be handled with language either in your contract with the owner or principal or in your agreement with your supplier. Each potential interest should be considered and a strategy developed to avoid liability in case of such a delay.

Another area in which an indemnification and hold harmless agreement might affect your company is in dealing with your material suppliers. For example, if you are an insulation contractor operating under any type of applicator agreement or certification with your material manufacturer, you might find language in that agreement that indicates you agree to indemnify and hold it harmless for any liability that may be alleged against them based on your installation of their product. Be sure to read all the language in all the contracts you sign to be sure any indemnification and hold harmless agreements will pass muster if the need arises.

OSHA Multi-Employer Work Site Policy

The final avenue of liability is the OSHA multi-employer work site policy/doctrine, which includes four types of employers for regulatory enforcement: controlling, creating, exposing, and correcting.

The controlling employer controls the work site and therefore takes responsibility for the safety of all employees there. On a work site where you are working for a principal but also have subcontractors working for you, you might be considered the controlling employer for all the employees under the umbrella of your contract with your subcontractors. (There is not space enough in this article to address all the details of how OSHA enforces this concept.)

The creating employer is the one who creates a safety hazard to which its employees or those of another contractor are exposed. As a subcontractor, you might be a controlling employer to your subcontractors but a creating employer to your principal or your subcontractors. In other words, your employees might create a situation that exposes other contractors’ employees to a safety hazard. In such a situation, you could be fined by OSHA as the creating employer.

The exposing employer is most frequently considered liable to OSHA for fines or penalties because its employees are the ones exposed to a safety hazard. Simply put, this employer is cited because its employees are exposed to safety hazards either of its own creating or that of some other employer on the job site. The fact that the exposing employer did not create the hazard is not a defense to this type of citation.

Finally, the correcting employer, through its contractual responsibilities or authority, has either the responsibility or the authority to correct a safety hazard it has observed to which either its own or other contractors’ employees are exposed. This employer can be cited for not fulfilling its obligations under the contract or for not correcting a safety hazard it or some other contractor has created.

Conclusion

There are many ways to have exposure liability under contracts with either your principal or other subcontractors. The first step to eliminating or to minimizing the impact of such exposure is to carefully review the contract you are about to sign or the contract you and your attorney have drafted to ensure that it is easy to understand, is straightforward in its language, and complies with the law of the state in which you are about to perform the work.

Also, remember that in most states it is against public policy to try to make someone else responsible for regulatory fines and penalties that might be assessed against your company, even though some other party created the situation that gave rise to the penalty. And finally, no matter how clear and detailed the contracts you enter might be, frequently it is how you and your management team operate on the job site with employees of the other contractors and the principal that will define the actual relationship between you and the other contractors.