What to Do When Subcontractors and Suppliers Ask the Owner for Payment

September 15th, 2013

Stacks of One Hundred Dollar Bills with Small House.When owners discover that their contractor has not paid subcontractors and suppliers, anxiety immediately sets in. Contractors who are not adept at running their businesses end up with cash flow problems and operate on credit. The situation then catches up with them and they stop making payments. Suddenly the owner finds himself being contacted by subcontractors and suppliers who are demanding payment.

The law in Massachusetts is clear; a subcontractor or supplier can only collect against an owner if it records a properly perfected mechanic’s lien. Then he can only expect payment to the extent that money is owed to the contractor at the time the lien is filed. That said, the owner has the right to finish the job. If there are no funds left, the subcontractor or supplier can only go after the general contractor for payment.

Mechanic’s liens are complicated. They consist of two documents: a Notice of Contract and Statement of Account. After filing these documents, the sub or supplier must file suit within 90 days, or the lien is no longer valid. Contractors and construction companies frequently fail to properly perfect or record their liens. If this occurs, they may be dismissed.

Generally, in MA, liens must be filed within 90 days of when the general contractor or someone working through him was last at the job. If an owner pays subs during the period that others can still record liens, he “pays them at his peril.” For that reason, the owner should record a Notice of Termination with the Registry of Deeds. That starts the clock running and all liens must be filed within 90 days of the recording.

At that point, the owner has a decision to make. Should he file a motion to dismiss the lien because no money is owed to the general contractor, or negotiate with the sub or supplier and pay them something to dissolve the lien? Unfortunately, the answer is, it depends.

In order to have a lien dissolved, your lawyer has to file an application to dissolve the lien with the court, and schedule a hearing. The whole process may take ten hours or more of your attorney’s time. As with any matter before a judge, there is no guarantee that the decision will go your way, even if the facts are on your side.

If the sub or supplier will agree to a smaller amount to pay the general contractor’s debt, it may be worth it to pay and have him sign a release. This may be a preferable and perhaps the only option if the subcontractor still has work to do, or if additional supplies are needed from the same supplier. It is generally more expensive to hire someone new to come in and complete work that has been started by someone else.

On the other hand, the amount owed may be so large that it is more economical to fight it out in court. If money is still owed to the general contractor, then that amount will be distributed pro rata to the subs who have filed properly perfected liens. Unless one can get all of the subcontractors to agree, it is better to obtain a court order decreeing the amount owed and how it should be distributed.

It is extremely stressful for an owner when subcontractors and suppliers start knocking on his door. Given the complexity of the situation, it is advisable for an owner to contact a construction attorney to determine how to best resolve the matter.

-Andrea Goldman

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What to do When Your Contractor Doesn’t Pay Subcontractors and Suppliers

August 15th, 2013

Recently I was contacted by some homeowners when their contractor told them that he had run into financial troubles and would not be completing their renovation work. They quickly discovered that he had not paid numerous subcontractors and suppliers and left them holding the ball. Over the years, I have seen this scenario many times. Contractors who are not adept at running their businesses “rob Peter to pay Paul.” At times, it is simply mismanagement of their finances, but sometimes it is intentional and criminal.

How can a homeowner avoid getting caught in this kind of situation? At its worst, I had a client who discovered that fourteen of the sixteen subs were never paid. The homeowner pays his general contractor in good faith and then faces the prospect of having to pay twice for the same work and materials. There are some ways that a homeowner can protect himself.

1. Make sure your contractor is properly registered and insured.
2. Ask references if the contractor was reliable, came to the work site regularly and followed the payment schedule.
3. Be wary of contractors whose bids are substantially lower. They may request more change orders in order to jack up the contract price to what it “should” cost.
4. Start with a good contract and link payments to the completion of milestones. Have a clause in your contract that allows you to cancel if your contractor fails to pay subs and suppliers.
5. Make the payment schedule detailed and spread evenly throughout the project (for example, 10% upon pouring the foundation, 10% upon completion of the framing, 10% upon completion of the rough inspection).
6. Avoid an overly large deposit. In Massachusetts, the deposit cannot exceed 33 1/3% or the cost of special materials; whichever is greater.
7. Require lien waivers in the contract as subcontractors complete their work and are paid.
8. Be wary of contractors who ask for payments in advance of the payment schedule.
9. Make sure that materials have actually been ordered by your contractor.
10. Make sure the payments do not get ahead of the work.
11. Periodically ask subs and suppliers if they are being paid as required.
12. If you are not able to be onsite to check the progress of the job, hire an owner’s construction manager to monitor the work for you.

If you sense a red flag, do not ignore it. Confront your contractor and find out why payments are not being made. If you are not satisfied that the job is being run properly, reserve the right to terminate your contractor and hire someone else to finish the job.

One of the homeowners who was abandoned by his contractor found himself in an excellent position. He had enough money left to finish the job with another contractor and did not suffer any damages. Even the best home improvement contractors have found themselves in a cash flow bind. The honorable ones will be forthright about it and address the issue. Be wary of the contractors who may abandon the job.

My next post: What to do when the subs and suppliers ask you for payment.

-Andrea Goldman

posted by: joelrosen in BUSINESS ADVICE & LITIGATION, CONSTRUCTION CONTRACTS & DISPUTES | 5 Comments

How to Handle Micro-Managing Homeowners

August 9th, 2013

Controlling business puppet conceptI assume that some of the contractors out there are already nodding their heads.  The Internet has done a lot of good in the world, but in certain ways, it has not benefited home remodelers.  The access to information allows anyone to research products and methods in construction, and unfortunately, a certain percentage of the public concludes that they have developed a level of expertise that trumps that of their contractor’s.

I have heard numerous complaints from home improvement contractors who now deal with homeowners who want to buy their own materials (they can get a better deal, they want something unique), have their contractors use different methods, or finish a task within an unreasonable amount of time. I am sure that the customers mean well, but interference from their clients can be a real problem for contractors and at its worst, derail a project or result in litigation.

How can a construction professional avoid getting stuck with micro-managing (albeit well-meaning) homeowners?

  1. Pre-screen your customers.  Most of my clients tell me that they saw red flags prior to signing a contract, but did not pay attention to them.  You are the expert; if the client starts out by telling you how to run the job or insisting that he order his own materials and supplies, take notice.
  2. Set expectations.  You are running the project.  Although a homeowner may believe that she can get a cheaper price, most contractors have ongoing relationships with suppliers that allow them to buy at a discount (which they can then mark up) and control the schedule for delivery so it does not delay a project.  If something arrives damaged, these relationships can enable the contractor to replace the item on an expedited basis.
  3. Draft a good contract.  Let the homeowner know that you will be taking a markup on your materials and supplies.  Issue a disclaimer for any owner-supplied items.  Do not guarantee performance of green materials.  Charge extra if the product requires special installation methods.  Let the homeowner know that improper installation can invalidate the warranty.
  4. Write in the contract that you control the means and methods of the work.  Make it clear that the homeowner can only enter the construction site if he/she is escorted by one of the workers.  Have the owner commit in advance to the fact that you are the expert and must make sure that work will be up to code and pass inspection.
  5.  Have a clause in your contract that allows you to terminate if the homeowner refuses to make decisions in a timely fashion, causes unreasonable delay or refuses to cooperate with you.

Renovating or building a home should be a positive experience for both parties, but as all builders know, there are aspects of it that are stressful.  Don’t let your client add to your stress level by allowing them to invade your territory.

-Andrea Goldman

 

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Safety Checklist for Homeowners

June 9th, 2013

In Massachusetts, homeowners are not held responsible for complying with safety regulations in construction. They can sandblast paint that may contain lead, walk on their roofs without protection and operate in blissful ignorance of the laws regarding safety. If homeowners hire contractors who do not follow safety rules, they are not responsible for that either. The risk of noncompliance falls on the contractor. If a homeowner creates an unsafe condition, of course he/she may be liable if someone gets hurt, but the homeowner does not have to police the contractor. In fact, since many safety regulations make the cost of doing a job more expensive, there is an incentive for homeowners to hire contractors who do not follow the rules! Today my friend and colleague, Mark Paskell posted a story about a roofer in Connecticut who died after falling off a roof http://www.thecontractorcoachingpartnership.com/Blog-Contractor-Coaching–Construction-Business-Coach-EPA-RRP-Lead-Rule/bid/65475/roofer-killed-in-fall-from-roof-in-westport-ct-osha-investigates?source=Blog_Email_[Roofer%20killed%20in%20fal]. You do not want to have that occur during your job.

Here is a checklist for homeowners to use when hiring a contractor:

1. Make sure your contractor has worker’s compensation insurance to protect his employees, and call the insurance company to ensure that it is still in effect.

2. If the contractor is a sole practitioner, make sure he has health and/or disability insurance. Sole practitioners do not have to have worker’s compensation insurance in Massachusetts. Check with your home insurance to see if they will protect you if someone gets hurt on the job.

3. If the contractor is handling any kind of hazardous waste, make sure the he is complying with the proper procedure for removal and disposal of the materials (this protects both of you).

4. If you hire a roofer, make sure that your roofer is using proper fall protection.

5. If your house is pre-1978 and has not been tested for lead, familiarize yourself with the Renovation, Repair and 6. Painting Rule (RRP) and confirm that your contractor will be following the lead-safe procedures

7. Cooperate with your contractor by staying out of the construction site without asking whether it is safe to enter.
8. Keep pets and children away from the work.

9. Ask workers to leave the premises broom-clean at the end of the day; no one wants to step on or drive over nails.
Follow safety procedures yourself, even though they are not required.

10. Do not hire contractors who do not comply with the law!

As a homeowner, you have a responsibility to see to it that safety rules are follow when doing work on your home. Even if the law does not require it, you should try to make the work safe for your family, the workers and your neighbors.

-Andrea Goldman

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Too Sexy for My Job

January 14th, 2013

Can you fire a woman because she’s too attractive? We wouldn’t advise it, but a couple of employers have gotten away with it.

A dentist fired his assistant because he was irresistibly attracted to her. The assistant had worked at his office for ten years, and her work was fine. When she and the doctor began sending texts to each other—which were personal but not romantic—the doctor’s wife got jealous. He fired the assistant to save his marriage, and she sued him for gender discrimination.

The Iowa Supreme Court said it may not have been fair, but it wasn’t discrimination. They held that the decision was based on the dentist’s personal feelings about the assistant, rather than her gender alone. Besides, there weren’t any unwelcome advances, and there was no hostile work environment. As a result, there was no basis for finding that the firing was illegal.

Then there is the famous case of Debrahlee Lorenzana, a 33-year-old banker, who was fired because her figure and style of dress were too distracting to her coworkers. A colleague at Citibank told the Village Voice: “Men are kind of drawn to her. I’ve seen men turn into complete idiots around her. But it’s not her fault that they act this way, and it shouldn’t be her problem.”

Lorenzana pointed out that other coworkers wore heels and fitted business suits, some that were more revealing or “sexy,” but Citibank said their bodies were different. Her figure was just too distracting. Lorenzana’s case went to arbitration, and Citibank has stated that she did not receive any payment.

Now Lauren Elizabeth Odes has filed a gender and religious discrimination suit against her former employer, Native Intimates. After sending her home to change clothes, and directing her to wear a red bathrobe over her outfit, her employer advised her to tape down her breasts to make them appear smaller. She was fired when she went shopping for an outfit that would satisfy her boss.

It’s true that employers can set standards of dress. Allegedly, none of these employees was sexually harassed as the term is generally understood. It is also true that employees-at-will can be fired for any reason or no reason—including a subjective decision on the part of the boss. But it hasn’t escaped us that every one of these stories is about a woman. We have never found a case where a man is told he is too attractive to keep his job.

Women are placed in an impossible position. Can an employer set one dress code for plain women and another for pretty ones? Who decides where the line is between pretty and plain anyway?

These cases caused much debate in our office. Surprisingly, the women felt that the requirement to dress appropriately should not constitute gender discrimination. On the other hand, when one considers the details behind some of these claims, it seems inconceivable that the harassment and termination could be based on anything but gender. In the Lorenzana and particularly the Odes cases, you cannot create a set of facts that would expose a man to the same requirements.

We predict that very soon, one of these cases will end up with a judgment against the boss. The woman isn’t too sexy—the employer is just too biased.

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When are Releases of Wage Act Claims Valid and Enforceable?

January 3rd, 2013

When an employee signs a general release of claims, the hope and expectation is that you will not hear from the employee again. In fact, that is the primary purpose of the release, especially when the employee is compensated in exchange for signing it. However, a recent decision issued by the Massachusetts Supreme Judicial Court offers guidance to employers to ensure when a release of Wage Act claims will be found valid and enforceable in Massachusetts.
In Crocker v. Townsend Oil Company, Inc., Plaintiffs, two former oil delivery truck drivers, claimed that they were owed compensation, including overtime pay, under the Wage Act based on their classification as employees, rather than independent contractors. The employer responded, along with a statute of limitations defense, that a general release contained in a termination agreement signed by plaintiffs barred any Wage Act claims. Though the SJC struggled with its policy to broadly enforce general releases, it disagreed.
The SJC concluded that the general release contained in the contract carrier termination agreement did not explicitly include the release of Wage Act claims. The Court continued that a release of Wage Act claims will be enforceable, only when such an agreement is stated in “clear and unmistakable terms”. Offering further guidance, the SJC stated that the release must be plainly worded and understandable to the average person, and it must specifically refer to the rights and claims under the Wage Act that the employee is waiving. Absent express language that Wage Act claims are being released, a general release is ineffective to waive them.
It is important to note that the SJC also stated that this case only dealt with retrospective release of claims – in other words, claims that existed at the time of the Agreement. This means and the Court strongly suggested that waivers of prospective wage act claims would be void under the Wage Act. This likely is an effort by the SJC to give weight to the Wage Act language that expressly states that employers cannot exempt themselves from obligations under the Wage Act by “special contracts with employees.”
As most employers are aware, damages under the Massachusetts Wage Act, including overtime pay, are automatically trebled. Given the potential risk, it is even more important that employers obtain a valid and enforceable release of Wage Act claims. The decision is an important reminder to employers to make sure they expressly state in plain and understandable language the rights and claims that the employee is waiving under the Wage Act. What constitutes “plain and understandable” and “clear and unmistakable terms” will likely be subject to further interpretation by the courts. In the interim, however, employers should proceed carefully and consult employment counsel if they want assurance that their employee’s release of Wage Act claims will be valid and enforceable.

-Kavita Goyal

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Surviving Challenges to your Non-Compete Agreement

December 29th, 2012

In Massachusetts, the validity and enforceability of non-compete agreements is a heavily litigated area of employment law. Non-compete agreements will generally be enforceable when they seek to protect legitimate business interests of the employer such as trade secrets, confidential information, or good will. A non-compete that seeks to prevent ordinary competition is not enforceable. In addition to protecting a legitimate business interest, the agreement generally must also be reasonable as to (a) the amount of time it seeks to be in effect, (b) the scope of what it covers, and (c) the geographic area it encompasses. Courts generally do not like to see that a non-compete agreement is over-reaching in any of these respects. It cannot, in effect, preventing an individual from earning a living.

There are also certain members of industries for whom non-compete agreements are illegal or will be found to be unenforceable. They are the following:
• Doctors
• Lawyers
• Psychiatrists
• Psychologists
• Nurses
• Social Workers
• Radio Broadcast on-air personalities
• Registered Brokers in a publicly traded company
The following are a few basic strategies for employers to help reduce the chances that an employee will challenge the validity of their noncompete agreement after they end their employment and increase the chances it will be upheld if it is challenged:

1. Be Specific

At the beginning of the employment relationship, discuss exactly what the employee’s obligations will be under the non-compete agreement should the relationship end and define any vague or ambiguous terms with the employee and/or his lawyer. When employees fully understand what is expected of them and they are in agreement at the beginning of the employment they are less likely to challenge the agreement’s validity at the end of the relationship. Additionally, should the employee challenge the legality of the non-compete, a specific agreement will more strongly support your position that the interests sought to be protected are legitimate and important as opposed to one that is vague and undefined.

2. Less May be More

Identify which legitimate business interests are truly the most important to your business and narrow the scope of your non-compete agreement to adequately protect just those key interests. Such an agreement will have a much better chance of surviving challenges to its enforceability because a court is less likely to view the agreement as overreaching and thus preventing the former employee from earning a living.

3. One size does not fit all.

Rather than having standard non-compete agreement for all employees, tailor your non-compete to the individual employee or to a class of employees. Execute them on a sliding scale with stricter and broader enforcement for high level executives with significant access to protectable company information to a very narrow, or even no, non-compete agreement for low-level employees with little or no access to confidential information.

-Peter Fisher

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Wages During a Disaster

November 8th, 2012

People have been asking us whether they are entitled to be paid after a hurricane or other disaster closes their workplace.

Hourly, or nonexempt, employees are paid only for the hours they actually work. If the business is closed during a natural disaster, they do not receive any payment. There are a couple of exceptions. An employee who is on the premises waiting to work—if the power fails, for instance—should be paid. Employees who are on call at or near the business premises may be entitled to payment.

Salaried employees get the same pay no matter how many hours they work in a given week. They are entitled to their full salary for any week in which they perform any work—even if the office is closed for part of the time. However, the employer may require them to use allowed leave—such as vacation or personal days—for this time. If the office is open, but the employee decides not to come to work, this may be considered unpaid leave, or the employee may have to use vacation time. If the exempt employee is only out for part of a day, there should not be any deduction in pay.

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Legal Tools for the Contractor’s Toolbox

August 8th, 2012

I was just thinking about two recent clients who were owed money by owners. One had a contract that was not in compliance with the Massachusetts Home Improvement Contractor Statute and had waited a long time to pursue his money. The other had a contract that fully protected him and contacted me once communication had broken down with the customer. In the first case, my client ended up writing the homeowner a check because he couldn’t face the risk of the multiple damages, attorney’s fees, interest and costs that are available to the homeowner under the Consumer Protection Statute (c. 93A). In the case of the second, I had no qualms about filing a mechanic’s lien and pursuing payment aggressively because my client was in full compliance with state law.

Just as no respectable contractor would work with poor quality tools, contractors and construction companies should make sure that they are working with high-quality legal “tools” that will protect them in the event of a dispute or investigation by regulating authorities.

So, here is a list of the legal tools that should be in your toolbox:

Make sure you have all required registrations for your field. That includes staying up-to-date on developments in the construction arena. Are you familiar with the special licensing required for roofers, windows and siding, demolition, etc. Do you know about the lead law for residential renovation work? Are you aware of the new continuing education requirement for contractors?
Invest in a good contract. The Massachusetts Home Improvement Contractor Statute (142A) has numerous requirements for contracts for home renovation work. However, that contract does not necessarily have clauses that protect you. For example, if you don’t have a provision that allows you to recover your attorney’s fees if you have to pursue payment from a client, you can’t collect. Contracts for new construction are different and should not be the same as your renovation contract. All contractors should have contracts with their subcontractors. I have written on this extensively in other posts.
Use mechanic’s liens. Mechanic’s liens are a great tool for getting paid. However, the deadlines and procedures for filing them are very strict, and if you don’t do it correctly and you miss the deadline, it is usually impossible to fix.
Demand letters. When clients call, they often ask about filing suit when a dispute occurs. However, filing suit should really be the last resort when there is a dispute. A well-written demand letter can frequently resolve a dispute, and is much less expensive and stressful then a full-blown lawsuit.
Your lawyer. Clients should call me before an issue arises. I draft contracts on a flat-fee basis and tell clients to call me (for no additional charge) when they want to delete clauses or add language for a particular job. I want to become familiar with their businesses and act as a trusted advisor. Preventing problems before they occur is much less expensive and stressful and enables you to focus on your business. If a dispute does happen, we will discuss the best way to resolve it. We will consider mediation and arbitration as well as the possibility of filing a lawsuit with your goals in mind.
A true craftsman does not work at a job without the best possible tools. Make sure that you protect your business with the proper legal tools as well.

-Andrea Goldman

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Mechanic’s Liens Basics

May 8th, 2012

Although I have written about mechanic’s liens in the past, the power of a lien cannot be underestimated and bears repeating.  The right to file a lien is a huge advantage for contractors and construction companies, and is a unique tool that helps contractors get paid.  As long as the construction company has a written contract with the owner, it can file a lien on a property within ninety days of the date the it last worked at the project.  If the contractor is a subcontractor, the time for filing is extended to within ninety days of the last date that someone working by and through the general contractor worked at the project.  These deadlines are strict, and if they are missed, then the company can no longer file a valid mechanic’s lien.

A lien consists of two documents; a Notice of Contract and a Statement of Account.  The Notice of Contract may be filed at the Registry of Deeds at the start of a project to put the public on notice that the company is working at the property. The Statement of Account provides the details of the contract price, the amount paid, and the amount still owed.  The lien is a public record that states money is still owed for work on the property.  These two documents constitute the mechanic’s lien.

What does a lien do?  A lien causes a blemish on the title.  What this means is if the owner has a construction loan, or is trying to refinance or sell the property, the bank will not disburse funds until the lien is removed.  Even if a property owner is not trying to currently sell or refinance, most owners hate having a lien on their property.  They are usually extremely motivated to have the lien removed.

There are only three ways to have a lien dissolved.  One is to settle with the general or subcontractor and have them file a Notice of Dissolution of Lien.  The second is to go to court to have the lien removed because the construction company did not follow the proper procedure for “perfecting” or finalizing the lien.  If the lien is filed too late, the company fails to file suit within ninety days of recording the lien, or if the lien fails in some other way, the owner can file suit to have the lien dissolved.  Finally, the owner can purchase a bond to “bond off” the lien, but this is usually a costly remedy.

If a construction company misses the window for filing a lien, it can still move for a real estate attachment, but this requires filing an action with the court, and it must show a “likelihood of success on the merits.”  A mechanic’s lien can be filed by a contractor as of right; a party can only file a real estate attachment if a court grants them the right to do so.  That is why a mechanic’s lien is a tool that cannot be ignored.

Liens can be an incredibly powerful tool when a contractor or construction company is owed money.  However, unlike most legal actions, the contractor may lose his opportunity to record a valid lien if he does not follow the proper procedures.

-Andrea Goldman

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