Harrisburg has seen a number of proposed bills during the past few weeks, many of which will have significant legal impacts on the construction industry. On the top of the list is an anti-indemnity statute that would put Pennsylvania among the ranks of 45 other states that statutorily limit a subcontractor’s liability for another party’s negligence. Lawmakers are also considering a bill designed to eradicate the century-old Separations Act which requires certain government agencies to enter into separate contracts for plumbing, electrical, mechanical, HVAC, and general trades work and two pieces of legislation that would require construction industry employers to verify the employment eligibility of their workers and to police worker misclassification.
Amendment of 68 P.S. § 491 – Proposed Prohibition of Certain Indemnification Agreements in Construction Contracts
On June 17, 2019, Pennsylvania Representatives Michael Driscoll and Todd Stephens announced that they plan to introduce legislation to amend 68 P.S. § 491, effectively making it an anti-indemnification statute similar to statutes in neighboring states like Delaware, New York, and Ohio. As it is currently, the statute only prohibits contracts providing indemnification for architects, engineers, or surveyors for claims arising (1) from the preparation or approval of maps, drawings, change orders, designs or specifications and/or (2) from the giving of or failure to give directions or instructions, provided it is the primary cause of a loss.
Given that indemnification agreements are generally enforceable in Pennsylvania, many Pennsylvania construction contractors sign construction contracts that unfairly force them to accept liability for another party’s negligence. The amended statute would prohibit these broad provisions, permitting only limited indemnification clauses for losses caused by the negligence of the indemnifying party.
House Bill 163 – Proposed Repeal of the Separation Act and Amendment of the Procurement Code
On June 19, 2019, House Bill 163 passed the Pennsylvania State Government Committee and will now move on to the Pennsylvania House for a full vote. The Bill, sponsored by Representative Garth Everett, would repeal the Separations Act, 71 P.S. § 1618, which requires public projects to solicit separate bids for electrical, plumbing, HVAC, and general construction work.
If passed, subcontractors may no longer have the opportunity to bid projects competitively to public entities, but rather may need to rely on their relationships with the general contractors for contract award. The House will most likely not review this important piece of legislation until September so stay tuned for updates.
House Bill 1170 – Proposed Requirement Mandating the Use of the Federal E-Verify System
Currently, Pennsylvania law requires that only contractors and subcontractors performing public works projects use the federal E-Verify system when hiring new employees to verify that their employees are authorized to work in the United States. This proposed piece of legislation, known as the Construction Industry Employee Verification Act, would expand mandatory use of E-Verify to all contractors and subcontractors performing private work. On or after the effective date, if the Department of Labor and Industry conducts an investigation and determines that a contractor or subcontractor has hired an undocumented immigrant or person who is otherwise not authorized to work in the United States, the Act provides for hefty penalties, including the imposition of quarterly reporting requirements, suspension of the contractor’s licenses, and possible referral to the Attorney General’s office. Contractors and subcontractors may be able to avoid these penalties if they establish that they used the E-Verify system in good faith.
House Bill 1170, co-sponsored by Representatives Ryan Mackenzie and John Galloway, passed on June 17, 2019, and is awaiting the Senate vote for final passage. If passed, House Bill 1170 will impact construction companies throughout Pennsylvania. Contractors will need to become knowledgeable about how to use the E-Verify system. Notably, the proposed legislation says that contractors may avoid being secondarily liable for their subcontractors’ violations only if the subcontractors acknowledge in writing that they are responsible for complying with the new law. As such, we strongly encourage all contractors to protect themselves from potential liability and amend their form subcontract agreements accordingly.
House Bill 716 – Proposed Creation of a Task Force to Assist With Prevention of Worker Misclassification
The Pennsylvania Construction Workplace Misclassification Act, commonly referred to as Act 72, became law in 2011. Act 72 applies only in the construction industry and contains some stiff penalties for contractors who misclassify their workers as “independent contractors” instead of “employees.” The spotlight on the worker misclassification issue continues to shine bright in Harrisburg. House Bill 716, which is currently up for a full Senate vote, would create the “Joint Agency Task Force on the Misclassification of Employees” to scrutinize the enforcement of misclassification issues by Commonwealth Agencies under a number of laws, including Act 72, the Workers Compensation Act, and Unemployment Compensation Act. The Task Force’s focus would include, but not be limited to, the construction industry. The Task Force would also make recommendations on how to boost enforcement regarding misclassification, and educate employers and the general public about properly classifying workers as employees or independent contractors.
Although this issue has received a tremendous amount of attention over the last decade, we continue to see many of our clients caught in the jaws of misclassification issues. Misconceptions about classification abound, such as the erroneous belief that contractors have the ability to “automatically” convert a worker into an independent contractor solely by setting up an LLC, utilizing an independent contractor agreement, and/or issuing an IRS Form 1099 instead of a Form W2. Before treating anyone as an independent contractor, contractors would be well-advised to consult with experienced labor and employment counsel.
Conclusion
If adopted, the discussed legislation will have a significant impact on construction companies in Pennsylvania and contractors and subcontractors alike must be prepared to comply with new regulations.
