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Subcontractors: Liability for breaches in Labor Regs

As a Prime Contractor, is there any liability for the compliance failures of your subcontractors as they pertain to labor codes, wage practices? what due diligence other than "representations" made in the contracts can be conducted?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Malak,

The two common ways for liability to percolate up to you are 1) if the contractor veil gets pierced and; 2) if your contract doesn't clearly assign responsibility / liability.

On the former, this could occur in many ways, but the most common is that the "sub" is really a statutory employee in some sense (works only for you for long periods, doesn't have their own insurance, etc). Depending on the structure, this could even flow down from your client, which makes subcontractor management critical to avoid poisoning that relationship.

On the latter, require that they have the proper insurances, pay the taxes, etc., and require that they show proof. I require delivery of their insurance for workers' comp and the like, and this is a very common requirement.

You also want to check to see if the sub is credit worthy. This is material when contracting with someone (If they can't meet the requirements of the contract and you should have known that, then there is doubt about their ability to take on the liability).

Topic Expert
Malak Kazan
Title: VP, Special Projects
Company: ERI Economic Research Institute
(VP, Special Projects, ERI Economic Research Institute) |

Thanks, Keith, for the actionable insight.

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