The construction landscape is constantly shifting, with new issues coming to the forefront and new delivery methods changing how construction services are rendered. Yet, all too often companies pull out the same tired form contract that has been used for years and/or neglect to revisit legacy employer policies and practices. To mitigate risk and avoid expensive mistakes, it is essential for companies to review their construction contracts and employer practices so they evolve as fast as the industry. In particular, all stakeholders in the property development industry should be mindful of two concerns that are commonly overlooked.
I. Prefabrication: Trendy Delivery Method Brings Contractual Challenges
While once a novel solution (think the Disney Contemporary Resort in Orlando, completed more than 50 years ago), using prefabricated elements in construction projects is now commonplace. Prefabrication occurs when building components are constructed offsite and then integrated into a project.
With any new construction technique comes novel legal issues. Chief among them is what law applies to products manufactured offsite, and that depends on whether they are considered "services" or "goods." Traditional construction work is typically considered a service, which is governed by Minnesota common law, whereas goods are governed by the Uniform Commercial Code ("UCC"). This distinction changes a party's obligations in countless ways, including what warranties apply, who covers risk of loss or damage during transport, and who is responsible for fixing nonconforming work.
One attempt to address these issues is ConsensusDocs Form 753. Released in 2020, Form 753 defines construction of prefabricated elements as part of the "Subcontract Work," implying that the prefabricator is akin to a subcontractor and the common law applies to the contract. But Form 753 also incorporates elements of the UCC (such as correction of all nonconforming work) and common law (such as disclaiming implied warranties). The form is also flexible and allows the parties to choose the body of law that will apply.
Associated General Contractors of Minnesota ("AGC-MN") takes a simpler approach in its form contracts. AGC-MN's materials contract applies prior to delivery of the components to the worksite, during which time the prefabricator acts as a merchant of goods. After delivery, the subcontractor agreement applies. While less customizable than ConsensusDocs' Form 753, the AGC-MN forms provide a straightforward approach that may be appealing to many developers and contractors.
II. Wage Theft: New Recordkeeping and Employee Notice Requirements
In 2019, Minnesota passed one of the nation's strictest laws governing wage theft, which affects more than 39,000 workers statewide each year and results in over $11 million in unpaid wages. The new law creates additional recordkeeping and notice requirements and increases civil enforcement authority. It also authorizes criminal prosecution for intentional acts.
The new law broadly defines wage theft as actions including underpaying an employee for hours worked, not paying overtime, and deducting pay for property damage or short breaks. It also includes misclassifying employees as "independent contractors." Employee misclassification can subject employers to insurance and tax fraud claims as well as civil and criminal enforcement, so it is especially important to consider the role and classification of independent contractors. This is a particular issue in the construction industry and, for the most part, construction workers should be classified as employees.
The new wage theft law requires employers to provide employees written notice of the payment and benefits they will receive and keep a signed copy on file. The notice must include: (1) employer information, including name, phone number, and address; (2) the employee's pay rate and whether the employee is paid hourly or is salaried; (3) whether the employee is eligible for overtime; (4) when the regular paydays are; (5) any paycheck deductions; and (6) other benefits such as paid time off, vacation, or sick time. The Minnesota Department of Labor and Industry has a sample notice form on its website, with versions in multiple languages that must be provided upon employee request. Any changes to employee payment and benefits must also be memorialized in writing.
The construction industry should pay particular attention to recordkeeping related to project pay and state-funded construction projects. If an employee is paid based on projects completed, associated records must be kept about each completed project and what rate was paid. For state-funded projects, employers must provide certified payroll reports to the public contracting authority and project owner, and retain records for three years after completion. The records are subject to examination by the Minnesota Attorney General's Office.
The new wage theft law aims to protect vulnerable workers, and growth in prefab construction offers many positive benefits as well. However, such changes also present new challenges to developers and contractors that must be addressed in advance of any project.
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