By: Alexander A. Miuccio Published: October 2016

Subcontractor Allowed to Maintain Fraud Claim against Sub-Sub for Unpaid Union Fringe Benefits

Contractual provisions sometimes provide that a general contractor is entitled to withhold payments otherwise due to its subcontractor for the subcontractor’s failure to pay fringe benefit payments for work performed on a project. This withholding insures that there is sufficient money outstanding to fund the payment of unpaid fringe benefits. Where the subcontractor enters into an agreement with a sub-subcontractor, the contract may require, as a condition of receiving progress payments, that the sub-subcontractor submit certified weekly payroll reports indicating that the workers had been paid correct prevailing wage and fringe benefits.

In the recent case of Summit Development Corp. v Interstate Masonry Corp., the general contractor withheld a payment otherwise due to a subcontractor when the union notified the general contractor of a sub-subcontractor’s failure to pay fringe benefits in excess of $300,000.00. The subcontractor thereafter brought an action against the sub-subcontractor for fraud, claiming that it falsified certified payroll reports.

Background

Summit, as subcontractor, and Interstate, as sub-subcontractor, entered into a subcontract whereby Interstate agreed to perform masonry work for a project in Manhattan. As a condition for receiving progress payments, Interstate was required to submit certified weekly payroll reports showing payment of both prevailing wages and union fringe benefits on behalf of the workers.

Eighteen months into the project, the general contractor received a letter from Bricklayers Local No. 1 and its fringe benefit funds claiming that Interstate owed the fringe benefit funds $341,000 for unpaid benefits payments. The general contractor withheld that sum from monies owed to Summit, as it was entitled to do under its subcontract.

Summit sued Interstate for the $341,000 it had previously paid to Interstate in reliance on the certified payroll documents. Summit then moved for summary judgment on its fraud claim, arguing that it would not have made progress payments to Interstate if Summit had known that Interstate’s representations and certified payroll reports were false and that benefits payments that Interstate claimed were made were, in fact, unpaid.

Decision

The trial court granted Summit summary judgment on its fraud claim, finding that there was no credible dispute that the representations made in the certified payroll documents were false. The appellate court reversed, finding that the pre-printed representation on the certified payroll document that the payments “have been or will be made” could not, on the face of the document, be determined to be false at the time it was signed. Similarly, it was not determinable from the face of the document whether the handwritten language on the payroll reports to the effect that the payments had been made “was present or whether at the time the forms were signed the handwritten language was added to the forms at a later time.” Accordingly, the appellate court held that these factual issues had to be presented at a trial for a jury to determine.

Comment

A question that often arises in the circumstance of subcontracting on a prevailing wage or a union labor project is what credence can be placed on the certified payroll documents. While certified payroll reports are made under oath and specifically represent that prevailing and/or union wages and fringe benefits have been paid, they are not evidence that such payments were actually made. Ideally, the issue of delinquent payments should be promptly brought to the general contractor’s attention after the delinquency is known by the union. Typically, a contractor does not have the wherewithal to monitor the actual payroll checks and wage statements of its subcontractors to determine whether such payments were made. Here, the Summit court reminds us of an additional remedy, that the submission of falsified certified payroll documents constitutes a fraud, and money damages may be awarded against the guilty subcontractor. 

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